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I don't know if it is you or Marx, but one of you makes no sense. My guess is that it's Marx.

Why post this topic? I'm curious. Will you reveal your intent?

You got it right Steve. And at the time, so did Marx. But I think he was looking at totally unregulated capitalism. What do you really think capitalism would be without regulated markets. Imagine no laws against insider trading, environmental issues, minimum wage, falsifying company accounting records. etc. etc. The game has to have rules or it will end up like Marx said.
Capitalism is by far the best system. But it does require a certain degree of regulation or it will end up like your game of monopoly. One rich winner and everyone else busted.

Bob:
I read that, among Marx's mistakes, he ignored entrepreneurs, rising living standards, the market's effect on consumers' well-being, the dynamic positive effects of growth, and the downside implications of risk-taking (namely, incurring losses instead of profits). Thought it would be a good idea to re-check the original source to verify whether those accusations were true.

They were.

"downside implications of risk-taking (namely, incurring losses instead of profits"

Or put it more succintly, Marx was completely oblivious of the existence and implication of UNCERATINTY in businesses.

In the uncertain world we all live in, the rent the entrepreneur extracts from his enterprise's outputs is the reward he gets for risking his time and capital. No investment can guarantee positive returns and there is no profit wihout risk. Hence the very notion of "surplus value" is meaningless.


Perhaps it's easier to see now than it was 140 years ago, but Marx completely misses intellectual capital and risk management. There's immense difference in value between bad and good decisions. You can have all the labor and capital in a country and still produce nothing of value (as every communist country later demonstrated).

markg,
"The game has to have rules or it will end up like Marx said." You're confused between free markets and anarchy. I have never heard proponents of capitalism claim there should be no rules. However, yes, they would like the Federal government to have a smaller role. "a certain degree of regulation or it will end up like your game of monopoly." This assumes you have Angels as regulators. Often regulations claim to have good intentions but either do little and pander to voters or protect large, powerful and usually inefficient corporations by crippling their competitors.

So which is it Jason? Certain regulations are good lest it be a free-for-all or regulations are bad because they don't do the good they were intended for? Can the line be clearly drawn?

I think Jason's point is a good one. Good question, Gil. The important thing to balance over-regulation is the law of unintended consequences. We have to balance the good that certain regulations would do versus the unintended consequences of such regulation. Cleaning up the meatpacking industry was good, but the unintended consequences were that it helped large corporations that could afford to pay to conform to government regulations and hurt the little guy who couldn't afford to conform to regulations. As with every action in life, Jason and Gil, nothing is every a choice between pure good and pure bad. Often we have to choose the action that does the most good in exchange for the least harm. As long as the legislative process is transparent (and I think for the most part it is for anyone who cares enough to look), then we are doing ok.

To add on to Robbie's comments, I often wonder how our collective values in America, especailly as represented in congress, translate into our assessments of what actions constitute "the most good in exchange for the least harm". I'm ready for a resurgence of classical liberalism (emphasis on personal liberty / pre-libertarian) values!

Gil, good point, my comments seem to have it both ways. I think the distinction would be general rules that clarify process and property rights versus detailed Federal regulation where private corporate battles are fought with public money.

"laws against insider trading"
I believe this is an issue of self-regulation. The exchanges have strong incentives to protect the integrity of their marketplaces. SEC is usually too slow to act and too rigid when it finally does.

"this environmental issues"
This is a bit tougher, but common law protections may be the best way to go (i.e. damage recovery and prevention through tort). I believe government mandates tend to be giveaways to favored industry, like ethanol.

"minimum wage"
Anyone that's taken a few economics courses knows the futility of price controls. Cafe Hayek explains why only 1-3% of workers receive the minimum wage (http://tinyurl.com/2bxfe9). There's a myth that without labor regulations, we'd all be working in mines at age 6 for pennies.

"falsifying company accounting records."
Again, there are more direct methods of accountability. Shareholders via the board of directors should be the regulators. It's their money at stake and they are the owners. Federal government is not.

Jason writes:

"falsifying company accounting records."
Again, there are more direct methods of accountability. Shareholders via the board of directors should be the regulators. It's their money at stake and they are the owners. Federal government is not."

Not a good idea. Shareholdes these days are predominately mutual funds and large institutionals. Yes, they (and their investors or pensioners) get hurt if the books are cooked but they are also all to tempted to look the other way on such matters as long as they beat the index they're measured by.

Lest we forget many of the boards are other CEO's so excuse me if I'm a bit jaded about objectivity here.

We do need laws or the result is even more chaos than there is today. Now, our government has gone way overboard on writing one conflicting law after another but that can be solved if we can find some rational and educated folks in the legislation.

Hhhhm. I said can be solved. Didn't say it would be.

Let’s see if I’ve got this right.

Last year, in 2007, the consumer was spending just fine, over-spending in fact. When they couldn’t pay for their credit card bills they rolled them into the refinanced home.

That was deemed to be bad. The consumer was not saving. They were going in to debt which now in 2008 is an un-payable debt.

So now here 2008 the refinanced home is not worth as much and the consumer has, or is, cutting back…. (Shame on the consumer.)… which is bad as we all know the consumer spending drives the economy.

So…..in an effort to stimulate the economy which in turn will hopefully allow the consumer to stay ahead of the bill-collector, the government (us) is going to borrow a whole bunch of money and give it to the taxpayer so they can spend it.

We now have transferred the un-payable debt from the consumer (us) to the un-payable debt of the government (us).

And who said alchemy is a pseudo-science.


While I’m sure that Congress would not go along it seems to me that just 10% of the 150 billion that the rebate is estimated to cost could be loaned a low rate to the monolines and forestall that potential meltdown. We loaned money to Chrysler why not MBAC and Ambac?

Steve,
Excellent discussion!! Who would have thought to go back and read Marx? Why now?

You said, "... he ignored entrepreneurs, rising living standards, the market's effect on consumers' well-being, the dynamic positive effects of growth, and the downside implications of risk-taking..."

I agree with you wholeheartedly.

Marx lived in a time of nascent technological advance, one US patent office official famously remarked that all the valid patents to be discovered had been discovered by 1900.

To paraphrase Condi Rice, nobody could have foreseen what was to occur economically and technologically in the 20th century.

My two cents:
Versions of Marxism do work where labor is more of a pure commodity or is dwarfed by other commodities, such as in economies whose main outputs are natural resources. Even Alaska, ruled by Republicans, hands out community property (ie, oil) checks to the citizens.

It occurs to me that one problem with Saudi Arabia, and other oil-rich oligarchies, is the lack of Marxist principles. The common good would benefit from a little injection of Marxist theory whereby the general population gains some benefit from the vast resources... and judging from 9-11 and the large number of Saudi nationals on those flights, that Marxist revolution may be in process now.

Steve, is this, pray tell, the reason for your renewed interest in Marxism?

As always, I enjoy your intellectual curiosity and expertise.

Some variation of Marx's basic insights - that unregulated markets do not always produce optimal results, and that market price does not always incorporate all the relevant values - is essentially correct. As one of the few people to actually create a whole system based on those insights, he actually made a valuable contribution to the economic ilterature.

Economists since Marx have done a much better job of defining the set of phenomena referred to as market failures.

Taking what's good about Marx, I think he missed three basic insights. First, he didn't anticipate the exponential increase in living standards that markets would generate after the industrial revolution (most of which occured after Marx wrote), and consequently missed the real value of the mechanism.

The second and third are things we still wrestle with today. Second is the assumption that people are somehow more rational or benevolent when they vote than when they spend. There's actually no evidence that this is true, and some evidence that it's false.

The third is that the goal should not be to regulate markets, but to regulate market failures (as best we can define them). Possibly just a semantic distinction, but one that doesn't get emphasized nearly enough.

There are a lot of other flaws in Marx - the distinction between the capitalist and the proletariat is essentially arbitrary, his system of exploitation is too dependent on the ignorance (or outright stupidity) of the exploited, and he just wasn't very um charismatic. But it's important to recognise the legitimate aspects of his efforts.

Good one. It would make sense that back in the days of slavery and then serfdom that Leftist economic thought would have developed before Free Market theories were articulated.


absurd thought -
God of the Universe thinks
Karl Marx was smart


absurd thought -
God of the Universe thinks
keep trying communism

you can never KILL too much
pursuing Utopia...


absurd thought -
God of the Universe thinks
let's PLAY communism

pretend to fix the world
by destroying it


absurd thought -
God of the Universe says
long to taste communism

but be a party leader
or join the wretched masses
.

Steve,

I think you have summarized Marx's theory quite well. When reading Das Capital together with Wealth of Nations, though, it becomes apparent that the "core" disagreement between Marx and Smith is their understanding of human nature.

Marx assumes that humans are born good, or at worst a blank slate. Capitalist society "corrupts" the human soul by "teaching" them to be greedy, through the "fetishism" mechanism. Smith, on the other hand, assumes that humans are inherently self-interested, and posits an economic system (capitalism) that would channel that inherent self-interest to benefit not only that individual, but also society at large. Additionally, I think that a fair reading of Adam Smith would lead to the conclusion that Smith views "greed" and "self-interest" as two very different things. I think Marx would argue that they are the same thing.

The importance of their basic disagreement on the assumptions of human nature cannot be overstated. If human nature is inherently self-interested, then Marx's theories fall apart. That is because if we are inherently self-interested, then individuals - and society - cannot be reprogrammed by the Socialist state. Remember, for Marx, the socialist state is a temporary state of affairs, maybe a generation or two, where the state "retrains" people to no longer fall into the "fetishism" trap of capitalism. Once the socialist state has successfully reprogrammed the population (yes, coercively if need be) then the socialist state will no longer be required to coerce individuals to produce at their maximum capability while only taking what they "need" to survive. That is when the socialist state whithers away (since the coercion is no longer necessary) and the Communist Nirvana begins.

But what if humans are inherently self-interested, as Smith posits? Then under Marx's theory, all you have left is a permanent socialist coercive state, since humans CANNOT be reprogrammed to NOT be self-interested.

It seems to me that much of the discussion until now is missing the trees for the forest. Under Marx's assumption of a "reprogrammable" human nature (since human nature is originally a "blank slate" according to him), all of the investment and economic growth mechanisms discussed in these posts (risk-taking, uncertainty calculations, etc.) would occur, even without the capitalist profit motive, because all individuals would produce at their full potential, but wpuld only take what they "need." So if your best skills are to run a business, then you do so. You just wouldn't get more reward (surplus value) for wildly succeeding at it. In fact, you wouldn't want that extra surplus value (more stuff) because you would know you don't "need" it. Remember, by this point you would have been reprogrammed to reject "fetishism."

Of course, Smith is right. We are all born self-interested - it's in our genes (the overriding survival drive so we can pass on the genes). But how that self-interest is expressed depends on the person and the situation. Greed is one possibility. But the opposite, giving is an equally possible expression of self-interest. I would argue that even the most "altruistic" people/actions are still self-interested at core.

So in the end, the whole argument b/w Marx and Smith is really an argument about human nature - is it inherently self-interested, or is it a blank slate that can be reprogrammed? Both theories flow from the answer to that question. And I do have a lot of respect for Marx's deductive logic. But he's wrong on his base assumption, so his theory falls apart in the real world.

Steve,

One correction above. I said:

"It seems to me that much of the discussion until now is missing the trees for the forest."

I meant:

"It seems to me that much of the discussion until now is missing the forest for the trees."

Sorry! ;-)

Jose

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