Why has Capitalism failed to produce optimal value everywhere?

[Aeson]

Why would lower reserve to deposit ratios cause a contraction in the money supply?

Why would it matter is a better question. With fiat currency we can increase the money supply essentially at will. It is not a problem.

[giblets]

Why would it matter is a better question. With fiat currency we can increase the money supply essentially at will. It is not a problem.

Yes. I don't understand why Boris is so mad about fractional reserve banking. Usually complaints about it come from right wingers who think fiat currency is evil.

[Kidlicious]

Not as much as the OP made people's heads hurt, of course.

Those people, like you, don't understand anything about economics. You get everything wrong. I'm not sure how you manage that.

[binTravkin]

The reality is that (most) things are relative and many things are not inherently good or bad in nature.
They just exist and they do, because they are better (as in more efficient or in some other quantifiable way, not "better" as in "closer to same imaginatory ideal") than the alternative in some way.
Capitalism works better than any other system developed thus far.
Arguably, capitalism also is not a constant in time and space.
Even if idea behind it stayed the same, the modern capitalism is quite "mild".
We have "welfare" states, significant regulation in certain industries and many other concepts that either go directly against or at least are not really in spirit of capitalism.

From the fact that capitalism is not the same everywhere it also follows that it cannot possibly be on the same efficiency level everywhere, thus cannot provide optimal value everywhere.
In fact, since humans themselves are not optimal in any way and since capitalism is a system created by humans, capitalism can not really be optimal on macro scope/long term.
Thus the question is moot.

Moreover, since any other system we may make (bar Singularity) is also going to inherit the faults of our thinking, it is quite possible that humans are inherently unable to provide optimal value everywhere.

[Kidlicious]

The reality is that (most) things are relative and many things are not inherently good or bad in nature.
They just exist and they do, because they are better (as in more efficient or in some other quantifiable way, not "better" as in "closer to same imaginatory ideal") than the alternative in some way.
Capitalism works better than any other system developed thus far.
Arguably, capitalism also is not a constant in time and space.
Even if idea behind it stayed the same, the modern capitalism is quite "mild".
We have "welfare" states, significant regulation in certain industries and many other concepts that either go directly against or at least are not really in spirit of capitalism.

From the fact that capitalism is not the same everywhere it also follows that it cannot possibly be on the same efficiency level everywhere, thus cannot provide optimal value everywhere.
In fact, since humans themselves are not optimal in any way and since capitalism is a system created by humans, capitalism can not really be optimal on macro scope/long term.
Thus the question is moot.

Moreover, since any other system we may make (bar Singularity) is also going to inherit the faults of our thinking, it is quite possible that humans are inherently unable to provide optimal value everywhere.

But if we discuss the reasons why it doesn't produce optimal value we can make it better (hopefully).

This was a continuation thread. It's hard to know exactly what the topic was. I believe it was something about market inefficiencies. One point that I made was that education is of equal value but it pays differently because of the inefficiency of the market. That is agents have no way of knowing which education to get to optimize social value.

[binTravkin]

One point that I made was that education is of equal value but it pays differently because of the inefficiency of the market. That is agents have no way of knowing which education to get to optimize social value.

This has less to do with capitalism or indeed any other economic system than with the fact that technology and society is changing at an ever faster pace.
Parents are usually the first instance for advice on education choices.
This may have worked well in 19th century and before, but currently the divide between generations is so great that some parents are struggling to understand how their children can make money with what they do. Many parents are barely computer-literate while their offspring work in producing and improving those same computers.

Imagine a family living at the time printing press was just starting to expand.
Son wants to be a worker at book printing, because he realizes how huge an impact the ability to cheaply reproduce and spread information is going to have on society (or he might not grasp it but "feel" that it's something big or just that it's "in") while father can barely read some verses from the Bible, the only book he and most of the town have ever had their hands on.

Now fast forward and son wants to be computer engineer, dreams of working at Intel (or a software developer, dreaming of working at Google) while his father is a farmer and even mobile phone is still a relatively "new" tool to him, first bought some 10-15 years ago or so.

These are probably extreme examples, but the problem is very widespread.
My father was an architect and luckily he didn't try to convince me from going into IT.
But I know some schoolmates who've had this problem. I've even heard an anecdote about parents calling computer "a fad".

There are even people around whom we let to publish "opinion pieces" and respect them enough to care to read their fantasies, who have written this about modern technology:


The main difference between the time of printing press and now, is that then it was pretty much a "one-off" change, while now we have an entirely different pace of change.
Internet, Google and Wikipedia are probably amongst the most influential and visible changes, but there are many other both in IT and different industries, which don't gather so much spotlight, but still amount to "obsolescence of the last generation" or whatever it is correctly called (I'm not a native English speaker).

[Kidlicious]

This has less to do with capitalism or indeed any other economic system than with the fact that technology and society is changing at an ever faster pace.
Parents are usually the first instance for advice on education choices.
This may have worked well in 19th century and before, but currently the divide between generations is so great that some parents are struggling to understand how their children can make money with what they do. Many parents are barely computer-literate while their offspring work in producing and improving those same computers.

Imagine a family living at the time printing press was just starting to expand.
Son wants to be a worker at book printing, because he realizes how huge an impact the ability to cheaply reproduce and spread information is going to have on society (or he might not grasp it but "feel" that it's something big or just that it's "in") while father can barely read some verses from the Bible, the only book he and most of the town have ever had their hands on.

Now fast forward and son wants to be computer engineer, dreams of working at Intel (or a software developer, dreaming of working at Google) while his father is a farmer and even mobile phone is still a relatively "new" tool to him, first bought some 10-15 years ago or so.

These are probably extreme examples, but the problem is very widespread.
My father was an architect and luckily he didn't try to convince me from going into IT.
But I know some schoolmates who've had this problem. I've even heard an anecdote about parents calling computer "a fad".

There are even people around whom we let to publish "opinion pieces" and respect them enough to care to read their fantasies, who have written this about modern technology:


The main difference between the time of printing press and now, is that then it was pretty much a "one-off" change, while now we have an entirely different pace of change.
Internet, Google and Wikipedia are probably amongst the most influential and visible changes, but there are many other both in IT and different industries, which don't gather so much spotlight, but still amount to "obsolescence of the last generation" or whatever it is correctly called (I'm not a native English speaker).

There are two problems that I see. The first is that with capitalism you really never know, just as Krugman didn't know. We don't know how long the demand for certain professionals will hold up or how many other agents will train for that profession (we actually do but we don't do anything with this information). The second is that agents don't care about making money or training for a profession that adds social value. So you can tell them all you want what they should choose, but they do what they want. Now you can say that that adds value by giving people choices but that's a capitalist way of looking at things.

[binTravkin]

Not really "with capitalism you never know", but more like "with humans you never know"
There are two levels of imperfection here:
1. Objective inability to predict future exactly.
2. Subjective inability or unwillingness to use basic rules of logical inference and the available data to predict future in a relatively plausible way.

Krugman falls squarely in the 2nd.
He can't even quote Metcalfe's law properly, which basically says exactly the opposite what Krugman does: "The value of a telecommunications network is proportional to the square of the number of connected users of the system".
E.g. - the bigger a network gets, the more valuable it is both as a whole and to each individual participant as well as potential newcomers.
Additionally, nowhere Metcalfe's law states nor it can be logically inferred, that, since the number of potential connections grow, these additional potential connections somehow create a strain on further growth of the network.
Neither such a rule can be observed in networks in existence before the Internet.

People believe false prophets.
It has always been so as the larger part of the population is either too stupid or too lazy to think, read, analyze themselves.
People even keep inventing new bull**** when the old one gets too boring. See "Scientology".
What we can do is start teaching critical thinking to our kids and maybe someday, at schools.

[giblets]

It looks like Krugman was claiming that the value of the internet is largely linear- he believed most of the people using it would just be passive consumers and not content creators. He probably assumed the internet would mostly be used as a news/entertainment source like the TV and didn't anticipate that social media would take off.

[binTravkin]

He knew that Metcalfe's law exists, although arguably, he didn't know what it's about.
That's like making predictions about thermodynamics while only pretending to understand the laws of thermodynamics.

Internet exhibits many of the properties that have existed in networks before it and ironically it's exactly Metcalfe's law, using which it is possible to predict what Internet has become.

Even if you ignore the types of internet usage that did not exist when said prediction was done, it is:
1. impossible to arrive at his conclusions using Metcalfe's law and/or any public knowledge about the general nature of networks
2. possible to predict exponential growth and massive value created by Internet using Metcalfe's law or other valid logical inference from existing samples

The prediction was made in 1998. when Internet had already transcended many of the constraints that exist in the other telecommunication networks by becoming global, by being significantly less regulated and by not being owned largely or entirely by a single entity.

[giblets]

Of course it's not possible to arrive at his conclusion using Metcalfe's law. He was arguing against relying on Metcalfe's law. If the vast majority of people had nothing to say and didn't create any content than the number of potential connections wouldn't be important.

[binTravkin]

Metcalfe already proposed that the value, n^2, exceeds the potential connections n(n-1)/2 exactly 2n/(n-1) times and thus the number potential connections themselves are only part of it.
And neither the telephone networks which the law was first referring to are full of people who want to connect to each other most or all of the time. Their value lies in the ability to connect to those people.

[Kidlicious]

Not really "with capitalism you never know", but more like "with humans you never know"
There are two levels of imperfection here:
1. Objective inability to predict future exactly.
2. Subjective inability or unwillingness to use basic rules of logical inference and the available data to predict future in a relatively plausible way.

Krugman falls squarely in the 2nd.
He can't even quote Metcalfe's law properly, which basically says exactly the opposite what Krugman does: "The value of a telecommunications network is proportional to the square of the number of connected users of the system".
E.g. - the bigger a network gets, the more valuable it is both as a whole and to each individual participant as well as potential newcomers.
Additionally, nowhere Metcalfe's law states nor it can be logically inferred, that, since the number of potential connections grow, these additional potential connections somehow create a strain on further growth of the network.
Neither such a rule can be observed in networks in existence before the Internet.

People believe false prophets.
It has always been so as the larger part of the population is either too stupid or too lazy to think, read, analyze themselves.
People even keep inventing new bull**** when the old one gets too boring. See "Scientology".
What we can do is start teaching critical thinking to our kids and maybe someday, at schools.

Are you saying that there's a problem that people are underestimating the value of the internet? I think Krugman was saying people were overestimating it, which was clearly wrong. But I don't see that people are underestimating it. Do you?

[binTravkin]

No.
I'm saying that by this logic cellular phone networks should also have "impact on economy no greater than fax machines".
Because most people use their phone only a few times a day and then only call a few people.

[Kidlicious]

Good point