Poor Richard’s Junto: The Fundamental Flaw of Capitalism – Authored by a Capitalist

My friend Ryan tonight authored this piece calling for objective regulation.  I agree with many of his points, including the fundamental flaw he speaks of, although I don’t think he addresses the whole cause of the flaw.  In his blog post: Poor Richard’s Junto: The Fundamental Flaw of Capitalism – Authored by a Capitalist. Ryan asserts that the fundamental flaw of capitalism is “bad behavior”.   It could be argued that this is the fundamental flaw in all systems, though, physical, political, economic and classroom.   Should regulators be inserted to fix the problem?  I am going to suggest no.

Bad behavior will always exist.  Irrational and deviant behavior can NOT be prevented.  So, the real question is what should be done about it?  The regulatory answer is to set up a governor, a set of rules, and a policing organization to “control” bad behavior.  In order to do so, everyone in the system pays for the additional overhead created by the regulation.  This typically, if it is objective and the regulators don’t behave badly themselves (rare), results in a milk-toast system of less than spectacular players selling a commoditized and undifferentiated product with lackluster service.   Examples of this are FM Radio, airlines, railways and (…wait for it…) BANKS!   If that is what we want, cool, but spectacular is something you will never get.  The other end of the spectrum is pure regulatory law with real teeth.   My opinion, this is much better.  You will have the fools who behave badly, but, if held accountable and we put accountability back on the buyer as well, this is the best system.   As products, like mortgages, become more complex, the chance for devious behavior (including deceptive) becomes more real, and buyers can be more easily duped, but that is a separate problem; stemming from a separate but equally important issue.  We are not living capitalism.

Woah…. Jimbo, what are you saying?   Not capitalism?  Ryan uses the example of the mortgage industry and sub-prime loans as an example of an industry following bad behavior into the ground.  But, those loans and the purveyors of those loans could NEVER have existed without government intervention in the system on multiple levels.   With the creation of the FED, and it’s subsequent creation of FIAT money, we facilitated an ever expanding money supply.   What is the goal of the FED?  INTEREST!  How do we increase interest?  VOLUME!  What if no one is borrowing, and no one wants to lend?  CREATE INCENTIVE!  How?  Offer loans to people who can NEVER pay them back, issue the money from THIN AIR, and you won’t care if they can ever repay the loan, so long as we COLLECT THE INTEREST!

I digress, again, but only to say that the flaw Ryan speaks of is a fundamental flaw within all systems; not specific to capitalism.  And to recommend that perhaps further regulation of an artificially regulated system would do little to solve the actual problem.   Abolition of the FED on the other hand, would go a long way toward fixing many things, but … that is a topic, most certainly, for another midnight rant.

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