Götterdämmerung Capitalism

When capitalism is working well, it unleases the creativity of everybody in society. Because capitalism specifically rewards people who do what other people want, and because it gives everybody the freedom to try and fail, the effect is that society as a whole gets steadily better at giving people what they want.

Of course, that was a simplification. Capitalism provides rewards in the form of money. Doing what other people want is one good way to get money, and that is the strength of capitalism. The weakness of capitalism is that there are other ways to get money, and the freedom required to make capitalism work also permits those other approaches to occur.

These problems arise when a small number of people make money by doing things that a majority of people do not want to happen. One myth of the market economy is that these things can not happen, or at best can only happen on a very temporary basis. But of course that is false. There are two obvious continuing failures of this sort.

The first occurs when costs are not properly accounted for in the market. The most obvious effect here is environmental: for example, Maxxam Lumber, in which the market capitalization of the owner of an old forest became less than the market value of the lumber. Thus, the forest was cut down. If the value of the forest had been counted as more than the value of the lumber in the market, this would not have happened. Another example is computer security: the costs of insecure software are borne by the customer, not by the maker of the software. Since the customer does not have the expert knowledge required to identify secure software, and since writing and testing secure software is more expensive, the effect is that software is insecure. If the security costs fell on the software maker rather than the software customer, software would be secure.

Another obvious failure mode of capitalism is insider trading. By exploiting private information and manipulating public information, a small minority can make enormous profits at the expense of a large majority. For example: CEO salaries. For another example: capture of regulatory agencies by the industries they regulate, which shows itself most obviously in the cycling of people between low paying government jobs and high paying lobbying jobs.

There are of course ways to correct for these issues. And no known social system is perfect. But with capitalism, the same characteristics that make it good for society when it is working well make it hard to control when it is not working well. Just as people have a strong incentive to do what people want, they have a strong incentive to beat the system when possible. Their interest in beating the system is going to tend to make them move faster and think harder than the people trying to stop them.

Götterdämmerung capitalism is what we get when the accelerating efforts to beat the system get ahead of the regulatory efforts to fix the system. We get a system which moves so fast that it destroys itself. The interesting question for today is how fast we are headed in that direction, and which side is going to win.