Sunday, January 25, 2009

Market economy

For Christmas, my parents bought me 3 months of subscription to Information, a small Danish newspaper with a focus on analysis and criticism of the daily politics. The audience is mostly intellectual (and also mostly left-wing).

Information is interesting for several reasons, one of them being that major politicians in Denmark, the people who actually make the rules for the rest of us, regularly post in the newspaper, and thus presumably also read it. For an old internet-addict, that's a whole new experience.

There's been a lot of talk lately about capitalism in the face of the current financial crisis. The thing is that over the past 20 years, almost everyone in the political landscape has been pursuing a the-more-market-economy-and-deregulation-the-better strategy to a some degree. And now it turns out that too few rules for the gamblers in the financial sector have put us into a global recession. So people are, again, beginning to question whether capitalism is such a hot idea after all.

When I went to high school, I always thought it was possible to do better. Because there is such an obvious waste in our market economy. For an example, go to your nearest supermarket and look at the shelves with shampoo and hair products. Or the shelves with soft drinks. Or the shelves with morning cereals for children. And ask yourself, how much value does all these colourful and overly expensive things bring to our society? Or the really classy ads that never mention any factual qualities in their products, but instead try to install in us an irrational idea of their products, because of the packaging so to speak, bringing improvements to our lives.

I ask you, how can drinking water with added sugar and various brown chemicals make you cool? Because a large company has invested enormous efforts in convincing everyone that it is so.

Surely ration can do better than that.

However, at university I spent a couple of years working with distributed systems. The most important lesson I learned is that centralized systems are bad, unless the scale is very small. Decentralized (peer-to-peer) systems are more adaptive to change, more robust and much more efficient - several orders of magnitude as the system scales. Yes, there's waste, redundancy, suboptimal behaviour.

But it's self-organizing. If I want something from a peer, I just ask - I don't need to contact a central authority which then has to decide how to respond to the change. Overall it just works incredibly better.

I think that the same is true of society. With a market economy, decision-making is decentralized, in spite of the tendency for old industries to advance towards monopolies. In the large scale, this decentralization is unbelievably effective compared to a centralized control because of the complexity involved.

It's also a lot more free than a democracy. In a democracy, 55% can decide for the remaining 45% (that's why we haven't built any new windmills in Denmark lately). With a market economy, everyone decides for himself. Within the limits of the market, of course.

However, not all is good. One of the more peculiar problems of market economy is the drive towards monopolies, i.e. a collapse of the market (read a treatise of Karl Marx's works to understand why). Like any game we set up, it needs rules.

Karl Marx

And the market cannot do long-term thinking. As we have just seen, it can happily drive over the cliff edge because of a phenomenon called the tragedy of the commons. It doesn't hurt me a lot that I exploit the system: I get the whole benefit, the downside is shared between everyone.

The tragedy is that even if some market players want to stop, they face the competition from the others. If price is the only factor, a short-term thinking competitor can drive the others off the market. So they are forced to follow, unless a force beyond the market sets down rules that cannot be ignored. The same reasoning goes for unethical behaviour.

So the issue here is how we change the rules of the game to ameliorate the bad things without throwing the basic idea out of the window. For in spite of the waste, it's working better than the alternatives. Ration is bounded, it's not enough to deal satisfactorily with the needs of millions of humans.

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