Felix Writes: Cargo Cult Capitalism

DigitalThoughts / Cargo Cult Capitalism

Let me point out something that may sound obvious, naive or both: you know how in introductory Economics classes they teach that money has been invented as a means of exchange? And how the next thing they teach is that securities are a form of money? Well... has it ever bothered you that people go to a stock exchange to buy and sell money for more money? That's doubly screwed up, once because it's like going to the farmers' market to trade your apples for somebody else's, and twice because suddenly money is a merchandise instead of an instrument for exchange. Only not exclusively. Getting dizzy already?

See, I was reading this looong article about Ireland's real estate bubble, which was apparently much worse than anywhere else, and it suddenly struck me: the reason why the world's economy has been so screwed up for the past three decades or so is because people have completely forgotten the point of having an economy.

The problem

For millennia, we city dwellers have been forced to chase money just to survive. For centuries, we've been forced to borrow from banks to finance any significant endeavor. For decades, we've been going every single day to a place called an "office" (why?) while wearing a heavy, uncomfortable "business suit" (for what?) only to spend around ten hours a day (I think you'll agree that the 8-hour work day is a myth) shuffling mysterious documents around only to have some money fall out of the sky at the end of the month, which are barely enough to get by. The only difference is that some of us are called "bosses" and receive a little more money, in exchange for considerably more stress.

And if anyone ever asks why, the question is met with a shrug. That's the way we've always done things. Sounds familiar? It's just like with school. Or copyright. Or any of the numerous questions kids ask. Only it's doubly wrong. We haven't always done it this way, and if we had, that would be a terrible reason to keep doing it.

We have forgotten the real motivations, if we ever knew them in the first place, and now we're just repeating the rituals again and again, building fake airfields in the jungle and wearing fake uniforms so that the great birds of thunder in the sky will keep parachuting their wondrous military supplies. Cargo cult capitalism!

In order to break this curse, we need to remember why economy was invented in the first place.

Why we invented economy

Tough, huh? Financial experts will do their best to convince you it's all very complicated. But it really isn't. You just need to think where absolutely any sum of money goes to at the end of the day. After all, farmers don't plant coins in the field, miners don't dig up coal with dollar bills and masons don't prop up walls with bonds. No, you pay all these people for their time, effort and skill. And you pay them instead of doing it yourself because specialization makes people more efficient. Which simply means you can accomplish more with the same limited resources. In other words, you create more value.

Yes, folks, that's the essential aspect of economics that we seem to have forgotten. In order to earn money, you need to offer something other people value. And you only need that money because other people have things you value. A farmer's produce is only valuable because you must eat to survive. A house is valuable because you need shelter. Even merchants do something useful: they increase the efficiency of both producers and consumers... which means both parties get to create even more value for the same amount of time, effort and skill.

So money exists only as a reflection of value, value exists only as a reflection of human needs, and satisfying those needs takes real work.

What went wrong

By now you can probably answer the question yourself. Because all economic exchanges involve money, somewhere down the line we started thinking that money is the point of the economy. And from that to the idea that money attracts more money... just like that, by magic... there was only one step. Did I say magic? Cue attempts to earn more money through what amounts to arcane rituals.

A textbook example was the dot-com boom back in 2000, when countless investors poured ridiculous amounts of money into the strange belief that since people were starting to get rich off the Internet, it was enough to be on the Internet to get rich. Needless to say, it wasn't.

More recently, News Corporation has started setting up paywalls for the online editions of their newspapers, apparently believing that since people pay for the printed newspaper, they will pay just the same for Web access, and for the same reasons. Turns out, they aren't.

But nothing is more illustrative for this tendency than the current financial crisis. First it was the American bankers assuming that just because someone could pay their current mortgage, they could also pay a bigger one, hence the "refinancing" craze. In Romania, they assumed that just because the young desperately need homes, they can also afford to take out huge loans to pay for them. (Cue modern apartment buildings sitting empty while said young live with their parents or rent little old apartments for cheap). And in Ireland, they didn't even cater to a perceived need, but just built like crazy, apparently taking the old saying, "if you build it they will come", a little too literally.

I'm having visions of dignified-looking men in expensive business suits waving their hands over an altar and chanting "Uga, booga, your money to me!" Yeah, that will work...

How can we fix capitalism?

Note, the question isn't whether we can fix capitalism. Of course we can. You might think it takes financial experts and grand national strategies, but that's silly for several reasons:

  • every single one of us is an economic agent, and has influence;
  • as I pointed as above, the problem is simple lack of common sense;
  • the "financial experts" got us all into this mess in the first place.

So, what can we, the little guys, do?

For starters, remember that economic exchanges are a means to an end; you don't trade for the sake of it.

For that matter, remember that we only use money because it's usually the most efficient way to conduct trade; you can very well have an economy without money, and sometimes it's actually better that way.

But most importantly, DO SOMETHING. Remember that ultimately, this crisis we're having is one of confidence. Nobody wants to hire you? Start a business. Too much bureaucracy in your country? Either go someplace else, look on the Internet, or identify an activity that doesn't involve money (at least not enough to be taxed). Just don't sit there complaining; that's guaranteed to solve exactly nothing.

As for the long term, educate yourself. This cargo cult mentality that subverted capitalism, rotting it to the core, is pervasive throughout the Western civilization. It is also a form of magical thinking, and that can only be fought with knowledge. Understand the scientific method, learn some physics, study history, wrap your head around probability theory and do some reading about how the brain works. Then maybe you can start making a difference.

2011-02-19