Capitalism vs socialism, markets vs gov... Most ppl think 1 is great and the other trash. That’s simplistic.

They’re tools adapted to different situations. We must understand them to know when to use them. Thread.
Capitalism is great. It uses natural selfishness to push ppl to be as productive as possible, promising them wealth. The + you produce for others, the + you get.

That is achieved by incurring both the cost and benefit of your initiatives.

Here’s the pbm
It creates a huge incentive to increase your benefits in ways that worsen society.

This happens in many ways. Eg:

1. Information asymmetry
You want cheap & delicious food. But what if it has ingredients that cause cancer? The producer knows it, but doesn’t tell you.
Would you buy a service without knowing the price, only to learn later you owe a fortune? Eg US healthcare

Markets where producers have much more info than consumers are ripe for gov regulation

Sometimes the market itself self-regulates. Eg when ppl learn a shoemaker uses slaves abroad, the impact to sales might be huge —> incentive to monitor the manufacturing chain.

Most times, though, it either doesn’t, or creates too many losers until self-corrected
The info asymmetry should be regulated away when it’s hard for consumers to figure out the quality of the goods.

So it makes sense to regulate who is a doctor (easy to fake), but not who is a hairdresser (hard to fake).
2. Externalities
When the buyer and the seller make a transaction that benefits them at the expense of others, that’s bad.

Eg: selling highly polluting cars, using slaves for production, using antibiotics on all animals (creates antibiotic-resistant pathogens)...
"The corporation is an externalizing machine (moving its operating costs and risks to external organizations and people), in the same way that a shark is a killing machine." - Robert Monks (2003) Republican candidate for Senate from Maine. Via Wikipedia
Externalities must be regulated away, either through straight regulation or through taxes
3. Monopolies & collusion
Some industries can become monopolies, either naturally (Eg, electrical grid) or through consolidation. A monopoly will always extract too much value for the producer. Collusion will increase prices. They must be regulated away.
4. Monopoly on violence
Everybody is a socialist when it comes to the military and police.

Even free market hawks understand they must be public. Otherwise the private owners of violence would abuse their violence for power.
What is socialism then? It’s when the community as a whole is the producer in a market.

Where else, besides violence, is it useful? Let’s look at 3 typical socialist markets: education, healthcare and pensions
In education, it’s extremely hard to figure out what’s good or bad. Parents make the decision on providers but don’t experience the service, decades pass btw the service and the payoff, educators can use propaganda on kids w/o parents knowing... massive info asymmetry
It’s also too expensive for many, but it’s beneficial to society that all ppl are educated, so there is also a redistributing role for the gov.

However, governments have huge downsides, mostly due to principal-agent pbms:
A. they spend other ppl’s money (the civil servant spends the money of the taxpayer). That makes them wasteful because civil servants don’t suffer the cost of their actions. Only through elections, which is feedback that takes too long and is too imprecise
B. Civil servants also don’t get the benefit of the value they generate.

So in education there are pros and cons of gov intervention. The balance is not obvious, and depends on lots of details. That’s why both public and private education can be great or terrible.
It’s not either or. It’s not capitalism vs socialism. Both can work in education.

Healthcare is similar, but with some differences.

There’s even more info asymmetry. It’s even harder to tell apart good vs bad service. Treatments can sound great but be worthless.
Unlike in education, in healthcare the decision-maker is also the consumer.

Also, most of the spend happens in only a few cases, so there’s an incentive to care for the healthy but not the sick.
That’s why, again, govs and markets can both have a role in healthcare. They both fail in different ways. Their performance really depends not on principles of market vs govs, but rather on the details of implementation.
5. Inequality
It has pros and cons. Done well, it incentivizes ppl to be as productive as possible. However, it prevents consumption for most. There’s also a natural acceptance of certain levels of inequality. Humans accept some, but abhor a lot.
These factors can break down with scale.
Eg, too much $ and you’re incentivized to be a rentier, ie not work (so no value addition to society) but reap lots of value from society.
Also, sometimes the compensation can be too high. Whether Bezos makes $100B or $100M doesn’t fundamentally change his motivation.
Some limits on consumption are good though, because resources are scarce. There, inequality is good: it tries to distribute scarce goods to those who contribute most to society, and to those who value them most
So govs & markets, capitalism & socialism aren’t good or bad. They’re just tools to understand and apply.
I wrote this thread so I could just paste it whenever somebody says something simplistic about markets vs gov. Feel free to bookmark to do the same.

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