Saturday, 28 November 2009

The Dubai Scare Makes The Market Look Stupid

The latest market plunge caused by investors dumping shares after Dubai's shock request to suspend loan repayments makes me believe more so now than ever before that the capitalist market system is really incompatible with realistic human nature. In theory, it's supposed to work because humans are expected to behave in a rational, self-interested manner which, to some extent, is true. But in a system where the sum total actions of all individuals acting in a rational manner in the system is supposed to result in an overall good, it is extremely susceptible to nonsense outcomes where tremendous losses are experienced and unnecessary unhappiness is created when everyone acts irrationally also due to human nature, such as when everyone panics, acts defensively (so that the prisoner's dilemma situation becomes an all-lose scenario) or behaves unintelligently due to a lack of complete information with which to make rational decisions.

I'm a little more lenient on the last point, as the reason for incomplete information is often due to the lack of liberal freedom, and illiberal conditions can only be created because politics undermines the 'efficiency' of the market (created by either the presence of monopolies or redistributive governments). Political influence thus results in withheld information and/or individual liberty constrained by unnatural economic flows. But otherwise, capitalism and free markets simply create room for the avalanches caused by snowflakes who don't see themselves as responsible.

I guess where one really stands on this depends on what one deems as the real direction of human nature. But while I believe it is true that humans are self-interested, each individual's psychological reactions to situations, particularly ambiguous ones that are notoriously created by the uncertainty of the market, makes each supposedly 'rational' self-interested action irrational instead. In other words, we do not meet the human condition that capitalism expects for its free market mechanism to work. I suppose this begs the question of what social system really works then, since communism has proven to be the opposite end of the spectrum and has been a great fiasco as well. Socialism? Haha. We're digressing already.

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