A critique of free market capitalism (using the Coase theorem)
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10-12-2013, 08:57 AM
A critique of free market capitalism (using the Coase theorem)
For those that do not know what the Coase theorem is, let me explain.

The Coase theorem attempts to bypass government intervention in the form of taxation or regulation when negative externalities occur. It manages to do so by making the party that causes the externalities negotiate with the afflicted party and eventually getting to a Pareto optimal solution.

An example: A baker is located next to a dentist. The baker has machines that make a lot of noise that bothers the dentist (a negative externality). A possible solution is having the government intervene in the form of taxation or regulation (in this case regulation). What this does is create costs for the baker, since he has to find a way to have his machines make less noise or make sure that his building is somewhat sound-proof. It also create costs for the government, who has to enforce the law and monitor the baker.

Coase came up with a solution. He said that the baker and the dentist should negotiate to get to a solution, thus leaving out the government entirely. Either the dentist pays the baker an amount to produce somewhere else or make sure he makes less noise, or the baker pays the dentist to either move or ignore the sound.

In essence, this is an argument for free market capitalism. Instead of getting the government involved and deciding things for people, they can work it out amongst themselves, provided that the negative externalities are inflicted to a specific party that can negotiate with the party that causes the externalities.

This is where the problem lies. The theorem requires privatisation of everything, making sure everything is someone's property. What is the problem with this? I will explain using an example.

Say there is a farmer who uses a fertiliser for his crops. Some of it goes through the ground into a nearby river and to a lake where it kills fish. Fishermen who fish there are unhappy with this and confront the farmer. There are a few possible solutions: the government could decide to regulate the amount of fertiliser the farmer is allowed to use, which causes a drop in fish dying.

The Coase theorem solves it in a different way. If the theorem were to apply, the lake would be privitised and become property of the fishers. This would make bargaining possible. Either the farmer could pay the fishers so he can keep fertilising as much as he needs, or the fishers pay the farmer so he uses less fertiliser. A Pareto optimum could be reached. No government intervention would be necessary, making it a perfect solution and following the ideas of a free market with little to no regulation.

But there's a problem. What if there is a group of environmentalists worried about the fish dying? In a system where government has powers to intervene, it could still decide to regulate the farmer's use of fertiliser. This would mean simply treating the environmentalists' worries as another negative externality. But if government had no power to intervene, what would happen? You cannot privatise the moral idea that the fish should be allowed to live. It's not simply a problem between two parties experiencing a loss in profit/enjoyment.

In this case, intervention by government would have to be necessary. In fact, if there was no government control and both parties were owners of the two pieces of land involved, there is a good chance that the issue of dying fish would not be known to people who would see this as a problem. The parties would simply agree on a settlement and move on.

I'd like to know what you all think of this. I thought of this today when this example was used in a video we watched in my high school Economics class explaining the Coase theorem. Please let me know if there's a flaw or something I'm not considering. And for the record, I am a libertarian, I just do not believe in free market capitalism, rather in some form of a collectivised economy. This, however, is irrelevant, since the way through which regulation would be applied doesn't really matter here.

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10-12-2013, 11:52 AM
RE: A critique of free market capitalism (using the Coase theorem)
I totally agree with you that in a capitalist economy, the government needs to intervene in order to take care of externalities (both negative and positive). However, I think in the long run we need to try to get away from capitalism altogether and replace it with a network of worker cooperatives. A democratic economy could take externalities into account, without government intervention.

Democratic socialism anyone?
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10-12-2013, 01:13 PM
RE: A critique of free market capitalism (using the Coase theorem)
(10-12-2013 11:52 AM)Valsyrie Wrote:  I totally agree with you that in a capitalist economy, the government needs to intervene in order to take care of externalities (both negative and positive). However, I think in the long run we need to try to get away from capitalism altogether and replace it with a network of worker cooperatives. A democratic economy could take externalities into account, without government intervention.

Democratic socialism anyone?

I'd go for anarcho-collectivism or something in that area. Just gotta replace representative democracy with consensus democracy.

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10-12-2013, 02:50 PM
RE: A critique of free market capitalism (using the Coase theorem)
(10-12-2013 01:13 PM)NL Atheist Wrote:  I'd go for anarcho-collectivism or something in that area. Just gotta replace representative democracy with consensus democracy.

I'm very interested in the topic of anarchism, and by Chomsky's definition, I am an anarchist. (If you're not familiar with it, he defines anarchism as the view that all systems of hierarchy and domination have a burden of proof, and need to be justified.) But by that definition, a fascist could be an anarchist so long as he/she believes that a totalitarian government can be justified. In general, people who call themselves an anarchists want to get rid of the state. However, I'm inclined to believe we need the state in order to clamp down on violence. I recently read Steven Pinker's book The Better Angels of Our Nature, in which he argues, quite persuasively in my view, that the creation of the state has been a significant factor in the historical decline in violence. In stateless hunter-gatherer societies, you were hundreds of times more likely to be killed by violence than today. And in places where the state is ineffective or weak, violence tends to be much higher. This is because without an institution with a monopoly on the use of force, you will have a lot feuding and vigilantism.

But perhaps Pinker is wrong, or there are other ways of reducing violence without the state. I'm open to new evidence and argument.
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10-12-2013, 05:59 PM
RE: A critique of free market capitalism (using the Coase theorem)
(10-12-2013 02:50 PM)Valsyrie Wrote:  
(10-12-2013 01:13 PM)NL Atheist Wrote:  I'd go for anarcho-collectivism or something in that area. Just gotta replace representative democracy with consensus democracy.

I'm very interested in the topic of anarchism, and by Chomsky's definition, I am an anarchist. (If you're not familiar with it, he defines anarchism as the view that all systems of hierarchy and domination have a burden of proof, and need to be justified.) But by that definition, a fascist could be an anarchist so long as he/she believes that a totalitarian government can be justified. In general, people who call themselves an anarchists want to get rid of the state. However, I'm inclined to believe we need the state in order to clamp down on violence. I recently read Steven Pinker's book The Better Angels of Our Nature, in which he argues, quite persuasively in my view, that the creation of the state has been a significant factor in the historical decline in violence. In stateless hunter-gatherer societies, you were hundreds of times more likely to be killed by violence than today. And in places where the state is ineffective or weak, violence tends to be much higher. This is because without an institution with a monopoly on the use of force, you will have a lot feuding and vigilantism.

But perhaps Pinker is wrong, or there are other ways of reducing violence without the state. I'm open to new evidence and argument.

A functioning anarchist society (in my opinion with minimal state, just for upholding the constitution and on a lower federal level other laws) needs a better educated and more caring society in general. It needs a revolution of sorts.

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10-12-2013, 06:28 PM
RE: A critique of free market capitalism (using the Coase theorem)
(10-12-2013 05:59 PM)NL Atheist Wrote:  A functioning anarchist society (in my opinion with minimal state, just for upholding the constitution and on a lower federal level other laws) needs a better educated and more caring society in general. It needs a revolution of sorts.

If an anarchist society can include a minimal state to take care of crime, then I've got no problem with anarchism.
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11-12-2013, 10:41 AM
RE: A critique of free market capitalism (using the Coase theorem)
(10-12-2013 06:28 PM)Valsyrie Wrote:  
(10-12-2013 05:59 PM)NL Atheist Wrote:  A functioning anarchist society (in my opinion with minimal state, just for upholding the constitution and on a lower federal level other laws) needs a better educated and more caring society in general. It needs a revolution of sorts.

If an anarchist society can include a minimal state to take care of crime, then I've got no problem with anarchism.

Well the thing with crime is that a community can decide who to give the authority to prevent crime. There is no absolute ncessity for giant bureaucracy. There is obviously bigger crime that needs to be investigated by federal government, but any authority that is given must be justified, necessary and accepted by the public.

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11-12-2013, 10:48 AM
RE: A critique of free market capitalism (using the Coase theorem)
(11-12-2013 10:41 AM)NL Atheist Wrote:  
(10-12-2013 06:28 PM)Valsyrie Wrote:  If an anarchist society can include a minimal state to take care of crime, then I've got no problem with anarchism.

Well the thing with crime is that a community can decide who to give the authority to prevent crime. There is no absolute ncessity for giant bureaucracy. There is obviously bigger crime that needs to be investigated by federal government, but any authority that is given must be justified, necessary and accepted by the public.

By definition you are no longer in an Anarcho system once you have a Police force. Anarchy is untenable and requires ignoring all of reality to even think it could work. What you two have just proposed is the system we have right now. Honestly I think the Scandinavians have the correct approach to government with an inclusive society that cares for it's members. Taxes are high but you get a lot for them.

(31-07-2014 04:37 PM)Luminon Wrote:  America is full of guns, but they're useless, because nobody has the courage to shoot an IRS agent in self-defense

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11-12-2013, 11:49 AM
RE: A critique of free market capitalism (using the Coase theorem)
"Capitalism" is not a form of government. Goverments all use politics and resources to sell commodities to themselves and to other countries. Gadaffi was a billionaire who owned stock in GE. China makes money off selling cheep goods off slave wages. Saudi Arabia sells oil.

The abuse is global corporatism and both open societies and fascist political states attempt to a greater or lesser degree to "capitalize" off the buying and selling of resources.

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11-12-2013, 01:19 PM
RE: A critique of free market capitalism (using the Coase theorem)
(11-12-2013 10:48 AM)Revenant77x Wrote:  
(11-12-2013 10:41 AM)NL Atheist Wrote:  Well the thing with crime is that a community can decide who to give the authority to prevent crime. There is no absolute ncessity for giant bureaucracy. There is obviously bigger crime that needs to be investigated by federal government, but any authority that is given must be justified, necessary and accepted by the public.

By definition you are no longer in an Anarcho system once you have a Police force. Anarchy is untenable and requires ignoring all of reality to even think it could work. What you two have just proposed is the system we have right now. Honestly I think the Scandinavians have the correct approach to government with an inclusive society that cares for it's members. Taxes are high but you get a lot for them.

I never said that I wanted a police force in the way we have it now. Community watches carry authority, yet they are not a police force in the sense that we have it now. They are appointed by the community and are a part of it.

As for anarchism requiring ignoring reality: I have yet to see you prove that to me.

I never meant this thread to be a discussion about anarchism, I made it to prove that free market capitalism is not a good system.

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