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Flow Revolution #1 : A Peaceful Transition

We may extol the virtues of the flow economy, and show how it is superior to the market economy in so many ways, but still one question remains: how do we transition from the Market Economy to the Flow Economy?

The beauty of the Flow Economy is that it does not require nationalization of industry or private property, violent insurrection or anything of that sort. The Flow Economy isn’t a totalitarian system – it is the exact opposite of a totalitarian system.

The End of Capitalism, Part IV : Toward a Flow Economy

We began this series with the prediction that in the next few decades disruptive technologies will bring the global economy to a total collapse.

We also stated that before we show what can be done to prevent such collapse, we need to understand how the market economy operates, and what are its strengths and weaknesses. For that purpose we devoted the previous two posts in the series (Part II : What Is Capitalism? and Part III : 12 Capitalist Myths) to explaining how the market economy works, and describing some of the problems of the market economy; the fact that it rewards marketability over merit, it is driven by corporate-induced consumerism, it overcompensates those at the top and disparages those at the bottom, it is inherently exploitative, its highest ideals are cynicism, nihilism and greed, and the economic theory behind it is based on flawed assumptions, such as the premise that humans behave like profit maximizing automatons.

So how do we confront such an immense and complicated challenge as preventing a global economic collapse and putting the economy on a path to prosperity? What should be evident by now is that the current economic system is hopelessly beyond repair; no amount of reforms can solve its problems or prevent it from total collapse. What we need therefore is a fundamentally new economic paradigm – one which can put us on a path to sustained growth and prosperity, and at the same time be robust enough to address all of the issues above.

Capitalist Myth #12 : Greed Is Not Good

“What human motivation gets the most wonderful things done?” The answer is that human greed is what gets wonderful things done. I wasn’t talking about fraud, theft, dishonesty, special privileges from government or other forms of despicable behavior. I was talking about people trying to get as much as they can for themselves. (In Greed I Trust, Walter E. Williams)

…We don’t give second thought to the many wonderful things others do for us. Detroit assembly-line workers get up at the crack of dawn to produce the car you enjoy. Farm workers toil in the blazing sun gathering grapes for our wine. Snowplow drivers brave blizzards just so we can have access to our roads.

Do you think these people make these personal sacrifices because they care about us? My bet is they don’t give a hoot. Instead, they along with their bosses do these wonderful things for us because they want more for themselves. (Economics 101, Walter E. Williams)

Despite what Professor Walter E. Williams and other Libertarians would like you to believe, greed is not good. Greed means doing whatever you can get away with to get more for yourself. Greed does not motivate people to do the most wonderful things. It motivates people to do the least to get the most. It is the reason why so many of our best and brightest – 47 percent of Harvard University seniors in 2007 – head to Wall Street, and not to science, medicine or engineering. It is the reason why banks sold subprime mortgages to families who could not afford them. It is the reason why in 2006 financial sector profits constituted 27% of all corporate profits in the United States. And it is the reason why the New York State Comptroller’s Office in 2006 had this to say about Wall Street traders:

Capitalist Myth #11 : No Such Thing As A Self-Made Man

Let’s make this perfectly clear: there is nothing wrong with people being confident in their abilities. There is also nothing wrong with people being proud of their achievements and success. No one is denying their initiative. No one is denying their talent or their hard work. However, there is something very troubling about people who believe they are self-made men. Because what’s implicit in their belief is the denial of the role of others in their success, and ingratitude for their contribution.

Capitalist Myth #10 : No Dignity In Work

There is a certain absurdity about the way capitalist society is organized. The reality is that those who are at the top are treated best, and those who are at the bottom are treated worst. Therefore, everyone has the incentive to strive to get to the top. Yet, no matter how hard we try – no matter how much education or skills we have – we cannot all make it to the top. It is simply a logical impossibility.

At the same time, there are certain lines of work that are simply indispensable for the economy and for society to function – in agriculture, construction, manufacturing, education, healthcare and so on. Though the work itself is indispensable, in a capitalist society the workers are not. And though these workers labor for long hours, doing physically and mentally exhausting work, they receive low pay and few if any benefits. That is because in a free market economy the intrinsic value of their labor does not matter.

Capitalist Myth #9 : Highest Ideal Under Capitalism: Cynicism

When John Donne wrote No Man Is An Island he probably was not thinking of a capitalist society. Because in a capitalist society every man is an island – an island of self-interest and profit maximization. And though It is true that capitalism is not exactly a zero-sum game, the system is such that the interests of people – as consumers, producers, workers or simply human beings – perpetually come in conflict with one another.

Under capitalism one company’s success may be another’s loss. Less emissions may be good for the environment, but they are bad for business. Higher wages may benefit workers, but not the employer. Technological progress benefits everyone, except for those who get laid-off because of it.

Corporations are not interested in well informed customers. Fast food chains and soft drink companies do not want people to eat healthy. Credit card companies do not want people to be responsible or pay their bills on time.

The prison-industrial complex is not interested in public safety or reducing crime, it wants more prisoners. The military-industrial complex is not interested in peace, it wants to sell more weapons.

Capitalist Myth #8 : Market Value Distorts Intrinsic Value

There are certain things that the free market does exceptionally well; it makes people industrious and productive, it is responsible for the incredible abundance of products and services we have, and for our high standard of living. Yet, when it comes to providing many essential products and services the free market fails. Why does this happen? Imagine the following two scenarios:

In the first case a scientist is researching a cancer that affects 100,000 people every year. After years of research the scientist discovers that there are two chemical compounds that can effectively treat and cure the cancer. The scientist develops a drug and sells it in the market for $500 per pill.

The second case is very similar to the first. A scientist researching the same cancer discovers two compounds that can effectively cure the cancer. The only difference is that in this case these chemical compounds occur naturally in oranges and pecans.

Though the intrinsic value in both cases is the same – curing a cancer that affects tens of thousands of people every year, the market value is different. In the first case the scientist can expect to make millions, if not billions, of dollars by selling the drug in the market. In the second case the scientist cannot profit from selling any drug when natural substitutes are readily available, so she can at best expect to make a modest income. That is, if she doesn’t first go broke from repaying the loans for the research.

The End of Capitalism, Part III : 12 Capitalist Myths

In the previous posts we explained what the market economy is and how it works. We also described how, in the next few decades, disruptive technologies can bring the global economy to a total collapse. In this series we will show what can be done to prevent such collapse and how to put the economy on a path to prosperity. But first we need to look at some of the problems of the market economy.

Now, before we go on we need to ask you – and this is particularly directed at all the Free Market Libertarians out there – to be patient and keep an open mind. The reason we ask this is that the knee-jerk reaction of free market advocates, whenever they see any criticism of capitalism, is to say: “what is your alternative? more regulations? more government? socialism?” Our answer to that is: “no, no, and no.” The purpose here is not to see how capitalism stacks up against socialism, communism, or any other existing economic system – in that case capitalism wins hands down. Rather, the purpose here is to judge capitalism on its own merits. Only then, can we offer solutions to the problems we face. So before we offer my solution, let’s have a frank discussion about the shortcomings of the current economic system.

Capitalist Myth #7 : For Motivation, Money Isn’t Everything

What motivates us? Standard economic theory states that the primary reason people engage in business or productive activity is for the profit motive. – ie., for money. It also states that people will always choose to maximize their reward while minimizing their effort. As we’ve already demonstrated before, however, there is a significant gap between what standard economic theory says and empirical reality. Why is that?

The simple truth is that social science knows more about human motivation than economic theory, and social science says that there is more to human motivation than just money. Namely, once people earn enough money to satisfy their basic needs, they become motivated by having a sense of autonomy (ie. the desire to be self-directed), mastery (ie. the urge to get better at things), and purpose in their work and life. Money is just not a good enough motivator.

We’ve already discussed the fact that giving people large monetary rewards for their work can result in poorer performance. Now let’s look at a few more cases that clearly demonstrate how money isn’t everything for motivation:

Altruism: an intrinsic motivator

In the 1990s, Swiss government officials wanted to build a nuclear waste facility outside the village of Wolfenschiessen. After a robust public awareness campaign, a bare majority of villagers—51 percent—supported the project. In hopes of bringing more people on board, payments of up to $8,700 per person was offered; instead, support plummeted to 25 percent. Villagers said they considered the money a bribe and felt belittled that their moral quandary had become a financial transaction. “The message was clear: People are much more altruistic than standard economics claims,” says Bruno Frey, an economist at the University of Zurich who studied the Wolfenschiessen case. “The challenge is for economists to nurture this intrinsic motivation instead of crowding it out.”

Contrafreeloading: preferring to earn something over getting it for free

The concept of contrafreeloading –  a term coined by the animal psychologist Glen Jensen – directly flies in the face of standard economic theory, which states that organisms will always choose to maximize their reward while minimizing their effort.

Capitalist Myth #6 : Corporate Bonuses Don’t Improve Performance

Do big bonuses improve the performance of corporate executives? Duke Professor of Behavioral Economics Dan Ariely examined this question in a series of experiments. Here are the results:

We presented 87 participants with an array of tasks that demanded attention, memory, concentration and creativity. We asked them, for instance, to fit pieces of metal puzzle into a plastic frame, to play a memory game that required them to reproduce a string of numbers and to throw tennis balls at a target. We promised them payment if they performed the tasks exceptionally well. About a third of the subjects were told they’d be given a small bonus, another third were promised a medium-level bonus, and the last third could earn a high bonus.

We did this study in India, where the cost of living is relatively low so that we could pay people amounts that were substantial to them but still within our research budget. The lowest bonus was 50 cents — equivalent to what participants could receive for a day’s work in rural India. The middle-level bonus was $5, or about two weeks’ pay, and the highest bonus was $50, five months’ pay.

What would you expect the results to be? When we posed this question to a group of business students, they said they expected performance to improve with the amount of the reward. But this was not what we found. The people offered medium bonuses performed no better, or worse, than those offered low bonuses. But what was most interesting was that the group offered the biggest bonus did worse than the other two groups across all the tasks.

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