How does socialism work?

[bluethread]

There appear to be only four options regarding governmental action:

1. Let the consequences of personal actions follow without interference.

3. Dictate behaviors by legislation

2. Provide goods and services regardless of personal actions.

4. Withhold goods and services based on personal behaviors.

Given that socialism dictates that the paramount consideration in legislation is what is best for society as a whole, and advocates usually argue for it based on compassion for the individual. How does that work? Which combination or combinations of the options above provide the best outcomes for society as a whole, while showing compassion for the individual?

[Bust Nak]

Thank you. I understand that economies are complicated things, and DI and FB wish to support particular kinds of socialism. However, rather than navigate nuance, I would like to being at first principles and test them to see which ones, if any, work and which do not.

Now, acknowledging that the first principles you have presented are not necessarily Socialism, with a capital S, lets accept them as the basis of our discussion.

I am not sure what capital S Socialism is, but alarm bells are ringing, sounds like you are already pigeonhole Socialism as the bad, oppressive kind of socialism.

This model appears to depend on legislative dictate, good outcomes for society and compassion for the individual, limited to only those area that have serious implication for society. Without getting into specific versions is this a correct summary of the socialist economic model we are to examine?

Sure. Sounds accurate enough.

Provide and withhold goods and services based on needs.

Is this an alternative model, or a general clarification of the means by which legislative dictate seeks to achieve good outcomes for society and compassion for the individual, in the model we are considering?

The latter, a clarification.

[Furrowed Brow]

I have no doubt there are some very smart economists working in the banking industry and yet the banking industry collapsed and needed a bail out. Greed trumps intelligence sometimes.

I see, you think that the housing bubble and financial crisis were caused by greedy, evil bankers. This is a conspiracy commonly held by progressives, particular those who identify with the occupy wall street movement.

Regarding the criminality of banks that point is proven by HSBC money laundering and being the bank of choice for drug cartels and terrorists, multiple banks seem to have been involved in the Libor rate rigging scandal but Barclays look to be the major wrong doer. Bank of America defrauded the Federal Housing Administration. Goldman Sachs cooked the books in order for Greece to enter the EU zone, then bet against Greece, etcetera. And then there are the ongoing investigations into how RBS pulled the plug on business loans in order to assert strip companies. Oooh...and then there were the misleading ratings provided by the rating agencies. The tale of the bank industry's ignominy is a long one. So I think there is good reason to be suspicious of the banking industry.

First, most economists do NOT go to wall street after attaining their PhD. Many of those traders and brokers you see on the floor of the stock exchange probably don't even have a masters in economics. They are business professionals and financiers whose knowledge of economics probably doesn't surpass undergraduate level micro and macro. Now, what economist DO is model the behavior of financial markets from the outside. And most of the models have been empirical success, ie: the capital asset pricing model, the efficient markets hypothesis, etc.

But all that modelling did not help the bank industry avoid collapse. It indeed seems greed trumped sensible economics.

Second, you appear to have some profound misconceptions about the field of economics.

Very likely.

Economists did NOT create any of the financial instruments that contributed the the 2008 crash, such as the credit default swap. These financial instruments were conceived by bankers and financiers who actually engage in banking.

Ah, so the kinds of skills of the technical staff that develop highly complex financial instruments require no understanding or training in economics. All the kinds of things you have mentioned that are involved in a economic education not put to use here. Is this really true?

The credit default swap was developed by "staff" at Bankers Trust in the 1990s. Link 1 The qualifications and expertise is not clear but presumably it was a mix of mathematical and legal and it would be surprising if there were no economic masters involved.

The coming of age of the CDS appears due to Blythe Masters at J.P Morgan when she pitched CDS as an opportunity to get around the restrictions of the Basel rules. Link 2 Blythe Masters gained her economics degree from Cambridge. Link 3

I think it is disingenuous to pursue the line that highly qualified, financially clever, and economically trained folk took no role in the invention, development, and monitoring of this and every kind of highly complex financial instrument the banks thought up. The fact many folk leave college with economics degree, Masters and higher and put their education to use within the banking and financial industry, is much like a trained physicist going to work for an engineering company, picking up some additional expertise along the way, and helping build a bridge or a factory. Anecdotally I had a friend with a math degree who helped design food processing factories. The math was useful for calculating the size of pipes, the flow through pipes and pressure etcetera. Using the same logic as your analogy for physicists my friend was not really doing math when he was designing the factory pipework. I think your point is a matter of semantics and not the economic acuity of the folk involved in banking and finance.

Again, economics is to finance and business what physics is to engineering. When an incompetent and perhaps evil engineer designs an inadequate bridge that ends up collapsing and killing several people, that is no ones fault other than the engineer. Don't you think it'd be rather ridiculous to indict the entire field of physics for the actions of an engineer?

Ah so when it goes wrong that is because someone ignored the advice of the economist.....which was my point. However I think is it tenuous to try and extract economics, economic education from the problems of the financial sector.

So tell me what were Noble prize winning economists Myron S. Scholes and Robert C. Merton doing on the board of hedge fund Long-Term Capital Management L.P. (LTCM) when it collapsed in 1998. Link 4 You might find this film interesting BBC Documentary on vimeo

Or how about how Brooksley Born who as Chairwoman of the Commodity Futures Trading Commission tried to introduce regulation into the derivative markets. She was stonewalled by Alan Greenspan (Ph.D. in economics), Robert Rubin (with an A.B. summa cum laude in economics from Harvard College and also attended London School of Economics), and Larry Summers (Harvard Professor of Economics). It is a fascinating tale of how the foundation of the 2008 economic crisis were laid back in the 1990s by these very high profile economists failing to act. Here is a link to the PBS documentary The Warning. No doubt this is all known to you already. But it is interesting how the economists failed to recognise the dangers of the derivative markets. Maybe there were not very good economists.

[bluethread]

Thank you. I understand that economies are complicated things, and DI and FB wish to support particular kinds of socialism. However, rather than navigate nuance, I would like to begin at first principles and test them to see which ones, if any, work and which do not.

Now, acknowledging that the first principles you have presented are not necessarily Socialism, with a capital S, lets accept them as the basis of our discussion.

I am not sure what capital S Socialism is, but alarm bells are ringing, sounds like you are already pigeonhole Socialism as the bad, oppressive kind of socialism.

Not really, by capital S I mean a universally accepted definition. We are going to accept this particular model, so we don't get bogged down in what is "real" socialism.

This model appears to depend on legislative dictate, good outcomes for society and compassion for the individual, limited to only those area that have serious implication for society. Without getting into specific versions is this a correct summary of the socialist economic model we are to examine?

Sure. Sounds accurate enough.

Provide and withhold goods and services based on needs.

Is this an alternative model, or a general clarification of the means by which legislative dictate seeks to achieve good outcomes for society and compassion for the individual, in the model we are considering?

The latter, a clarification.

Good, so the table is set, legislative dictate, good outcomes for society and compassion for the individual, limited to only those area that have serious implication for society, providing goods and services based on needs.

Now let's see how this works.

Is there are particular type of government structure that would work best; dictatorship, representative republic, democracy? We may as well look at the best case scenario, at least to begin with. I ask because the first issue that jumps out at me is who is doing the dictating and what assures that the dictates are according to the goals and limitations we have established?

Once we have established an optimal structure, how is it that structure balances good social outcomes and individual compassion? For example, does the good of the many outweigh the good of the few, or the one? Is it a matter of those who provide the greatest benefit to society receive more compassion, or do all receive equal compassion regardless of the benefit they provide to society as a whole?

Third, how does one determine what constitutes a serious implication for society? What determines the line between what is and is not a governmental concern?

Finally, how is "need" to be determined? How are those needs balanced when there are limited goods and services?

At this point, there is no right or wrong answer. I just want to see how this plays out.

[Bust Nak]

Is there are particular type of government structure that would work best; dictatorship, representative republic, democracy?

I think the consensus says representative republic regardless of economic system, it seemed to be the system that's risen to the top in the shake up of human history. I can see why, the best part of democracy, minus tyranny of the masses.

Once we have established an optimal structure, how is it that structure balances good social outcomes and individual compassion? For example, does the good of the many outweigh the good of the few, or the one?

Mostly yes, other than what is labelled human rights.

Is it a matter of those who provide the greatest benefit to society receive more compassion, or do all receive equal compassion regardless of the benefit they provide to society as a whole?

The latter, bearing in mind that equal compassion does not imply equal support, which is based on needs.

Third, how does one determine what constitutes a serious implication for society? What determines the line between what is and is not a governmental concern?

Finally, how is "need" to be determined? How are those needs balanced when there are limited goods and services?

Does the "representative republic" answer above also answer these questions?

[bluethread]

Is there are particular type of government structure that would work best; dictatorship, representative republic, democracy?

I think the consensus says representative republic regardless of economic system, it seemed to be the system that's risen to the top in the shake up of human history. I can see why, the best part of democracy, minus tyranny of the masses.

Sorry it took so long to get back to this, representative republic it is.

Once we have established an optimal structure, how is it that structure balances good social outcomes and individual compassion? For example, does the good of the many outweigh the good of the few, or the one?

Mostly yes, other than what is labelled human rights.

Why the exception? How does one establish "human rights' in a representative socialist republic? Also, how does one maintain "the good of the many outweigh the good of the few, or the one." or a variant of it, in a representative republic? Couldn't the representatives just legislate in their own self interests, or the interests of a chosen few?

Is it a matter of those who provide the greatest benefit to society receive more compassion, or do all receive equal compassion regardless of the benefit they provide to society as a whole?

The latter, bearing in mind that equal compassion does not imply equal support, which is based on needs.

Interesting, so what motives one to provide a benefit to society?

Third, how does one determine what constitutes a serious implication for society? What determines the line between what is and is not a governmental concern?

Finally, how is "need" to be determined? How are those needs balanced when there are limited goods and services?

Does the "representative republic" answer above also answer these questions?

I presume you are saying that the representative regulate whatever they wish to whatever extent they wish. Is that correct? Also, the representatives decide who gets how much of what, and one really has no right to complain, because by definition, what one gets is what one needs, regardless of how much or how little that is. Is this correct?

[Bust Nak]

Why the exception?

Because it's morally right.

How does one establish "human rights' in a representative socialist republic?

The same way how everything else is established in a representative socialist republic, decided by representatives selected by voting.

Also, how does one maintain "the good of the many outweigh the good of the few, or the one." or a variant of it, in a representative republic? Couldn't the representatives just legislate in their own self interests, or the interests of a chosen few?

The same way how one maintain "free enterprise" in a representative capitalist republic, when the representative can just legislate a health service that is free at the point of use. These questions aren't related to how socialism works, but how representative republic work.

Interesting, so what motives one to provide a benefit to society?

Sticks and carrots. Same as how every society motives their member.

I presume you are saying that the representative regulate whatever they wish to whatever extent they wish. Is that correct? Also, the representatives decide who gets how much of what, and one really has no right to complain, because by definition, what one gets is what one needs, regardless of how much or how little that is. Is this correct?

The specifics are up to the representatives to decide, the base level welfare can be adjusted according to how much or how little there is. Same as any other representative republic, socialist or otherwise. As for complaining, the best form of complain is to vote someone else. I have to ask, other than the focus on social welfare, why do you imagine representative socialist republic would operate different to any other representative republic?

[bluethread]

Why the exception?

Because it's morally right.

How does one establish "human rights' in a representative socialist republic?

The same way how everything else is established in a representative socialist republic, decided by representatives selected by voting.

Also, how does one maintain "the good of the many outweigh the good of the few, or the one." or a variant of it, in a representative republic? Couldn't the representatives just legislate in their own self interests, or the interests of a chosen few?

The same way how one maintain "free enterprise" in a representative capitalist republic, when the representative can just legislate a health service that is free at the point of use. These questions aren't related to how socialism works, but how representative republic work.

Not all representative republics establish or recognize "human rights". All a representative republics does is establish that a select few will make the laws. By adding the word socialist, one indicates that the chosen few are to establish the laws in the best interests of society as a whole? Adding capitalist indicates that property rights are protected and adding "Free enterprise" indicates that the chosen few will only pass laws to resolve general conflicts. That is a laissez-faire form of government, that allows the natural arms length exchange of capital make the decisions regarding what is best for society as a whole. However, we are not talking about laissez-faire capitalism. We are talking about socialism. Is there such a thing as laissez-faire socialism?

That said, legislating a health service that is free at the point of use is not capitalism. Also, it is not free in any case, it is provided at not cost to the consumer. In a capitalist system, the provider can just withhold services and there is no conflict, because there is no transaction. Now, if you are suggesting that in a socialist system the legislators get the same services as everyone else, how does that happen, given that the legislator will most likely demand betters service?

Interesting, so what motives one to provide a benefit to society?

Sticks and carrots. Same as how every society motives their member.

Not all societies use carrots and sticks, but we are talking about socialism here. What carrots and sticks do the representatives use and where do they get them? I know it is probably similar to other systems, but let's just focus on those things that would work in a socialist system.

I presume you are saying that the representative regulate whatever they wish to whatever extent they wish. Is that correct? Also, the representatives decide who gets how much of what, and one really has no right to complain, because by definition, what one gets is what one needs, regardless of how much or how little that is. Is this correct?

The specifics are up to the representatives to decide, the base level welfare can be adjusted according to how much or how little there is. Same as any other representative republic, socialist or otherwise. As for complaining, the best form of complain is to vote someone else. I have to ask, other than the focus on social welfare, why do you imagine representative socialist republic would operate different to any other representative republic?

No, it is not the same with all representative republics. There are representative republics where there is no "base welfare". I am not imagining anything. I am enquiring. If socialism works the same as any other representative republic, then just state how you believe it works in every representative republic and leave it at that. There is no need to engage in comparative justification here. I have not made any judgments. All I am doing is asking how thing work under socialism. When I we do get to the point of making judgment, then comparisons might be useful. However, let's just focus on socialism for now.

Ok, there are 2 livers available and 100 people who need a liver and one of them is the President, ie House of Cards. In a socialist society, you say it is up to the representatives. Are they to micromanage these decisions, or set a policy in line with "the good of the many . . . " principle?

[Furrowed Brow]

Here are a couple of links referring referring to the research of Professor Virginie Perotin of Leeds University Business School. Just more evidence that co-operatives are not untenable as some claim.
Worker Cooperatives Are More Productive Than Normal Companies
What do we really know about co-operatives?

[WinePusher]

I see, you think that the housing bubble and financial crisis were caused by greedy, evil bankers. This is a conspiracy commonly held by progressives, particular those who identify with the occupy wall street movement.

Regarding the criminality of banks that point is proven by HSBC money laundering and being the bank of choice for drug cartels and terrorists, multiple banks seem to have been involved in the Libor rate rigging scandal but Barclays look to be the major wrong doer. Bank of America defrauded the Federal Housing Administration. Goldman Sachs cooked the books in order for Greece to enter the EU zone, then bet against Greece, etcetera. And then there are the ongoing investigations into how RBS pulled the plug on business loans in order to assert strip companies. Oooh...and then there were the misleading ratings provided by the rating agencies. The tale of the bank industry's ignominy is a long one. So I think there is good reason to be suspicious of the banking industry.

What's up with the huge non sequitur?

I specifically said you, along with the occupy wall street people, seem to believe that the housing bubble and financial crisis were caused by evil, greedy bankers. This appears to be a belief that you cling to, yet you have NO justification for it. Instead, you diverge off on irrelevant digressions on Libor. I'm sorry if you got the impression that I'm defending the bankers who perpetrated the Libor scandal or those who stole money from deposits in Cyprus. I'm NOT defending these thieves, but I'm also not so gullible as to believe that a few greedy, corrupt banksters were able to bring down the economy.

First, most economists do NOT go to wall street after attaining their PhD. Many of those traders and brokers you see on the floor of the stock exchange probably don't even have a masters in economics. They are business professionals and financiers whose knowledge of economics probably doesn't surpass undergraduate level micro and macro. Now, what economist DO is model the behavior of financial markets from the outside. And most of the models have been empirical success, ie: the capital asset pricing model, the efficient markets hypothesis, etc.

But all that modelling did not help the bank industry avoid collapse. It indeed seems greed trumped sensible economics.

Which model has EVER purported to be able to predict the ups and downs of the financial markets?

In fact, if you understood what the efficient markets hypothesis actually states you would realize that your statement is absurd. The efficient markets hypothesis states that financial markets are efficient because investors cannot predict where asset prices are moving. If investors could predict exactly where asset prices were heading then they could game the system and consistently earn positive rates of return and NEVER incur any losses.

The main reason why the financial markets collapsed in 2008 is that virtually no one ever thought that housing prices would fall. They all thought that housing was a bull market. Their predictions were based on past trends and they were wrong, which can be seen as confirmation of the efficient markets hypothesis.

Economists did NOT create any of the financial instruments that contributed the the 2008 crash, such as the credit default swap. These financial instruments were conceived by bankers and financiers who actually engage in banking.

Ah, so the kinds of skills of the technical staff that develop highly complex financial instruments require no understanding or training in economics. All the kinds of things you have mentioned that are involved in a economic education not put to use here. Is this really true?

Not really. Sure, an understanding of how money and banking works would be necessary to work on Wallstreet, and the basics of money and banking are taught to all economics students, but to develop highly technical financial instruments requires more of an understanding of mathematics and finance.

So tell me what were Noble prize winning economists Myron S. Scholes and Robert C. Merton doing on the board of hedge fund Long-Term Capital Management L.P. (LTCM) when it collapsed in 1998.

Not sure, can't say that I've followed every single detail of their lives.

But, I am familiar with the Black-Scholes (Merton) model they developed, and it has been empirically successful in what it attempts to actually do. The Black-Scholes model doesn't attempt to save or prevent hedge funds of banks from failing. If that is what you think the purpose of these models are then you're dead wrong. The purpose of this particular model and the formula is to optimally price an option, and it has been successful at doing this.

Or how about how Brooksley Born who as Chairwoman of the Commodity Futures Trading Commission tried to introduce regulation into the derivative markets. She was stonewalled by Alan Greenspan (Ph.D. in economics), Robert Rubin (with an A.B. summa cum laude in economics from Harvard College and also attended London School of Economics), and Larry Summers (Harvard Professor of Economics).

Alan Greenspan was probably the main perpetrator behind the 2008 crisis, but not because he blocked additional regulation of the derivatives markets. If there hadn't been an artificial increase in home ownership, there would not have been any prevalent excess in lending and there would not have been any of these bad, subprime loans that the collateralized debt obligations consisted of. Greenspan, Bernanke and Yellen (all of whom are economists) are to be blamed for following the Keynesian prescription of easy money and low interest rates.

[Furrowed Brow]

I see, you think that the housing bubble and financial crisis were caused by greedy, evil bankers. This is a conspiracy commonly held by progressives, particular those who identify with the occupy wall street movement.

So I think there is good reason to be suspicious of the banking industry.

I specifically said you, along with the occupy wall street people, seem to believe that the housing bubble and financial crisis were caused by evil, greedy bankers.

And my answer is that I am suspicious of the motivation and greed and propensity for criminal activity of the banking and related industries. I think it is obvious that the wrong doing and crimes mentioned were not down to a few rogue traders, but were an essential part of banking practice. Big profits versus small fines, and maybe a few low level employees thrown under the bus, a recipe for malfeasance and misfeasance.

As to the specific causes of the housing bubble these are no doubt complex but I would not ignore malfeasance and misfeasance. I would lean more to blaming structural problems within the banking industry and an economic model that relies on "more debt" to sustain itself.

This appears to be a belief that you cling to, yet you have NO justification for it. Instead, you diverge off on irrelevant digressions on Libor. I'm sorry if you got the impression that I'm defending the bankers who perpetrated the Libor scandal or those who stole money from deposits in Cyprus. I'm NOT defending these thieves, but I'm also not so gullible as to believe that a few greedy, corrupt banksters were able to bring down the economy.

Well they might not have done it on their own, but the banking industry did collapse and this did bring down the world economy. And I don't think it is a few greedy bankers. I tend to think is largely comes down to how the banking system is structured and how the economy is reliant on an overinflated banking sector. It is a systemic problem.

Which model has EVER purported to be able to predict the ups and downs of the financial markets?

A full blown collapse is not "ups and downs". It is a major history defining event and there were multiple economists and financial pundits who predicted the collapse. True not so many Keynesians. Many held some form of Austrian theory, Steve Keen is an alternative economists who also predicted the collapsed based on mathematical models drawn from Minsky and focusing on the levels of private debt. Here is a link to a presentation by financial analysis Mike Maloney predicting the housing bubble was going to burst back in 2005. And here is a list of 11 who predicted the collapse.

In fact, if you understood what the efficient markets hypothesis actually states you would realize that your statement is absurd. The efficient markets hypothesis states that financial markets are efficient because investors cannot predict where asset prices are moving. If investors could predict exactly where asset prices were heading then they could game the system and consistently earn positive rates of return and NEVER incur any losses.

Then either the hypothesis is wrong or the 11 economists listed were using voodoo.

The main reason why the financial markets collapsed in 2008 is that virtually no one ever thought that housing prices would fall. They all thought that housing was a bull market.

I think it paid a lot of people very well for a short time to ignore the signals the market was in a bubble. Sure it is not possible to predict accurately when the market is going to break, but the fact it is unsustainable and the fact it will break devastatingly it turns out was predictable. I have no reason to doubt that the banks did not have at least a few number of doomsayers on their staff that were not listened to, I am also sure there were a lot of folk using the wrong models.

So tell me what were Noble prize winning economists Myron S. Scholes and Robert C. Merton doing on the board of hedge fund Long-Term Capital Management L.P. (LTCM) when it collapsed in 1998.

Not sure, can't say that I've followed every single detail of their lives.

But, I am familiar with the Black-Scholes (Merton) model they developed, and it has been empirically successful in what it attempts to actually do. The Black-Scholes model doesn't attempt to save or prevent hedge funds of banks from failing. If that is what you think the purpose of these models are then you're dead wrong. The purpose of this particular model and the formula is to optimally price an option, and it has been successful at doing this.

Erm...are you saying you are not aware of the history of Long-Term Capital Management or the reasons for its collapse. Maybe you did not watch the documentaries I linked.