Sabine
patreon
Capitalism is good. Let me explain.
🕑 Added 2023-09-02 12:00:05 +0000 UTC[This is a transcript with links to references.]
Capitalism will kill us all. That is, if you trust Greta Thunberg. Which maybe you should not. Free markets will save us all. If you trust Robert F Kennedy, junior. Which maybe you should not. Maybe we should talk about what capitalism and free markets are. Will they kill us or save us? That’s what we’ll talk about today.
Before we talk about capitalism and markets and stuff, we need to talk about money. I don’t mean my money, though while we’re at it, check out my Patreon. I mean money in general.
What do we even need money for? Suppose you have an apple, but you’d rather have an egg. You ask your friend Sue, the one with the chickens, and trade and egg for an apple. Ok. But what if Sue doesn’t want an apple, she’d rather have a banana?
No problem, you ask your friend Joe with the bananas if he will trade your apple for a banana. Then you trade the banana for Sue’s egg. Ok, but what if Joe doesn’t want an apple either, he’d rather have new shoelaces. No problem, you ask your friend Mary if she’ll take an apple for shoelaces, give the shoelaces to Joe, take the banana, give the banana to Sue and sure enough you have your egg.
It works, but honestly, that seems a little cumbersome. How about we instead trade something that everyone will accept because they can exchange it for something else later. Like, gold maybe. I give some gold to Sue, and she gives me an egg. Then she can take the gold and give it to Joe and get her banana. That’s much easier. Hurray, we just invented commodity money!
Alright, but now imagine you don’t want to buy an egg, but an entire chicken farm. That would be a lot of gold you’d have to wheel around. So how about we instead, I dunno, print the face of a king onto a piece of gold and say it stands for an entire cart of gold. Come to think of it, why bother with gold, let’s just print it on a piece of paper. The paper itself doesn’t have much of a value, but if we all agree on what it stands for, we can use it for trade. Hurray, we just invented token money!
That sounds great, but the problem is, if a lot of vendors just refuse to accept this money, it stops working. So in reality token money is backed up by a king or government which enforces that vendors accept the money as payment. It’s then called “fiat money”. Almost all money we use today is “fiat money,” except cryptocurrencies, but that’s another story...
Fiat money is fascinating, because it’s ultimately still based on trust. If all you guys watching this video freak out, exchange your entire US dollars for Euro, and tell your friends to do the same, the US dollar would collapse. So don’t do it.
Several economists have argued that any community of sufficiently intelligent traders will eventually introduce a type of token money because it’s the most efficient way to distribute resources. This idea was maybe first clearly formulated by the Scottish economist Adam Smith.
Alright, so we have money, but our busy traders still have a problem. Suppose you have a lot of apples and not sufficiently many people to buy them. Your amazing apples rot away, what a shame. You would like to make apple juice from them, but you can’t afford a juice press, so your breakthrough innovation doesn’t come into being. That sucks.
However, your friend Sue has been getting really rich with all her chickens. So rich in fact, she’s sitting on a big pile of money that she doesn’t know what to do with. Sue sees your problem and offers you a deal. She gives you some of her money, so that you can buy your juice press. You just have to agree that if you get rich with your juice press, you give her the money back, plus something on top. That money which Sue gives to you is your “capital”.
And such was born the “capitalist”. The capitalist is a person or institution who provides capital to those who want to launch a new business, someone who is able and willing to take the risk that this capital will never have a return on investment.
Today, we grow up with money and banks and all, and we tend to take them for granted. And while money lending and a basic notion of financial debt date back thousands of years, capitalism and all the elaborate financial instruments that come with it, is a surprisingly recent innovation. It didn’t really take off until the industrial revolution 150 years ago and it’s dramatically changed the world.
Scientists tend to associate the stunning societal progress we’ve seen since then to science and technology, but I think that’s having it backwards. The driver of all this progress was the capitalist system that allowed an efficient allocation of resources. By resources, I don’t just mean raw materials, but also goods and human resources. Capitalism is a system that distributes these resources without anyone needing to have an overview, just by interactions between traders. It’s pure genius if you think about it. And that’s why science took off, not the other way round.
Remember that story about how the Scottish physician Alexander Fleming supposedly accidentally discovered penicillin in 1928, and saved the lives of countless wounded soldiers in World War II? Yeah, well, that isn’t really what happened.
First of all, scientists had discovered that the fungus penicillium inhibits the growth of bacteria decades earlier, it just wasn’t widely known. The British physiologist Burdon-Sanderson for example observed this in 1870 and wrote a book about it. There are also several other written documentations from other people around that time who had studied the effect of fungi on bacteria.
Fleming’s contribution was that he realized the fungus was shedding a particular substance, which he called penicillin. But he pretty much left it at naming the stuff.
It wasn’t until 10 years later that a group at the university of oxford set out to find a way to grow the fungus and extract penicillin in large quantities. They then conducted medical trials, and once they were sure penicillin was both safe and effective, their method was scaled up by the pharmaceutical industry. Two members of the Oxford group later shared the Nobel Prize with Fleming.
So what saved all those many lives wasn’t just Fleming’s observation in a petri dish. The game changer was producing the stuff in large quantities and bringing it where it was needed. Innovation and industrialization, ultimately going back to capitalism. That’s what saved all those people.
Capitalism got a pretty bad rep when Marx claimed that it’s just about grabbing hold of the “means of production” and “exploiting the working class”. Of course, there was an element of truth to his fears, because some things went badly wrong during the industrial revolution, but that’s another story…
For today we just need to know that capitalism, like fiat money, requires a governing institution. That’s because someone must be there to enforce contracts, should the need arise. That, and a few other things, as we will see in a moment.
There are many different ways to govern a capitalist system, and they go by different names like “welfare capitalism” or “laissez-faire capitalism” or “state capitalism”. Now, one can debate how well the actions of certain governments reflect the interests of their electorate, if they were elected in the first place, but that’s another story. Even so, capitalism has been enormously successful in unlocking societal progress, and the nations who still don’t use it, such as North Korea, Cuba, and Laos, are places you don’t want to live.
We’ve seen that capitalism is a system that combines markets with governing rules to efficiently distribute resources. This distribution of resources works best if everyone can put forward their offers freely and customers can pick what they want. This is known as a “free market,” and it optimizes the distribution of resources by competition. Free markets are a beautiful example of decentralized self-organization, an “invisible hand” as Adam Smith put it.
The way it works in a nutshell is that everyone can trade around until they’ve got what they think is the best combination of goods, services, and financial assets. If someone doesn’t use resources as efficiently as possible, some competitor can do it better and beat them off the market.
This idea also goes back to Adam Smith but later blossomed into an entire discipline now known as “microeconomics”. Microeconomics is all about how agents – that could be people or corporations or institutions – trade, and how that trade distributes resources where they are most needed. To be fair, microeconomics has some shortcomings when it comes to explaining how we trade in reality, but that’s another story… By and large, microeconomics works fine, and several Nobel Prizes have been awarded for it.
One of the most important insights to come out of this research is that free markets only work to everyone’s benefit if they are set up properly. Keep in mind that capitalism is not just a free market. It’s a free market plus the governing framework to run it.
Free markets do not, for example, work to everyone’s favour if some people have insider information which gives them a trading advantage. This is why we have laws against that. Free markets also work badly if one single company dominates a market sector and can use their power to force customers to stick with them. This is why we have laws against that.
And free markets also don’t automatically account for externalities, such as environmental pollution. An externality is generally any consequence of trade that doesn’t directly affect the trading parties. They can be both good and bad, but it’s the bad ones that are the problem.
Suppose there’s a river going by your house that everyone is free to use. One day a clothing company puts up a factory and dumps their toxic waste into the river. All the fish die, and no one dares swimming in the river anymore. This is clearly not an optimal use of resources, you might say. Why didn’t Smith’s “invisible hand” prevent it?
The reason market forces didn’t prevent it is that the water was free to use. The market didn’t know it had *any value, so pollution couldn’t reduce its value.
There are several ways to deal with problems like this. One is to just pass laws that forbid certain actions and punish those who disobey. Or you can put a tax on the pollution so that at least the government has money to clear up the mess. Or you can put a price on using the water. There are pros and cons to all of those, but that’s a different story…
The story for today is that we have known that externalities can lead to market failures since the middle of the last century. Carbon dioxide emissions are such an externality. For the market to optimize the use of fossil fuel resources, we should have put a price on releasing carbon dioxide into the atmosphere. We did not, and this is why we we’re now in deep shit.
So, yes, our current capitalist systems do have a problem with environmental protection. But the reason isn’t that there’s something wrong with capitalism per se. It’s that we didn’t set up it up correctly in the first place. Basically, the origin of the problem is that no one paid attention to economists.
And unfortunately, we still don’t pay enough attention to economists. The current situation is that companies who voluntarily produce environmentally friendly goods put themselves at a competitive disadvantage, because other companies exploit the environment at zero cost. This moves the burden onto the consumer. If you want to buy a climate friendly product today, you face extra costs, because fossil fuels are cheap and getting to net zero is not.
This makes no economic sense, and it will ultimately not work. It’s completely upside-down. Products whose production causes damage to the environment, which then requires adaption and mitigation should be more expensive, not less expensive.
This is why economists have argued for decades that we need to put a price on carbon, and it’s why several countries have now introduced carbon taxes, or use a cap and trade system. To calculate the cost of carbon emissions one basically needs to evaluate the damage the emissions would cause in the future and then put a price on them. It’s called the “social cost of carbon”. There’s a long debate about just exactly how to calculate this, but that’s another story…
At the moment, carbon taxes and trading schemes only apply to about a quarter of all emission and the price of carbon is almost certainly still too low, but it’s a step in the right direction.
In summary, capitalism has been incredibly successful in advancing society. To the extent that it has caused us problems it’s because we haven’t properly used it. The solution is not to abandon it, but to make sure it works to our advantage. There’s no simple way to do that, and everyone who claims that the solution is to either discard capitalism or blindly trust it didn’t understand the problem in the first place.
Comments
That´s a very accurate summary and conclusion, I think.
Hi all, I’m just getting to this and reading through everyone’s comments. It’s probably no surprise that this video received a lot of backlash because it has a clickbait-y title that is guaranteed to rankle. Capitalism is a dirty word to many people, and has done a lot to earn that reputation, so I’m sure many folks probably clicked dislike without even watching, or went into the video with a negative preconception about it that colored their views. Admittedly, I went into it with a certain wariness. Having watched, I don’t even necessarily think the video lived up to its title, as it did not read to me as a full-throated defense of capitalism or even much of an opinion piece. It was mostly a high-level explainer, which is what anyone should expect from Sabine, with a few examples of how capitalism has driven innovation. I do think the video pays too little attention to the many obvious negative effects that capitalism has on the environment, our social structures, and the lives of individuals, but part of that is that this is a massive topic and not everything fits in a short video. I have to believe Sabine made this in response to a negative attitude about capitalism that has become rote and that many people might not actually give much critical thought toward. Again, I think capitalism has earned its bad reputation. But I think there is still value to getting people to question why they believe what they do, or to at least add some nuance to their opinion, even if their opinion remains the same. For me, a more interesting question to consider than “is capitalism good” is the question of what are the realistic alternatives and are there practical pathways to reach them? Decrying capitalism is very easy and very low stakes and will probably get you a lot of likes. But as capitalism is probably the most deeply entrenched system in human history, and not one that is easily uprooted, what steps could society take to actually disentangle itself from that system, and where might the world believably go from there? Or are there ways to work within the current system or that hybridize it with other economic philosophies in ways that promote the well-being of the masses and the planet and not just those few people who have everything and still want more?
Thanks, we much appreciate your support.
Hi Javier, though I think this vid was a `shot in the oven` (the only one in SHs work, that I know), I want to greet you here in that forum. Good decision to come here.
Sabine. I have been enjoying your videos for quite some time. This video in particular, and doing a science approach to a heavily debated topic made me subscribe. I know it's not much, but I'm happy to support your content
Good morning Tracey, very sad, and it´s even worse, one hour before the vid was uploaded, the channel switched on 999, after that it went backwards, and is resting since three days, while normally winning thousand people per day, since I follow. If Sabine gives a shit for that, that´s ok, if she´s "annoying people" and "not stick to physics " (many comments recommended that after the highly loved video last week) she does it right. This personality surley is one of the reasons, why many of us, including me, are here. But she should hear on what the people tell her, these ones are mostly not the professional haters, ideologicsts and fanatics. If she argues, people didn´t understand, what she reported and her fail is just that she underestimated that lack of knowledge, she´s clearly wrong. She says unreflected, capit. is good in the title and argues, that it´s related to the fact, that it doesn´t cause climate change, what´s right, of course. But how to conclude it from the title? She says, again unreflected, capit. is "genius", that´s not economy, that´s ideology, even if I take her style, sarcasm, joking and free-thinking into account, that people, including me, like so much. Here we have not just a confusion of terms like capit.=deregulation. Also her beat on Greta wasn't a good idea. How can she say so? I became aware of this channel, by Sabine´s wittiness and her extraordinary ability (just two of her many great abilities) to explain in an accurate way. This vid´s explaining power is, as I said, good for 10 years old children maximum (or am I too dumb, to understand it?). So yes, for me this is a low blow, because it destroys so much of her excellent work of years in just 15minutes, I´m afraid, because that ´s how socialmedia works. Hope, she has a nice and relaxing holiday with her fam, and finds a way out of that. - I remain!
Well, it's been a bad week for SWTG; it looks like over 1000 people unsubbed over this video. As I recall, the reason economics isn't considered a "real" science is because it has untestable hypotheses, a lack of consensus among economists, and so many influences that it is impossible to isolate individual drivers of the system. The only thing one can do in a 16-minute video is grossly oversimplify and omit things, which a lot of people took issue with. "Sabine, you should stay in your lane and not talk about politics/economics!" said a thousand non-economists. "Sabine, you did a fine job simplifying down to what your main point was in a 16-minute video" said actual economists. "Sabine, where are your data and stop dissing Cuba!" said a bunch of people in the YouTube comment section, all of whom would rather live in the US with no real socialized health care than move to Cuba with, in some ways, a much better health care system. Hmm... I wonder why? "Sabine, that is not how money evolved, stop promoting the barter myth!" said a lot of people who assumed Sabine said something she didn't. A well-placed banana is always a must when demonstrating why money is useful. "Sabine, you're mixing up terms, markets vs. capitalism vs. regulations, and you vindicate greedy capitalism of all of it's ill effects that you hand-waved away!" said so many people using technology developed in capitalistic free-ish regulated-ish markets. Let's be clear, I'm pretty stupid about most things, but I will defend this video for it's fundamental premise, which was ultimately about babies and bathwater. The people who took issue with the video seemed to have a forest vs trees problem -- that and they wanted a 19-part in-depth miniseries instead of the 16-minute oversimplification presented. Whether you like, dislike, or are indifferent to this week's video, look at all of the new names popping up here that have never commented on videos in the past. I appreciate the conversations, whether I participate in them or not, so, from someone who has lived in these parts for a few years, I welcome all of the newbies and the long-time lurkers who've come out of the woodwork to comment.
Yes it's a very good explainer. Well done! I would go further than the statement "To calculate the cost of carbon emissions one basically needs to evaluate the damage the emissions would cause in the future and then put a price on them." That statement is pretty much a statement of the impossible. If adhered to, it would become another recipe for inaction. The world has committed to stopping net emissions by 2050 or so. Therefore we are envisaging a world in 2050-2100 where any emissions are absorbed. I (and the late Prof Peter Read) have argued since around 1990 that this paradigm provides the simplest way to regulate that a price be put on carbon emissions. Peter called it the Tradeable Absorption Obligation or TAO. Note that one leaves it to the market to determine the price, and government's role becomes to set the quantum of net emissions allowed. We know that the quantum in 2050-2100 will be/needs to be/has been promised to be zero. We know what net emissions are now. Simply require that the TAO apply from now on according to a simple ramp-down (or preferably faster to stimulate the transition technologies including biofuels). You can read more about this on my blog https://isothermal.site/
As far as solving Climate Change by imposing a cost on emissions, I don't think it's enough. What is needed is to make the feedbacks between actions and impacts much quicker and local (so local in spacetime), otherwise they get lost in noise, and I don't see my impact. I can pay for more emissions by working harder, or just externalizing other costs. Much better to localize the economy so that I see how precious natural resources are (yes even renewable ones), but having immediate consequences from their use and transformation to myself, my family or my community (which of course doesn't exist anymore locally for most people, but that's another story;-)) Just seeing how clueless people are about where food, water, building and clothing materials come from makes me think no carbon tax will solve Climate Change and other earth destroying actions. Also, seeing how helpless most people are with regards to almost everything: they can't make or repair anything in the material world... They have been indoctrinated and incentivized into a consumeristic helplessness. No carbon tax will solve this.
I quite liked this explainer, which I enthusiastically played for my son, and agree with your basic conclusions. Well done!
Sabine, Happy Sunday! There are a few problems here. First, as noted above, barter as the original economy is a myth, see that video that summarizes Graeber's research discussed in his book "Debt". Second, laissez-faire economics, I prefer this term to 'capitalism' because it defines our system, more or less, whereas 'capitalism' defines a specific segment, that of capitalists who earn through their wealth, capital, not through work, played a major role in creating every ecological problem that now threatens us with a Permian Era level extinction event along with human overpopulation. Laissez-faire economics promotes greed above all else simply because democracy's voice is institutionally limited and thus allows the value systems of each individual participant to take effect, leaving the democratic system to react through law. That it may solve a problem, it does so serendipitously as in your penicillin example. If you look at what laissez-faire has done in medicine, you'll see that it has created a system based on maintaining illness rather than promoting health and wellness, limited care to those who can afford it, and pushed research into areas that have the higher chance of profitability than many others in which people are left to suffer. Greta is far more correct than RFK Jr. Consider the cholera epidemic in which John Snow, a physician, tracked the epidemic that led to the problem being the unsanitary conditions in London that led to systemic changes to how human waste was handled. While not ecologically sound, it merely sent that waste to the river to pollute the marine environment, it did resolve the immediate problem. Laissez-faire economics created the mess that was solved by competent people and political will. Therefore, any system, including laissez-faire systems, require an enlightened electorate who choose qualified, competent people. Capitalism is not an answer, it never has been.
Btw: people are right to be critical, but let's not bash Sabine for summarizing what is basically mainstream economics. We expect her to summarize the science, and that's what she did. If you've studied economics for years it's fine to have a more critical opinion, but we should not expect that from a non-expert.
The problem is not, what the text says, but what it´s omitting. Well, Sabine, let´s hope on "another story".
Rad Antonov
Was this entire script written by ChatGPT?
His Dad
The other 2 keys are Limited Liability Companies and Insurance.
Getting the natural resources for free (with violence even) then selling them to those in need is indeed a big unfair business. Most of us only have our workforce to trade. Stay healthy and useful!
a joke perhaps, intro to the celebration? She says about five times "that´s another story" And last week she said "...don´t trust ME", so let´s wait...
Assuming that you are not insane, I am very disappointed by a video of this kind. I had an idea that a serious, honest scientist, free from biases, would discuss issues related to constraints from money and ideology. However, it seems you are promoting some of the worst economic denialism regarding the responsibility of the current economic system for the Sixth Mass Extinction. The demonstrated lack of understanding of economic theory is quite striking and seems deeply entrenched in the rhetoric of the business media. The explanations provided wouldn't even pass for a basic economics class. This is a significant flaw in your videos, and it raises concerns about the reliability of your future content. A disturbing question arises: to what extent does money influence your assessments?
