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January 23, 2012

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Nic

There is a major flaw in one of your assumptions. There was not free-market or "liberal" capitalism prior to the recession. Free-market capitalism would never have resulted in such a calamity. Instead, one must analyze the true causes without placing the blame on the word "capitalism".

Firstly, the cause is rooted in (government) interventionism. If the Fed had not artificially lowered interest rates during the early 2000s, then the investment banks on Wall St. would not have been driven to risky assets such as securitized debt, which emerged from the real estate market. The free market would not have allowed such low interest rates to exist.

Furthermore, it is slightly ignorant to state plainly that big corporate executives are earning so much more than the average worker (and all the other stats you provided...) without questioning how this can happen. Many of these companies should have failed with the onset of the recession. Instead, the socially liberal American government decided they were "too big to fail" and quite literally printed the money they would need to continue operating, despite their inefficient and wealth-destroying business models. As a result, the companies continue to pay these executives millions because they are "the best in the business," but I question the validity of such a statement when it is the same people who steered their companies towards bankruptcy.

Christopher S. Rollyson

@chris

Upon reading The Economist cover story you reference several months ago, I had a different reaction I'll share here.

I have studied more history than economics, and I used to think my love of history was a very impractical major of undergraduate study. Now I appreciate it much more because I've had the chance to observe leaders' and lands' rises and falls. I've had the opportunity to try to understand the reasons.

One thing I've learned is that man constantly overestimates himself vis à vis complex systems. He comes to understand a few key patterns, uses them to interact with the systems (science, weather, economies), and sometimes his interactions seem to prove the patterns and corroborate his hypothesis. However, these are complex systems, and man never understands the whole picture. Being prone to overestimate himself, he quits watching with an inquisitive mind and comes to constrain his observations to defending his hypothesis.

Having lived in the U.S. and several European countries, I may be overly inculcated with a "liberal capitalism" perspective but I'll risk stating that (for me, anyway) the jury is still out on "state capitalism." Far more relevant than political or economic system in my mind is the stage of economic history of the country under consideration (i.e. China).

Obviously, this is a complex issue, but I believe emerging countries' biggest advantage, as a group, is hungry and motivated people who have low expectations and high hopes. Contrast this with the G7, which has well-fed and wanly motivated people with high expectations and ebbing hopes.

Emerging countries' economic history stage also means pent up demand for all kinds of goods and services that G7ers take for granted. This will fuel economic growth in emerging markets for several years, which they themselves will largely capture. In the G7, supply has outstripped demand for many years, and this is still accelerating.

As I explain in Building Post-Product Relationships in the Social Channel (http://rollyson.net/post-product-customer-relationships-in-the-social-channel), the end of the Industrial Economy is the real cause of "rich" (most industrialized) countries' malaise. Overproduction and commoditization are accelerating globally. The root cause of the current global economic disruption is that industrial processes and maxims no longer produce the value they did even 30 years ago, and financial wizards have been helping us fake it for several decades. We will continue to pay that bill for some time.

Turning to your reference of the 99% (and the 1%). This happens when the system stops producing growth. Those who can take the last vestiges. "Après moi le déluge." That will pass when enough people understand the true nature of the disruption and move to where the puck is.

The stage is set for what I call The Knowledge Economy, which creates value and differentiation in the Social Channel (http://socialchannel.biz). In the Knowledge Economy, products themselves provide little value and differentiation; applying the products to produce excellent outcomes and experiences will be the focus.

People also panicked when the Industrial Economy supplanted the Agrarian Economy in the 1800s (in Europe, varied elsewhere) because it disrupted most facets of life. The revolutions of 1848 and rise of anarchism bear testimony to that disruption. No one could imagine how many different kinds of livelihoods the Industrial Economy would create.

The Knowledge Economy will create millions of very rewarding livelihoods, too. Most we can barely fathom today.

I use "livelihood" because "job" itself is an Industrial Economy construct. But we will endure a prolonged period of disruption first. People need to let go of the old before they can move on to the new. That's the root of the widespread political dissatisfaction and the blame game and viciousness we are seeing.

Political leaders are clueless as a group and are not leading. They should be resetting expectations, but that's for another day.

In summary, I also read several financially oriented sources, and I find it too easy to let them cloud my thinking; they are in a panic because their livelihoods are severely threatened, but they wrap their anxieties in pretty intellectual paper that sounds convincing but requires careful reading. Their advertisers are taking a shellacking and will continue to do so. Hence their existential crises and viewpoints.

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