No, my point was that the owners of Merck suffered losses because the management persuaded them that it was a good idea not to take their profits as dividends and invest it in developing and marketing new drugs which, in the case of Vioxx, turned out to be a costly mistake.
But again I don't say that capitalists "should" be rewarded for taking risk, only that they *are* rewarded for risk-taking, albeit from a position of advantage.
> The socially necessary risk can be maintained by various institutional
> mechanisms, each one exacting different transaction costs. Take for example
> the risk of infectious diseases. This is a socially necessary risk inasmuch
> as we as society cannot eradicate certain diseases and thus suffer the risk
> of contracting them. That risk can be managed in several different ways
> e.g. by a nationalized health care and prevention system with relateively
> low transaction cost, or by private profit-oriented firms like insurance and
> pharmaceutical companies with higher transaction costs. From a purely
> rational point of view, the risk management solution with the lowest
> transaction cost should be the one adopted in a society, but things are not
> always rational. If we have a situation in which a corporate cabal usurps,
> by hook, crook or outright coercion, the semi-monopoly right to manage
> society's necessary risk - that cabal is not being rewarded for its socially
> necessary risk management service. Instead it is reaps "economic rent" (or
> tribute in everyday English) for its monopoly rights enforced by hook, crook
> and coercion.
Here we are getting into the difference between what is necessary and what happens. I agree of course that it is not necessary for capitalists to be rewarded. I don't agree that that implies we should not have a financial system.
We should have the cheapest, most comprehensive risk-management solution, but my point is that the Soviet union had essentially no risk management. Per an argument similar to your previous one, they did not recognize that society, as a whole could be subject to financial risk.
You're wrong when you say that capitalists are not rewarded for socially necessary risk management. They just define "socially necessary" as meaning "necessary for capitalists". But surely you don't deny that relative to other capitalists capitalists who make a more popular product (popular and therefore defined by the public as beneficial) at a lower risk win out. The interests of capitalists overlap the interests of the population enough to keep the economy growing and goods flowing. So they capitalist system clearly does serve some social necessity. They just don't do it on purpose.
> Now if these capitalist semi-monopolist face the added risk of loosing their
> market shares i.e. their monopoly rights vis a vis other semi-monoplists-
> that is undoubtedly a real and serious concern to them, but why should the
> rest of us give a flying fuck about it, let alone "reward" them for
> maintaining these rights is beyond me. Actually, by nationalizinng these
> private monopolies of risk management, the society as a whole would be
> better off by saving the tribute and the higher transaction costs.
Again, you're assuming that I'm arguing capitalists "should" be rewarded. I know it's confusing that I seem to praise parts of capitalism but I'm not a capitalist. I'm writing from the vantage point that capitalists take an unjust slice of the pie. What I'm trying to get at is how to organize society so that capitalism doesn't seem like a good option and I think that we've left the financial part behind.
A national risk management strategy would be good, provided you can rationally value different assessments of the same risk. The problem with anything unitary is that it tends to build institutional, rather than rational consensus.
> However, I fully agree with you that the menagement of socially necessary
> risks, whether done by government or semi-governmental or private
> instituions should use cost- benefit analysis and all planning tools
> available, including financial management - no quarrel here. But you woul
> dcertainly agree with me that financial management, while certainly
> important, is not panacea and non-financial considerations which do not
> enter fiancnail management must also be duly considered.
Yes but the more I look at it, the more I think everything has to be quantified and tested in the marketplace. The reason is trade-offs. Let's take Vioxx and Celebrex. Those drugs were an enormous waste of time and effort (apart from the basic research) but they were developed because the desire of seniors in the developed world for an NSAID that does not affect the lining of the stomach is easily monetized whereas the desire of say, Africans living in tropical and sub-tropical regions for a Malaria cure are not easily monetized. So let's say that you could monetize the need for a Malaria cure. Then the people who suffer Malaria could reward the people who have the means to cure it. But how? Some scientists would say "well, it's unlikely we can kill mosquitos without damaging the environment so let's create a drug" whereas other scientists might say "well, pesticides are the best, proven Malaria mitigator so let's try and develop something as effective as DDT but selective for mosquitos - or even the parasite itself". You can't know in advance which will work best. There is risk in both approaches. A planning board with a lot of environmentalists and physicians on it would tend to take the drug approach and give short shrift to the pesticide approach, but say they were wrong? Malaria has frustrated drug-makers for centuries. It's a very hardy parasite. So putting all your eggs in the cure basket might prove a huge mistake. Meanwhile, some entymologist might be thinking "you know, if I could only get a little funding I think my research could be applied to safely wipe out this little bugger." A planned economy would tend to fund one track while a capitalist economy would tend to fund both tracks - because of the nature of the institutions.
But saying that funding both tracks is the answer is not to say that capitalism is the answer. What it does suggest is that you need a system which is open to possibility and simultaneously quantifies risk. In a capitalist system, people in the capital markets make independent assessments of cost/benefit of economic propositions and the more risky-seeming proposition pays a higher premium for financing - but it still can get the financing.
The problem with capitalism is that unless the proposition comes from a company that has stated that its purpose is to reward capitalists, it gets no funding at all.
> > I would say that the system of financial management we have
> > is inherently perverted but sound in most other respects -
> > like a pedophile who has a regular job and gets along with
> > people but uses his money to buy child pornography. And it's
> > not nothing for capitalists to decide that peace and
> > econoomic security are more important than acting on their
> > amoral impulses. Leaving aside the present American regime,
>
> I agree. I would not even call it "perverted" - just limited, as every
> other tool, like computers. They are excellent tools for solving data or
> numerical problems, but they suck if you try to program them to write
> poetry, or at least good poetry. That does not mean that we should get rid
> of computers because they are useless for meeting human needs for poetry,
> but likewise we should not get rid of poetry writing because it cannot be
> managed by computer programs. Two words are in order here: judicious
> choice. Judicious choice of means to various human ends (not the other way
> around).
I still say capitalism is perverted. It does not serve to benefit even the customers, only the owners. Capitalism circumscribes itself to doing that which benefits capitalists. But it does not mean that markets are injudicious. If there is a need for poetry there will be a market for it.
> > let's look at France and Germany - or better yet, Poland and
> > Germany. Clearly there is something to modern finance
> > capitalism if it makes former enemies who slaughtered each
> > other in their millions within recent memory to decide that
> > such behavior is unthinkable. It may seem a simple triumph of
> > the most elemental rationality, but elemental rationality has
> > not had a good record in Europe until recently. Why else
> > would Poles, with every right and provocation to hate
> > Germans, decide that it is more satisfying to trade with them
> > than to murder them (however satisfying that might be)?
>
> I'd say it has more to do with the norms of civlity or even human
> reciprocity than with finances. For the most of human pre-history, human
> groups both fought and cooperated with one another. Only when the
> professional warrior class took over, social and economic interest were
> subsumed to total warfare. However, the warrior class (e.g. in ancient
> Rome, or aristocracy in Europe, escpecially the Prussian military and junker
> class) has been loosing its role which resulted in partial restoration of
> civlity among nations. I'd argue that the good Polish-German relations are
> owed more to the communists' good works of breaking the backbone of the
> Prussian military and the junker class, whose power base used to be in
> Eastern Germany (xGDR) than to anything else.
Okay, except you have to admit that the murderous behavior on the basis of clan or ethnic dominance is now unacceptable anywhere but on the soccer field. And finance and commerce definited require both civility and reciprocity to work. Also, capitalism has removed the economic incentive for warfare among capitalist states. The ruling class secures more economic rents in a peaceful society than a warring one.
boddi