This ties in with a thought chain I had this morning. While we may have an incredibly competitive environment, it is also populated by imperfect actors. You can’t effectively compete against people who are not accurately evaluating the consequences of their decisions. This can be seen in sports, where illegal performance enhancers are the norm in many sports, and non-dopers can’t really keep up (despite the achievements of the dopers being annulled later). This can be seen in business where someone who is willing to sell at a loss and make up for it in volume, will steal all of the customers from a legitimately profitable operation (though will soon go bankrupt as well). I’m sure there are examples in all sorts of industry where imperfect actors make decisions based on poor analysis that can potentially ruin better plans due to an overly competitive marketplace.
I’m not sure if performance-enhancing drug use (at least at the professional level) is a good example of irrationally short planning horizons. I’ll bet Lance Armstrong regrets getting caught, but I’ll also bet he’d have been worse off in the long run (financially, and also fame-wise) if he didn’t use the stuff: it’s not unlikely to have made the difference between “world-famous cyclist in disgrace over a drug scandal” and “peaked at a #5 finish in the 1999 Tour”.
Sure, he lost medals, but that could also be phrased as “bragging rights”, and his cycling career was already over the hill at the time.
The core issue is that other people want different things than you. You want fair sports, they want to win. You can try to make rules but they are not 100%. The only thing that would really work is if they wanted the same thing as you.
Depends on what exactly they want. If they want to win at all costs, you’re correct. But perhaps they want to win at low cost, performance enhancers have a high cost, and cognitive biases prevent them from seeing that.
For more clarification, I was thinking this over when considering rental properties in my area. A lot of people have complained that it is near impossible to make a profit on a rental property where I live. I think a lot of that is because there is a huge chunk of people who have bought property as an investment based on potential appreciation instead of based on cash flow. If your model is using only cash flow, but another model has a 5% appreciation of principle built in to it, it is going to be near impossible to be able to compete with them on rates. However, what you also see is a ton of people looking to sell their rental properties after the appreciation they were expecting never occurs (potentially due to the glut of properties on the market from other people doing the same thing). The people exiting the market take a loss, and the people who could have actually made a profit based on a cash-flow model never can get a renter to begin with, due to overly competitive rates. However, since new people are willing to invest under the same assumptions as the old investors (imperfect information), the market keeps going strong, and renters can take advantage of cheap rates, though no one is really profiting from it. That’s the type of scenario you can get with an overly competitive marketplace filled with imperfect actors.
Edit: I’m sure people are making money from rentals in my area, or there wouldn’t be so much of it. I’m just also sure that a lot of people are losing a ton of money from it, and driving down prices for everyone else.
No, I’m saying that capitalism is never purely implemented (with no barriers to entry/perfect information/etc.), and there are cases where due to these inefficiencies, increased competition can cause a poor business model to outcompete a sound business model, leaving nobody standing at the end. This doesn’t always happen (hence capitalism mostly works).
I’m saying that capitalism is never purely implemented
Um. I feel there is some serious disconnect here.
Capitalism is not an abstract model that gets “implemented”. It is what you empirically get in reality given a few starting points (e.g. personal freedom, right to own property, right to trade, etc.).
People build models of that empirical reality and these models are simplified and rely on certain abstractions. But capitalism is not the result of “implementing” these models, quite the reverse—the models are imperfect descriptions of actual capitalism.
increased competition can cause a poor business model to outcompete a sound business model, leaving nobody standing at the end
Sure. That’s fine. One of the reasons capitalism works so well is that failure in it is frequent. The unsuccessful shoots and tendrils need to die off and free up resources for the successful ones. The journey towards the equilibrium is an unending dynamic process that is not a straight line and never gets to its destination, anyway.
This ties in with a thought chain I had this morning. While we may have an incredibly competitive environment, it is also populated by imperfect actors. You can’t effectively compete against people who are not accurately evaluating the consequences of their decisions. This can be seen in sports, where illegal performance enhancers are the norm in many sports, and non-dopers can’t really keep up (despite the achievements of the dopers being annulled later). This can be seen in business where someone who is willing to sell at a loss and make up for it in volume, will steal all of the customers from a legitimately profitable operation (though will soon go bankrupt as well). I’m sure there are examples in all sorts of industry where imperfect actors make decisions based on poor analysis that can potentially ruin better plans due to an overly competitive marketplace.
I’m not sure if performance-enhancing drug use (at least at the professional level) is a good example of irrationally short planning horizons. I’ll bet Lance Armstrong regrets getting caught, but I’ll also bet he’d have been worse off in the long run (financially, and also fame-wise) if he didn’t use the stuff: it’s not unlikely to have made the difference between “world-famous cyclist in disgrace over a drug scandal” and “peaked at a #5 finish in the 1999 Tour”.
Sure, he lost medals, but that could also be phrased as “bragging rights”, and his cycling career was already over the hill at the time.
This is simply expecting too much.
The core issue is that other people want different things than you. You want fair sports, they want to win. You can try to make rules but they are not 100%. The only thing that would really work is if they wanted the same thing as you.
Depends on what exactly they want. If they want to win at all costs, you’re correct. But perhaps they want to win at low cost, performance enhancers have a high cost, and cognitive biases prevent them from seeing that.
So you’re saying capitalism could not possibly work, right? X-/
For more clarification, I was thinking this over when considering rental properties in my area. A lot of people have complained that it is near impossible to make a profit on a rental property where I live. I think a lot of that is because there is a huge chunk of people who have bought property as an investment based on potential appreciation instead of based on cash flow. If your model is using only cash flow, but another model has a 5% appreciation of principle built in to it, it is going to be near impossible to be able to compete with them on rates. However, what you also see is a ton of people looking to sell their rental properties after the appreciation they were expecting never occurs (potentially due to the glut of properties on the market from other people doing the same thing). The people exiting the market take a loss, and the people who could have actually made a profit based on a cash-flow model never can get a renter to begin with, due to overly competitive rates. However, since new people are willing to invest under the same assumptions as the old investors (imperfect information), the market keeps going strong, and renters can take advantage of cheap rates, though no one is really profiting from it. That’s the type of scenario you can get with an overly competitive marketplace filled with imperfect actors.
Edit: I’m sure people are making money from rentals in my area, or there wouldn’t be so much of it. I’m just also sure that a lot of people are losing a ton of money from it, and driving down prices for everyone else.
I don’t see why do you think this is a problem, and a problem for capitalism in particular.
No, I’m saying that capitalism is never purely implemented (with no barriers to entry/perfect information/etc.), and there are cases where due to these inefficiencies, increased competition can cause a poor business model to outcompete a sound business model, leaving nobody standing at the end. This doesn’t always happen (hence capitalism mostly works).
Um. I feel there is some serious disconnect here.
Capitalism is not an abstract model that gets “implemented”. It is what you empirically get in reality given a few starting points (e.g. personal freedom, right to own property, right to trade, etc.).
People build models of that empirical reality and these models are simplified and rely on certain abstractions. But capitalism is not the result of “implementing” these models, quite the reverse—the models are imperfect descriptions of actual capitalism.
Sure. That’s fine. One of the reasons capitalism works so well is that failure in it is frequent. The unsuccessful shoots and tendrils need to die off and free up resources for the successful ones. The journey towards the equilibrium is an unending dynamic process that is not a straight line and never gets to its destination, anyway.