Wednesday, January 21, 2009

How we got here, a quick guide

In capitalism, entrepreneurs identify needs (effective demand) and try and fulfil them. This, though, is impossible, so they use market forces, the pricing system, as a proxy for knowing the real state of demand. Another name for market forces, is trial and error. The entrepreneurs allocate capital according to profitability, again on the basis of trial and error. Now, the return on this capital will always be a simple fraction of the investment, i.e. it will always in a given period be less than the value of the investment itself.

Thus, for a, say, E1,000,000 annual return, E10,000,000 is invested. If the entrepreneur gets it wrong, all of that capital is lost. That is the punishment of trial and error. Simple really, the value of the risk is less than the value of the reward. When, as it inevitably must, it goes wrong, capital gets lost.

A crisis is capitalism functioning perfectly correctly. Perfectly smoothly, the situation today is capitalism being normal.

This is what capitalism looks like. Entrepreneurs must get it wrong, and the value of capital must be adjusted, and the lives of all those dependent upon it must change. The point is, that value is a ghost in the shell, that lives on beyond the actual goods deployed in production, its exorcism is a painful process.

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