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Good Rules Make Good Capitalists, Part 1

by Michael Shermer, May 04 2010

image via Wikipedia

As the SEC prepares its case against Goldman Sachs for allegedly intentionally defrauding the public with toxic securities that it created, sold, then bet against, I want to reflect for a moment on the need for rules in a free market society. Critics of capitalism believe that we libertarians want an essentially lawless society in which people are free to do whatever they want. That may be true for some libertarians, but I have come to believe through experience and science that free markets operate best within a system of clearly defined and strictly enforced rules and laws. Within the system itself markets should be as free as possible and people should be free to trade with whomever they want without interference from the state (think Chinese citizens trading ideas about democracy with each other and outsiders), but good rules make good capitalists.

Consider a sports analogy: In 1982, three other men and I founded the 3,000-mile nonstop transcontinental bicycle Race Across America (RAAM) from L.A. to New York, sponsored by Budweiser and televised on ABC’s Wide World of Sports. The rules were simple: each cyclist takes the same route, has a support vehicle and crew that follows behind providing food, drink, and equipment, and no drafting behind or hanging onto a vehicle is allowed. The race started on the Santa Monica Pier in California. The first cyclist to reach the Empire State Building in New York City would be declared the winner. That was the entire set of rules, which we didn’t even bother to write down.

All four of us finished the race and the next year dozens of cyclists wanted to compete so we began to outline some rules. During that first race, for example, it wasn’t clear what to do with a rider who went off course—can he get a ride in his support vehicle back to the route where he left it? (yes), can he be driven up the route the same distance he rode off course? (no). Although no drafting was allowed, it is often windy out on the open plains, and if there is a cross-wind from your left when your support vehicle comes alongside to hand off water bottles and food, there is a noticeable drafting effect. Not to mention that ten days is a long time to ride by yourself, so it is psychologically advantageous to have your support crew to talk to for long stretches. So we had to draft extensive rules defining how long a handoff can last (one minute), how many times an hour (four), with room for exceptions to the rule, such as if the temperature exceeds 100 degrees, in which case the number of handoffs is unrestricted.

Lon Haldeman & Jim Lampley, Empire State Building, 1982

Once you start writing down what people can and cannot do, the list grows exponentially. As the years moved on and the race grew in popularity, the rulebook expanded with it. Women entered in 1984, so we added rules about gender divisions. Cyclists over 50 and 60 years of age wanted to race, so we added rules about age divisions. Four-man relay teams entered in 1989, so we created a new set of rules just for them, that subsequently had to be expanded to encompass two-person relay teams, men-and-women relay teams, age division relay teams, and even corporate relay teams. Every year something would happen that led to more rules. In the 1989 race one of the competitors was riding slowly up the long grade of Oak Creek Canyon from Sedonna to Flagstaff, Arizona, with his two vans and motorhome all caravanning behind him, preventing cars from safely passing. This went on for miles until someone called the police, but by the time the officers arrived they could only find the next rider back, whom they stopped on the side of the road, thereby disrupting his pace and costing him time, which we had to subtract from his overall finishing time. Another year, also in Arizona, we had a similar problem on a busy stretch of Highway 89, after which someone called the Arizona Department of Transportation to complain, resulting in a post-race ruling by the DOT that RAAM could only pass through Arizona during the day. As this would have obviated the nonstop nature of the race, I had to negotiate a deal with the Arizona DOT with a proviso in the rules that read: “The Follow Vehicle may not impede following traffic for more than one minute. The Follow Vehicle must pull off the road and let traffic pass when five or more vehicles are waiting to pass regardless of time. During the day the rider may proceed alone, with the Follow Vehicle catching up once traffic is clear. At night the rider must also pull off the road.”

Shermer, 1982, listening on Sony Walkman (pre iPod)

One especially hot year one of the RAAM riders happened upon a small hotel pool while passing through a diminutive Western town, so he dismounted his bike and leaped into the pool, fully attired in cycling clothes, shoes, gloves, and helmet. Someone called the police, and once again by the time they arrived the pool perpetrator was gone, so they pulled over the next competitor that happened along, thereby disrupting his pace. This led to yet another rule, this one prohibiting competitors from swimming in public pools without permission from the owner. Most of the racers enjoy listening to music, either from small earbud phones or from speakers mounted on the roof of their following vehicle, which led to two additional problems: one, blasting music through tiny earphones jammed in your ears makes it difficult to hear oncoming traffic, ambulances, and the like; two, passing through small towns in the middle of the night blasting rock-n-roll music from loudspeakers tends to awaken the locals. Thus, two new rules were added, one restricting the use of only one earphone and the other curtailing the broadcasting of music during hours of darkness.

All of these new rules, of course, require the addition of appropriate punishments for violations, which we assessed in time penalties. However, an exhausted cyclist who is forced by an official to take time off the bike in the middle of the race may actually benefit from the penalty, so we had to write even more rules about where and when the penalties would be served, which we determined would be in a penalty “box” ten miles from the finish line (and, yes, we have had cyclists passed by competitors while sitting there on the side of the road). More rules and penalties mean more officials needed to assess them, and therefore more potential for subjective misjudgments on the part of officials (who are often sleep-deprived and exhausted themselves), so we had to add yet another set of rules that allow the cyclists to challenge the officials’ assessed penalties, and a set of guidelines for the Race Director to make a final evaluation before the end of the race if such a challenge is made, as well as a post-race board to hear one final appeal by the athlete if he or she feels that both the official and the Race Director made the wrong decision. Finally, we created a nonprofit governing body—the Ultra-Marathon Cycling Association (UMCA)—to oversee the entire sport, including and especially the development and adjudication of the rules.

The structure and development of this sporting event and the rules that govern it—as quotidian an example as it is—serves as an analogue for society at large. In its simplicity, sports can help clarify and illuminate the evolution and operations of more complex and nuanced social institutions. Just as good rules make good competitors, good walls make good neighbors and good laws make good citizens. People naturally want what is best for themselves, but most people also want what is fair for others. Without a structure in place to create and enforce firm and fair rules to meet both of these needs, people become more self-centered than other-centered, and if you go far enough down that path it degenerates into Hobbes’ bellum omnium contra omnes, “the war of all against all.”

Now, my libertarian friends, don’t panic thinking I’ve gone soft in the head liberal about creating obsessive government regulations in the economy. In this post I’ll demonstrate how industries naturally create their own set of rules from the bottom-up, and that these can serve as useful guidelines for top-down regulators.

44 Responses to “Good Rules Make Good Capitalists, Part 1”

  1. Max says:

    Check out Nassim Nicholas Taleb’s rules for a more resilient financial system.

  2. Beelzebud says:

    You’re making progress. This is much saner than your “Regulation Schmegulation” article you wrote right after the crash, in which you attempted to make the case that wall street just wasn’t de-regulated enough… You seem to be critically thinking about this ‘no regulation’ dogma.

    You still have work to do though. Industry never regulates itself either. Until the labor movement, industry was just fine with child labor, indentured servitude, and scant human rights. It took government regulations, and a strong labor movement to keep them in check. They certainly don’t regulate from the bottom up.

    • Kurt says:

      Industry never regulates itself either.

      This is a historical myth. Industry is often the driving force behind new regulation, and they always weigh in. If you click through to Shermer’s third part he uses The Man Who Shot Liberty Valance as a parable for the emergence of formal law. This is a pretty good analogy for what happened in the progressive era. Big business killed free competition (via the law) and then let government take credit for the kill. But make no mistake, the regulatory state would never have emerged without the assent of big business.

      Of course, the system we have now isn’t an optimal rules set. All we’ve really done is replicated tribal organization at the level of the firm, with each corporation as a “brave” within the tribe. The rules tend to push the economy towards a small number of larger firms because even the elites fear a society of impersonal laws. Primates prefer a small, personal clique even though it doesn’t scale up properly. The real trick would be figuring out how to organize an advanced economy without gargantuan firms.

    • Patrick says:

      We had lots of regulations and regulations even expanded under Bush. Deregulation or a lack of regulation is NOT what caused the meltdown. It was bad incentives created by bad government policies.

      Appropriations for regulatory agencies under Bush increased from $21 billion in 2001 to $45 billion in 2007 – according to George Mason University’s Mercatus Center, Washington University’s Weidenbaum Center and the Heritage Foundation. Staffing exploded from 144,000 regulators to 244,000. The Code of Federal Regulations increased to 145,816 pages, more than 4,500 pages longer than in 2001, when Bush took office. Even the Federal Register (a list of daily regulatory activities) was up to 72,090 pages in 2007, which was higher than in Bill Clinton’s last year as president.

      We have the Securities and Exchange Commission, Federal Deposit and Insurance Corporation, Comptroller of the Currency, the Office of Thrift Supervision, the Federal Reserve, Environmental Protection Agency, and the Occupational Safety and Health Administration. Just looking at the US Department of Commerce there is the Bureau of Industry and Security, Economic Development Administration, International Trade Administration, Minority Business Development Agency just to name a few. Toss in the Department of Labor to manage and regulate labor relations, Department of the Interior to manage government owned property, the Department of Agriculture to keep food prices high and subsidize mega agro-corporations, or the Department of Education which oversees and regulations a nationwide government monopoly on education services.

      Anyone who says we deregulated the economy under Bush or that deregulation caused the crisis is believing a myth of monstrous proportions. You might as well believe in ghosts.

      • Skepacabra says:

        I agree that bad government policy was involved but what made it bad policy was that it gave too much freedom to these companies without proper oversight. The obvious solution to the problem is better regulation by outside agency like the government, not less regulation. The solution is not, let’s just pray to the great and powerful invisible hand of the market that companies will learn how to play fair without any outside checks and balances.

        Now I don’t doubt that if left to their own devices, companies would create their own set of rules and penalties for violating those rules. However, without outside forces to keep them in check, there would be nothing stopping them from ganging up on smaller businesses or conspiring with each other to fix prices for the mutual benefit of all the companies within a particular industry.

        To return to Shermer’s sports metaphor, you need a non-partial ref.

  3. quentin says:

    If you compare the economy to sport, ok but i am just wondering : what is the goal ?

    Is our society a big competition, a game where the goal is to earn more money, or is there something beyond that ?

    Money can be seen as a reward for the best competitors. Usually, these are the one who take advantages of lacks in the rules, who don’t feel guilty when being harmful to others (or to the environment) because they want to win. Well not always, it can also be very talented people…

    But money could also be seen as a reward for those who create value for the society, by their work or their skills. I don’t think this is really the case nowadays. It may be difficult to understand why, but this is a fact : it’s easier to earn a lot of money by buying and selling on the market, without producing any value (you must be rich to do that), than by working hard to build or create things for the benefit of the society (this is the solution when you are pow).

    Now what do we need more in our societies : competitors or value-creators ? People put themself first or people try to see beyond their own person ?

    I agree about the importance of the rules but i think the whole system would be better if it was built on a really ethic basis (something like : the impossibility to make money without work or service), and adding new rules for a better competition won’t change it a lot.

    • Kurt says:

      what is the goal ?

      The goal is production (in the broadest sense, including services and leisure as well as just goods). Changing the rules is helpful since you want to connect productivity with reward. Make no mistake, traders do perform productive work (effective allocation of resources is crucial to an economy) however, they are almost certainly overcompensated in the current system. The reasons for that are numerous and complex, but simply banning capital gains would accomplish nothing but the end of industrial civilization.

      • quentin says:

        my answer to this comment is below.

      • JGB says:

        “The goal is production”

        Something about that doesn’t sit right with me. We cannot
        afford to become so monolithic.

        Money, Capital and free-markets can’t save the human race one month (or even one year) before a 25-km asteroid impacts Earth.

    • Patrick says:

      Quentin, why can’t competitors be value creators and vice versa? I believe they can, and in fact already do both. If you disagree, please explain why a new computer today is 4 times cheaper than my computer from 10 years ago and 100,000 times more powerful.

      • Robo Sapien says:

        Computing technology isn’t a good example, it scaled up a lot faster than other technologies with greater demand. Compare advances in computing with the slower advances in automotive, which have been reliant on computers.

      • Patrick says:

        As far as I’m aware, computers don’t receive government protection or subsidies and it isn’t subjected to regressive regulations. At least not in America.

        Meanwhile American automobiles are protected by a combination of taxes of imported cars and import quotas. Regulations mandate costly and some times conflicting policies (ex: safety which adds weight and fuel efficiency – both significantly add to the cost but not necessarily to the profits). Additionally American automobile manufactures have expensive pension deals with autoworkers that make car manufacturing seem like a nuisance that gets in the way of dolling out cash to retirees.

        I would say these differences make it possible for computer technology to advance more rapidly than cars (and prices to fall as well).

      • Robo Sapien says:

        I agree the unions hurt the auto industry, but computers improved our ability to design everything, including new computers. That created a sort of information loop that expanded exponentially.

      • Shayne says:

        “As far as I’m aware, computers don’t receive government protection or subsidies and it isn’t subjected to regressive regulations. At least not in America.”

        One word for you to think about: patents.

      • quentin says:

        I did not say they could not be value creators. I don’t think competition is always a bad thing. Now the transistor technology, on which computer science is based, is a result of public researchs…

      • quentin says:

        Competition can be a good thing but there is also a problem with competition.

        Why different countries never sign agreements to protect our environment ? Because if they do so, they will be less competitive on the international market. It would be fine for everyone if there were rules to protect the environment, but it’s not fine, from an individual point of view, so as long as there is no world government to set the rules, nothing will be done. (I have the same problem with my girlfriend about the dishes…)

        The problem is similar with work conditions, health and everything that cannot be owned because it’s a common good. Medicines could save a lot of lifes in africa, but the market is not valuable.

        In the past, states had the role of protecting common goods for their people, and fortunatly it’s still true, but nowadays markets are international and there is no world state… Recent events in Greece show that governments do not have any decision power in front of the financial system.

      • Patrick says:

        The last thing we want is for the government to have more financial power over the market. The last time this argument was made Thailand collapsed into a dictatorship. 100 years ago this argument was made and World War I was the result.

        The market – which ultimately is all of us – absolutely should be left to punish governments for stupid policies.

      • Max says:

        The market is all of us like a democratic government is all of us. The power is still concentrated, since the top 1% holds more financial wealth than the bottom 95%.

    • quentin says:

      Production shoud not be a goal for a society, but a mean (and in fact production is not the real goal in a capitalism system, it’s a mean to achieve profit).

      Let’s take an example : if ten persons want to have a TV, is it better to build 100 cheap TV’s that will last 1 year each or to build 10 TV’s that will last 10 years ? The second solution means less work (and potentialy more free time for the workers) for exactly the same result, and less polution too. It is more profitable for the whole society. But the first solution means more production and more profit.

      In the capitalism system, profit (of a company) is the goal, that’s why the first solution is generally choosen. That’s not a decision that comes from the customers, they just buy what is available, but from the manufacturers : the people who really take decisions on a market are the more powerful. Cheaper prices, advertisement, everything is made to persuad the customer to go toward the first solution, because it means more production, more work, more profit.

      You could say that the technology is evolving, that’s why it’s better build 100 TVs, but there are many other examples where this argument is not relevant and newness is often artificially created for marketing purpose.

      In the past, production has certainly been a mean for more confort and well-being, but I think we reached a point where it’s mainly a mean for more profit, without any concern on how this profit is distributed. We reached a point where it’s more harmful than benefic, especially for the environment.

      Capitalism is not a democracy applied to economy, it’s more like a kind of feodalism where the financial system plays the role of the lords, and money the role of weapons. You can say that the lords are beneficial to protect the farmers (like speculation is beneficial for resource allocation), but i still think that a really democratic system would be better. I know, this is very idealistic…

      • Kurt says:

        But the first solution means more production and more profit.

        More profit, possibly — but not more production. The present value of a TV that quickly breaks down is considerably less than a TV that lasts. You can certainly argue that GDP numbers or corporate accounting don’t do a good job of capturing quality differences, but from an economic standpoint crappy TVs are less valuable than quality TVs. Making lots of lousy TVs is less productive. If the economy is producing lots of lousy TVs (metaphorically speaking) that means the rules are producing poor incentives, not that we should seek an alternative to markets. (See below)

        You can say that the lords are beneficial to protect the farmers (like speculation is beneficial for resource allocation), but i still think that a really democratic system would be better.

        My main problem with this argument, whenever I encounter it, is that people who advocate a “democratic” economy can never describe what exactly they mean by such a thing. When they try, they usually conjure some sort of syndicalist fantasy land where key production information is magically known by everyone.

        The reality is that the quantity of information transmitted via market price signals is so huge that if we tried to work it out through worker’s councils with no price system, we’d still be arguing over whether to make cheap TVs or sturdy ones when the Sun’s corona enveloped the Earth millions of year hence. That is not hyperbole. Market prices contain, just by one example, the results of millions of human-years of technical knowledge and experience possessed by every worker, engineer and manager in the economy. We simply have no alternative but markets. Sure it’s impersonal and counterintuitive, but it’s all we have.

      • quentin says:

        The fact is that cars, washing machine, electronic devices or trousers manufacturers do not make too solid products because that would kill there business. They don’t make too fragile product neither, because that would kill their reputation, but it’s very important for the market to keep on selling washing machines every year.

        I am just saying that the logic of profit does not coincide with optimum management at society scale. My opinion is that the main problem is that companies are not democratic, and as a result, every decision is driven by profit (not good work condition, not quality of product, not environmental issues…).

        I can tell you exactly what I mean by democratic : I mean a cooperative system where the workers inside a company vote for their direction. It already exists in several places, and it’s working. Of course, this system cannot become important in our system, because investors are not interested by such companies, and as a result, they cannot grow and become competitive. Goverments won’t promote such a system because they also want investors to come into their country… That’s why I said it was idealistic.

      • Patrick says:

        Do you have any proof that products are worse today than they were years ago?

        Profit does organize and coordinate society efficiently. Profit is the reward you get for efficiently using scarce resources while creating a product people WANT!

    • Beatrice Honningforth says:

      Another problem with the sports analogy is that in sports all competitors serve equal roles. This is in stark competition with society, in which an upper layer has a disproportionate share of wealth and power and does all it can to keep the general population powerless.

  4. marke says:

    …free markets operate best within a system of clearly defined and strictly enforced rules and laws…

    truer words were never spoke!

    Those who preach of no regulations, conveniently ignore all the rules that are already in place and making the system work to the extent that it does…

    • JGB says:


      Ask the anti-regulation types if they’d like the gov’t to do away with contract law. If corporations could not be forced to keep their agreements (at the point of a gov’t gun) how much business would get done? Many regulations provide confidence in that market so parties will feel secure to make agreements.

      A case where lack of regulation contributed to devastation of a market was the e. coli tomato scare a few years back: Tomatoes were not tracked, so no one knew the source of the contaminated tomatoes. Consumers, not wanting to get sick, stopped buying tomatoes because they had no confidence in which tomatoes were safe. Even when it was established that certain varieties were safe, the confidence was eroded and the tomato market collapsed. Farmers had to plow entire crops under because they could not sell them. Why didn’t they track tomatoes? It cost too much. BTW: The gov’t did not need to regulate and track tomatoes, the industry could had done it – and staved off the whole disaster.

      • Patrick says:

        Who said get rid of contract law? How about just get rid of stupid regulations? There is no reason to believe the amount of regulations we have no are all good.

  5. Jim Shaver says:

    Michael, regardless of any intended or perceived political or philosophical message, I found your story very cool and interesting. Thanks!

    Also, is it just me, or does the guy who does the Capital One commercial voice-overs sound a lot like you? Just wondering.

  6. Tuffgong says:

    It’s funny how critical people are of Shermer when I could have told you he wrote these very words down years ago. That is the concept of good walls make good neighbors. I understand people might only know Shermer intimately from this blog and I have to consider that in his reactions but I can pretty much say he’s been consistent.

    He demonstrates two great points at the same time. That regulatory systems can be vastly complex and variables that don’t ensure the regulation can be done effectively. But the STRUCTURE is necessary in order for there to be freedom within. Like water without a pool is a puddle but with walls it becomes a public pool. However the structure requires maintenance, detail, and oversight that really bogs down the original intention of “I want walls around water so I can swim in it”. Not my best analogy but it will do.

  7. MadScientist says:

    I couldn’t figure out if the topic was libertarianism or long distance bicycle rides, but I’m sure the Chinese will be happy to trade ideas.

  8. Max says:

    Does the UMCA ban any performance-enhancing drugs?

  9. Henry James says:

    I wish we would shift our tax base to resources used and pollution produced rather than labor, time, creativity or production. The real biological benefits and costs of how we live would be much more apparent and population rise would no longer be necessary nor rewarded by disproportionate wealth for resource controllers.

    The earth’s resources, land and water are finite and the real basis for biology and economics, so who controls them is king. Resources could be more equitably distributed if they were identified and quantified by taxes, determined by market prices for commodities, real estate, etc.

    Think how differently fresh water would be managed; all users would be concerned with sustainability to keep taxes down. Free markets on resources tend to drain them when the money is there and taxing would slow the drain while leaving markets free to work within the restraints of sustainability. We do need a healthy economy to generate taxes, after all, but this system would no longer see divorces, car crashes and cancer as benefits to the weird Gross National Product. We would no longer see using resources up as “good.”

    Stripping a mountain top into a moonscape for the coal underneath would levy enough taxes from resource depletion and pollution to make alternatives competitive. Who says individuals can take from the commons without sharing through taxes? Resource taxes leave the individual’s personal behavior untouched with the more natural boundaries formalized to more natural social and economic controls. The incentives to breed beyond sustainability would also be greatly reduced – extra kids use extra resources and cost extra.

    How about tax credits for increasing resources, like planting trees?

    • Paul Justus says:

      You have a great idea…charge a user fee on all natural resource use and remove taxes on human production! This tax shift would help create a world of economic freedom, justice, and ecological sustainability.

      Perhaps you might consider attending the Council of Georgist Organizations annual conference on this subject. As you may know the business boom and bust cycle is nothing new but Henry George proposed a remedy that, where applied even on a limited basis provided great benefits. George’s remedy? Put a user fee on natural resources…especially the site value of land.

    • Patrick says:

      You identified problems associated with having no market. When something isn’t owned or is collectively controlled or used, it is overused. Deforestation isn’t a problem when private individuals and firms own the forests. It is a problem when the land is communal.

  10. ROBERT ST. JOHN says:

    When you are talking about people who make million dollar bonuses it has to be more about ego than the money they make. Piling up large amounts of cash does not serve a social benefit. It becomes about bragging rights.

    Of course, without that psychotic desire to beat the other guy we would not have the large corporations and the high standard od living that we all enjoy. Which do you want to give up?

  11. JGB says:

    Michael Schermer inadvertently brought up two of my biggest problems with laissez-faire economics by his discussion of RAAM:

    1) Participation in a sporting event is completely voluntary so it is fair to say “If you don’t like the rules, don’t play.” but economics has become so central to our society everyone MUST play. And Common-sense isn’t enough to make economic decisions anymore – and it’s getting worse. For example, being the world’s best piano maker is not enough one must also be a part-time economist and take a step back from specialization (or raise prices and hire a part-time economist). Either way, this seems to be wasteful.

    2) We debate about applying the principle of laissez-faire to economic power, but no one supports applying it to physical power. We all seem to agree that people shouldn’t be able to use their physical strength to get what they want from other people. We don’t accept the justification that it encourages physically fitness and naturally leads to governing rules (like “Only the Strong Survive”) We accept that physical power is important but enact laws to ensure that it isn’t *all* important. The world has become better and more stable since the strong are not allowed to have their way with the weak.

  12. tmac57 says:

    In my opinion, the erosion and abandonment of the concept of Fiduciary Duty is what has led to the near collapse of the worldwide economy. Once the idea took hold in our financial institutions that growing the ‘bubble’ for maximum profit was the main focus instead of the welfare of the depositors, then the stage was set for any and all forms of what would have been considered fraud (and still is in some cases) in the past.

  13. GoneWithTheWind says:

    For those of you who purchase life insurance you basically did what Goldman Sachs did. Bookies do it too. Go ahead and ask your bookie what he does if you bet $10k on a 20:1 long shot. What he does is lay off the bet, spread out the risk, bet against himself.

  14. Rubberband says:

    For those of you who purchase life insurance you basically did what Goldman Sachs did.

    No, to purchase insurance you must have ‘insurable interest’. Whether that is to purchase life insurance for your heirs/kin, insure your own car, insure an employee’s life because he has key skills that will cost you time and money to replace if he passes away.

    What GS did was more like taking insurance on your neighbors house, and then doing everything you could to reduce the size and power of the Fire Department, make sure there was lots of dry, flammable vegetation around, and reduce the ready availability of water, because you stood a little to gain from your neighbor’s house, but a lot more to gain if something bad happened to it.

    Just like Goldman Sachs made sure AIG got bailed out by the Taxpayer, since the reason AIG went bankrupt was because of all the money they had to pay out to Goldman relative to the premiums they collected.

  15. Rubberband says:

    Just to clarify the above, insurance companies generally won’t sell you more insurance than the value of the asset, to prevent these kinds of situations.

    And not only was GS taking out Insurance on products it no longer held itself, but it was also making bets on the underlying asset, and sometimes bets on bets on bets on the underlying asset.

    This was called “Financial Innovation” that was responsible for “Robust Growth” in the earlier part of the decade.

  16. RaySquirrel says:

    I am amazed at Micheal Schermer’s ability to take any subject and reduce it down to a cycling analogy.

    Coincidently, I have beenreading the new book by Nobel Prize winning economist Dr. Muhammad Yunus, “Building Social Business: The New Kind of Capitalism that is Addressing Humanities Most Pressing Needs”. Dr. Yunus is the banker who pioneered microcredit, a method of lending exclusively to poor people. One of the most popular examples in the US is Dr. Yunus suggests that in order for the market to fully supply the needs of all individuals we need a completely separate model of business to opperate parrallel to for-profit and non-profit business. What Dr. Yunus defines as a social business is a business geared towards providing a social good, where all profits are reinvested into the company. All investors are promissed are promissed a 100% return on investment (without interest), but are not promissed a dividend. There are allready a number of social stock exchanges where these companies can be traded and invested.

    Some of the few things obstructing the growth of social business is that in many places in the US and around the world it is illegal for a CEO to not make a profit for their investors. Also, while it is easy to quantify personal profit how does one quantify a social good? How would you quantify the number of hungry people fed or the number of people without insurance given health services?

    If you check out my website I am also working on my own social business. It utilizes new energy technology combined with modular affordable housing to give everyone housing.

  17. souper genyus says:

    I’m not a libertarian, really, but I would entirely agree with the idea that rules should arise from a bottom-up, democratic process as you suggested in part 2. They definitely shouldn’t be dictated by a central authority without acknowledging the preferences of the people. That just wouldn’t be useful at all.

  18. Max says:

    Popular Mechanics has an interesting article that coral snake antivenin is about to disappear because it’s not profitable, so hospitals will have to keep bite victims on ventilators for weeks, which is more expensive.

    • tmac57 says:

      Good to know! Okay,lemme see.How’s that sayin’ go again?…Oh yeah;”Red on yellow,kill-a-fellow.Red on black,friend of Jack”.
      That should do the trick!Problem solved.
      You’re welcome.