mathbabe

I enjoyed my discussion with Doug Henwood yesterday at the Left Forum moderated by Suresh Naidu.

At the very end Doug defined capitalism pretty much like this wikipedia article:

Capitalism is an economic system based on the private ownership of the means of production, with the goal of making a profit.

Doug went on to make the point that, as a society, we might decide to replace our general pursuit of profit by a pursuit of improving our collective quality of life.

It occurred to me that Doug had identified a proxy problem much like I talked about in a recent post called How Proxies Fail. The general history of failed proxies I outlined goes like this:

1. We’d like to measure something
2. We can’t measure it directly so let’s come up with a proxy
3. We’re aware of the problems at first
4. We start to use it and it works pretty well
5. We slowly forget the problems we had understood, and at the same time
6. People start gaming the proxy in various ways and it loses its connection with the original object of interest.

In this example, the thing we’re trying to measure is something along the lines of “human value,” although we’d probably also want to consider value to the rest of mother nature as well. For context, we were discussing the financial system – what the purported function of the financial system is and what monstrous proportions it has taken on due to the brutal pursuit of profits over goals we might consider reasonable and useful to society.

So the proxy for value is profit. And of course we measure profit in money.

Going back to my history of proxies, it’s been a long time ago since the discussion of “whether money is a good proxy for value” was started, and a large part of economic theory, I guess, is devoted to considering the extent to which this proxy fails. I say “I guess” because I’m no economist, but I am aware of the economic concept of externality, which grapples with this discrepancy between money paid or earned, and to whom, versus actual harm or benefit, and to whom.

It could be argued that the concept and industry of regulation has been erected to deal with externalities of our profit proxy: when a chemical company pollutes the water, causing harm to nearby nature and people, regulators step in, sometimes (and sometimes people sue, of course, but most of the time they’re not even aware of the value being extracted from them, or are helpless to confront it adequately).

This is obviously more than an academic or regulatory topic: it pervades our collective lives. When an individual loses sight of the failures of the profit proxy, they value themselves or others in terms of how much money they have or the rate at which they get paid. They infer that if someone is highly paid or rich, they must be valuable. If someone’s poor, they must hold no value. There are a lot of people like this, I’m sure you’ve met them.

And that brings us to the part of the history of a failed proxy, which is that people game the proxy. We’ve seen this happen a lot lately, especially in finance and technology. And if you think about it, it’s no surprise since so much money goes through the financial system, and the financial system is now entirely technologically driven, and the systems are so complex that the regulators can’t keep up with the manufactured externalities. Someone could probably write a book reframing large parts of the financial system as purely devoted to exploiting the difference between value and money.

I don’t think I’ll start coming to different conclusions now that I have this framework to think through, but I do think it will be easier for me to spot instances of the “profit proxy failure” when I come across them. It’s especially timely for me to be thoughtful about this kind of thing, since I’m hoping to create something valuable, rather than merely profitable. I don’t want to avoid profit, obviously, but I don’t want to measure my progress with the wrong stick.