What Do Socialism and Capitalism Mean to You

[Bomb#20]

Are you seriously doubling down on your careless reading?

My apologies. When you said:

And yet in spite of those shared characteristics, fire insurance is an excellent example of a product for which capitalism is spectacularly well fitted -- so much so that when Adam Smith was going on and on about the general deficiencies of corporations, insurance was a service he singled out as one of the exceptions; it's something the early corporations of his era were actually good at.

I should have realised you were lauding Adam Smith for his prescience in discussing the characteristics of fire insurance as it would be from the late nineteenth century onwards, and not discussing fire insurance as it was in his lifetime.

It was most careless of me to assume that you understood the context of what you were writing about, and I should have read it with your lack of knowledge in mind

Oh for the love of god! You're tripling down! Stop being deliberately obtuse. (And I wasn't even lauding Adam Smith -- that would be superfluous. I was entering his testimony into evidence.)

What Adam Smith was discussing was the ability of the corporate investment structure to avoid the problems of conflict-of-interest between owners and executives that plagued joint-stock companies in his day, when the corporations specialized in certain lines of business, among them the business of hiring actuaries to calculate odds and using those calculations to design mutually beneficial bargains with people seeking to get somebody else to bear their risks for them. His comment was on insurance in general, rather than specific to fire insurance. The circumstance that some of the fire insurance companies happened to also try to reduce their payout expenses by putting out fires was immaterial to Smith's point and he didn't talk about it.

 

[lostone]

At one time, a long time ago, back in the 1960's, in the Lyndon Johnson era, the US was making an effort to make it possible to bring those unemployed non-functional people back into the mainstream of society. To improve capitalism and make life better for more people. The Conservative opposition to such efforts, efforts that were floundering down many blind alleys and mistakes, has killed off that effort entirely. Opposition usually framed as 'lower taxes'.

 

[No Robots]

Materialist atheism is destroying both conservatism and socialism. Deprived of its roots in religion, conservatism is degenerating into violent fantasy. Likewise, socialism without its spiritual foundation is feckless and anemic. Conservatives and socialists need to unite to root out the anti-spiritual elements that sap their vitality.

 

[Emily Lake]

And people don't want to be in the street watching their houses burn down, they don't choose to be, and the cost of their loss is determined by the severity of the fire rather than by anything they have control over. And yet in spite of those shared characteristics, fire insurance is an excellent example of a product for which capitalism is spectacularly well fitted -- so much so that when Adam Smith was going on and on about the general deficiencies of corporations, insurance was a service he singled out as one of the exceptions; it's something the early corporations of his era were actually good at.

Except that it's absolutely not good at it at all.

Generally speaking, insurance is not very capitalist at all. It's redistribution of risk, it's one of the earliest types of communistic endeavors. Everyone shares the cost up front for an essentially unpredictable scenario with very low likelihood and very high cost.

I mean, insurance in and of itself is a very good idea... I just don't think it's something that can be considered "capitalist" in nature.

If it isn't capitalist, how did Warren Buffett make so much money selling it? It's not like his customer is the government and he's paid from taxes. No, not everyone shares the cost up front. Only those who make a bargain to have their risks covered share the cost up front. If everyone paid and everyone got covered whether he wanted to or not, that would be a communistic endeavor.

It isn't sharing that makes something communist rather than capitalist. Capitalists share all the time -- it's why the portions of the capital they own and the profits they collect are called "shares". What makes something communist is compulsory sharing.

The insurance business is a garbage disposal business, like Waste Management, Inc. Economically, risk is just another kind of garbage -- it's something people have and don't want so much that they'll pay somebody who's less averse to it to take it off their hands. Just as the widget business consists of trading a widget from people who like one less than the widget price to people who like one more than the widget price, the garbage disposal business consists of trading garbage from people who like it less than paying the disposal fee to people who like it better than losing out on the disposal fee, and the insurance business consists of trading risk from people who like it less than paying the premium to people who like it more than losing out on the premium. The economic difference between a normal widget business and a garbage/insurance business is merely the minus sign in front of the price people are willing to pay for the item being sold.

The concepts behind capitalism inherently rely on a free market system (nowadays let's settle for free-enough). It relies on market forces of supply and demand to produce an equilibrium price for the good or service being traded.

Insurance doesn't work that way. Insurance disrupts the supply-demand relationship. The supply is provided by the doctors and hospitals, not by the insurer. The demand is being provided by the consumer, not the insurer. The insurer's position as a redistributor of risk results in the actual price of supply being masked from the consumer - the consumer no longer has a clear idea of what the prices of the service are. That doesn't mean it's not a good idea - the value at risk for insurable services is waaaaaay too high for an individual to bear, even if it's incredibly unlikely. It also doesn't meant that people can't make money off of it.

I think it's also worth noting that your own analogy seems to undermine your argument. In almost every part of the US, waste management is a non-competitive business. They're almost always municipal services, even if they're outsourced to a private company. They are monopolistic, but they're generally natural monopolies, and competition wouldn't bring the costs down. They're also services that are communally necessary - we truly can't have a portion of citizens "opting out" of waste removal, because that presents a health hazard to the entire community.

I also think this is one of those areas where the technical definition of "capitalism" and the functional usage of "capitalism" cause a pretty big disconnect. The academic question of who owns the means of production has very little to do with how things function in the real world.

 

[Emily Lake]

I'm kind of wondering if @AthenaAwakened is planning to come back to her thread... ?

 

[Alcoholic Actuary]

In the US, fire insurance by itself is not common. It's usually bundled into a blanket property insurance policy (homeowners, renters, building insurance, etc.) that provides financial security in the event of many different potential catastrophes. There might be specific fire insurance riders in certain industries or situations where the fire risk is materially higher than average. I could see a grain farmer having a specific fire insurance policy that is separate from their blanket property insurance, given the higher than average likelihood of a fire, and the amplified damage that a grain fire might cause. But I'm speculating, it's not my area of practice.

If this weather keeps up, fire insurance is the only property coverage anyone will be able to get in 5 years. (and PS - wildfire will be excluded)

aa

 

[Alcoholic Actuary]

And people don't want to be in the street watching their houses burn down, they don't choose to be, and the cost of their loss is determined by the severity of the fire rather than by anything they have control over. And yet in spite of those shared characteristics, fire insurance is an excellent example of a product for which capitalism is spectacularly well fitted -- so much so that when Adam Smith was going on and on about the general deficiencies of corporations, insurance was a service he singled out as one of the exceptions; it's something the early corporations of his era were actually good at.

Except that it's absolutely not good at it at all.

Generally speaking, insurance is not very capitalist at all. It's redistribution of risk, it's one of the earliest types of communistic endeavors. Everyone shares the cost up front for an essentially unpredictable scenario with very low likelihood and very high cost.

I mean, insurance in and of itself is a very good idea... I just don't think it's something that can be considered "capitalist" in nature.

If it isn't capitalist, how did Warren Buffett make so much money selling it? It's not like his customer is the government and he's paid from taxes. No, not everyone shares the cost up front. Only those who make a bargain to have their risks covered share the cost up front. If everyone paid and everyone got covered whether he wanted to or not, that would be a communistic endeavor.

It isn't sharing that makes something communist rather than capitalist. Capitalists share all the time -- it's why the portions of the capital they own and the profits they collect are called "shares". What makes something communist is compulsory sharing.

The insurance business is a garbage disposal business, like Waste Management, Inc. Economically, risk is just another kind of garbage -- it's something people have and don't want so much that they'll pay somebody who's less averse to it to take it off their hands. Just as the widget business consists of trading a widget from people who like one less than the widget price to people who like one more than the widget price, the garbage disposal business consists of trading garbage from people who like it less than paying the disposal fee to people who like it better than losing out on the disposal fee, and the insurance business consists of trading risk from people who like it less than paying the premium to people who like it more than losing out on the premium. The economic difference between a normal widget business and a garbage/insurance business is merely the minus sign in front of the price people are willing to pay for the item being sold.

The concepts behind capitalism inherently rely on a free market system (nowadays let's settle for free-enough). It relies on market forces of supply and demand to produce an equilibrium price for the good or service being traded.

Insurance doesn't work that way. Insurance disrupts the supply-demand relationship. The supply is provided by the doctors and hospitals, not by the insurer. The demand is being provided by the consumer, not the insurer. The insurer's position as a redistributor of risk results in the actual price of supply being masked from the consumer - the consumer no longer has a clear idea of what the prices of the service are. That doesn't mean it's not a good idea - the value at risk for insurable services is waaaaaay too high for an individual to bear, even if it's incredibly unlikely. It also doesn't meant that people can't make money off of it.

I think it's also worth noting that your own analogy seems to undermine your argument. In almost every part of the US, waste management is a non-competitive business. They're almost always municipal services, even if they're outsourced to a private company. They are monopolistic, but they're generally natural monopolies, and competition wouldn't bring the costs down. They're also services that are communally necessary - we truly can't have a portion of citizens "opting out" of waste removal, because that presents a health hazard to the entire community.

I also think this is one of those areas where the technical definition of "capitalism" and the functional usage of "capitalism" cause a pretty big disconnect. The academic question of who owns the means of production has very little to do with how things function in the real world.

Agree.

Aaand furthermore, each state government directly controls who is required to get insurance, what the reasonable rates are, what market it can go to, and which insurance companies get to do business in that territory.

So yeah, seems a little wonky to call a completely government controlled market a good example of capitalism.

aa

 

[lostone]

I'm kind of wondering if @AthenaAwakened is planning to come back to her thread... ?

Maybe she went back to sleep?

 

[Emily Lake]

In the US, fire insurance by itself is not common. It's usually bundled into a blanket property insurance policy (homeowners, renters, building insurance, etc.) that provides financial security in the event of many different potential catastrophes. There might be specific fire insurance riders in certain industries or situations where the fire risk is materially higher than average. I could see a grain farmer having a specific fire insurance policy that is separate from their blanket property insurance, given the higher than average likelihood of a fire, and the amplified damage that a grain fire might cause. But I'm speculating, it's not my area of practice.

If this weather keeps up, fire insurance is the only property coverage anyone will be able to get in 5 years. (and PS - wildfire will be excluded)

aa

Unless you're in Lake Tahoe... or downstream thereof.

 

[lostone]

The insures will find a way to avoid paying both fire and flood damage. It's a basic part of their business plan of how to stay in business in a changing climate.

 

[Alcoholic Actuary]

The insures will find a way to avoid paying both fire and flood damage. It's a basic part of their business plan of how to stay in business in a changing climate.

Flood insurance is already predominantly covered solely by the federal government (NFIP). Typically, it's a separate flood policy, but even if you have coverage through your carrier, the flood portion is 100% reinsured by FEMA. (absolutely no capitalism there). The reason for this is that the insurance industry as a collective determined that flood was an uninsurable risk given the volatiliy of events. Believe we're going to see a similar reaction for catastrophies in general, given the activity in the last 4-5 years.

aa

 

[Bomb#20]

There are always complications to surgery and one surgery that works may have less severe complications than another surgery that works; likewise, one surgery that doesn't work may leave the patient as bad off as when he started and another may make the bad situation worse; likewise, two surgeons that both got it right may have had different odds of getting it right.

And the amount the patient (or health authorities) paid for the surgery has exactly zero impact on these complications.

Expensive surgery by a qualified surgeon isn't better than less expensive surgery by a different qualified surgeon; It's not less likely to have complications, unless it's only cheap because the surgeon isn't qualified.

You are treating "qualified" as a binary variable. It's actually a continuum.

 

[bilby]

The circumstance that some of the fire insurance companies happened to also try to reduce their payout expenses by putting out fires was immaterial to Smith's point and he didn't talk about it.

Well, health insurance is a lot more like the fire fighting element of the fire insurance of Smith's day than it is like fire insurance as we know it today.

The analog of modern fire insurance in the health sector would be income protection or life insurance. Not health insurance.

Acute healthcare is, like firefighting, a response to an urgent and immediate threat, and not a means of compensating those harmed by a threat after it has passed. A funding model that works for the latter shouldn't be expected to necessarily work for the former.

it's important that while the fire is burning, or the patient is bleeding, there isn't time wasted in trying to work out who is going to pay for the immediate intervention that's necessary. This demands a single universal payer in any given jurisdiction, and clear and unequivocal jurisdictional boundaries (there should be no homes burning to the ground because they are at the border between two fire department districts, and both districts' fire chiefs say the fire is the other's responsibility).

 

[ZiprHead]

I'm kind of wondering if @AthenaAwakened is planning to come back to her thread... ?

Maybe she went back to sleep?

She only wakes up during a full moon.

 

[Loren Pechtel]

2. I have seen plenty of pictures of the apartments and homes of these coworkers and friends taken when under the eastern bloc command economies and I must say they lived a lot better than a lot, I mean a lot of people I know today who hold full time jobs.

Admittedly, long ago, but my experience was the opposite--things were considerably worse behind the Iron Curtain than elsewhere. There were fewer signs of major poverty but how much of that was the system actually working vs how much was it was just out of sight? Lots of Potemkin stuff going on and no way to know how much more there was we weren't aware of.

 

[Loren Pechtel]

1. the question of wether socialism works or capitalism works is an unanswerable question

West German Embassy, Prague, Czechoslovakia, 1989

Berlin, 1975, IIRC it was something like an hour to clear East German border control. West German border control saw this (this was a pedestrian crossing point), saw our US passports and waved us through. (Obviously our documents were in order since we had been let out of East Germany.)

 

[Loren Pechtel]

Some people want to look at socialism and capitalism in bubbles, but the reality is that what matters nearly as much is how they are regulated. Capitalism is kind of like a car salesman. They say trust us... and we see failure after failure after failure... and then people be like *showing image above* and implying capitalism hasn't endured some historic fuck ups including the CDS related global economic implosion that only didn't end in a Great Depression because people remembered how that was fucked up. As a reminder, that failure was less than 15 years ago. It required trillions of Government money to somewhat disappear. And in a couple of years, the banks were begging the Government to trust them again!

But in the absence of authoritarian rules the default state is capitalism. The only question is how much authoritarian.

 

[Loren Pechtel]

Social Security is not a pension, nor is it retirement insurance. It's not structured like either of those at all, and it doesn't follow the same rules.

The amount of your social security benefit is dependent on how much you contribute. How much you earned during your working years determines your allotment. My wife's check was different from mine. Look it up.

But the relationship between contribution and benefit is non-linear. And with Medicare there's no relationship at all beyond the 40 quarters requirement.

 

[Loren Pechtel]

Healthcare is an excellent example of a product for which capitalism is poorly fitted - "customers" buy healthcare mostly because they have absolutely no option. They don't want to be in hospital having triple bypass surgery, they don't choose to be, and the cost of their operation is determined by their medical needs, rather than by anything they have control over.

You can't get a better triple bypass surgery because you're wealthy enough to buy a really top of the range one, either - the surgery either works, or it doesn't, and if your surgeon gets it wrong more often, that shouldn't mean he is forced to lower his prices and appeal to a lower budget consumer; it should mean he's going to be fired and sued for malpractice.

This assumes all surgeons are exactly equal, something which is clearly not true.

However, the fundamental problem is that cutting health spending is more appealing to the politicians than raising taxes to pay for health spending. It becomes a case of the fox guarding the henhouse, they keep redefining down the standard of care.

 

[Loren Pechtel]

Scarcity of health care services, for one thing. Sure, it's nationalized and free to all... which isn't helpful when you can't get in to a doctor. And at throughout this past winter, I think a whole lot of UK citizens are less than pleased with the national services for heat and power.

I wouldn't blame them for the problems with heat and power. They're just caught up in Pootin's mess.