System Failure


Here’s an object lesson as to why both socialism and capitalism constantly break down. The reason is simple. Both are built on flawed models of human behavior. Both theories — and make no mistake, they are theories, not evidence based explanations of reality — think people must act differently than they actually do.

For me, this is an old revelation. When I took an economics survey course in graduate school, the professor seemed dumb-founded that Italian contractors gave discounts to Italian families in Toronto. He could acknowledge that it was possible on an isolated basis but not as a widespread practice. That’s impossible, he claimed and proceeded to show why such a practice was unsustainable according to market economics. This, despite, the continued assertions of a student who was the scion of one of the largest construction companies in Toronto.

Didn’t fit the theory — therefore impossible.

Capitalism insists that people make rational decisions to optimize their utility (or the sum of economic values). When everyone does that it results in maximum efficiency and, according to some, the greatest good for the greatest number. Socialism argues that humans are by nature co-operative and not competitive and will operate based on altruism and a desire to create equal good for all. As long as no-one falls behind, all is well with the world. Both argue that people will operate within the rules of social exchange but disagree what and how many those rules should be.

Neither of these models capture the real complexity of human behavior.

Let me give you the example of luggage on the train. Last night was a full trainload from Toronto to Ottawa. Luggage space was limited but sufficient. A simple rule was proposed. Put the larger luggage in the racks and the smaller bags over head. Failure to do so would lead to some luggage being taken to another car.

Of course, no one did that. By the time I got to the luggage rack with my large bag, they were full, with small bags. People had maximized their utility and screw everyone else. The most efficient solution had been found — those already on the train (the majority) were happy and to hell with the stragglers.

Except of course, the most efficient system hadn’t been found. The racks above were largely empty. People had not only increased their utility by getting a spot but by doing it in the laziest way possible. As well, some of their utility came from excluding others from the space. Fortunately I was having none of that. I rearranged the luggage until there was plenty of room for mine and one other.

Then I stopped. I stopped exactly when the energy of doing the rearranging approached the energy of taking my bag back two cars. I didn’t need to maximize my utility but I wasn’t going into debt either.

But that’s ten minutes.


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