Tuesday, November 8, 2011

Decline of capitalism and availability bias

Availability bias refers to human cognitive failure to grasp historical perspectives and draw flawed inferences from immediate and salient events. The graphic below captures this problem in the context of debate questioning the value of capitalism as an economic system. As I have blogged earlier, this trend prevails in many areas of modern public life.

I am not holding a brief for capitalism. Capitalism is surely flawed and like any system of allocating scarce resources, need to be constantly learning from successes and failures, adapting and evolving. The more important point that deserves serious debate is that the events of the past few years have raised several questions about some of the characteristic features of American capitalism. Capitalism needs to learn from these experiences and adapt if it is to retain its credibility.

In fact, the ardent free market capitalists and neo-liberals too suffer from availability bias when they abstract from the limited experience of the two decades of Great Moderation to oppose any role for government to remedy market failures, including by imposition of higher taxes.

Appropriate to this debate, John Kay has an excellent op-ed in FT in the contenxt of the Occupy Wall Street protests that capitalism "should be replaced by something nicer". He is spot on in this assessment,

"Perhaps the "something nicer" which should replace capitalism is a more nuanced – and more accurate – account of capitalism itself."

1 comment:

KP said...

Dear Gulzar,

John kay makes a lot of sense even to a casual observer of the problem - particularly the economists obsession with axioms based on unrealistic assumptions, this one made for a comprehensive argument


This exchange between Sachs and Niall Fergusson on Fareed Zakaria GPS - enlightening ...


The combination of right wing obfuscation / deflection and economics is telling.