The Complexity Argument for Capitalism

We're seeing an attack on capitalism on both ends of the political spectrum with with the election of Democratic Socialist Zhoran Mamdani as mayor of New York, and Donald Trump trying to direct the economy through tariffs, less independency of the Federal Bank and partial government control of companies such as a nearly 10% ownership of Intel and the "golden share" of U.S. Steel.

Now I'm not an economist and there are many arguments for and against socialism and capitalism, especially in their purest forms. I want to focus on the complexity of the economy. Let's start by considering rent control.

It starts with the worthy goal of preventing people from having to leave their apartments because of rising rents due to market demand. So you limit the rent increases and the ability to evict current residents. But this could cause landlords to cut back on improvements, not prioritize service and repairs, or build new properties to increase the supply. So you have to give landlords incentives to do these things, leading to other issues which leads down a rabbit hole. I saw extreme rent control in Berkeley in the 1980s and a lack of available housing forced me to live 13 miles away. 

That's just rent control in a single city. Other attempts to control the economy will lead to unexpected inefficiencies and you can't predict markets enough to catch them.

The 1920 essay Economic Calculation in the Socialist Commonwealth by Ludwig von Mises argued that market prices give critical information for companies and individuals to make decisions. I think of it like a circuit, where the prices are values of intermediate gates so that we can have simple operations at every level leading to a very complex behavior in the aggregate, much like a neural net today. Frederick Hayek went further in his 1945 essay The Use of Knowledge in Society that a center planner couldn't adapt with the speed of change in the markets. 

Could today's neural nets replace the need for these intermediate pricing and adapt quickly? It's really a combination of the two, many companies are using sophisticated machine learning models that lead to more accurate pricing, adding to the efficiency of markets. 

Capitalism has its challenges: Companies can shrink or close, people can lose their jobs and we need good safety nets. Government has a role to protect safety, enforce contracts and provide services and some control where competition doesn't scale, like utilities and pubic transportation. Government also has a role in promoting public goods including education, scientific research and national defense. 

While neither Mamdani or Trump want anything close to complete government control of the economy, I still worry that even their limited influences will hurt innovation and in the longer run hurt the very people these policies are meant to help.