> Who decides what is 'most needed'? Are they chopped liver in capitalism?
I almost feel like you're deliberately misunderstanding me. The only places you're disagreeing with me are _the places that I agree with you_. I am saying that capitalism is the best way to allocate resources, not centralized distribution as in Communism. Instead of trying to figure out where you're misunderstanding me, I'll start from extremely basic economics. I'm sure you know some (all?) of this, but just bear with me as we're clearly talking past each other here.
The goal of economics is generally to maximize utility.
[What is utility?]
Utility is best (and simplistically) described as "what people want". This is the end-all and be-all of what economics strives for. I'll be using "wealth" and "utility" interchangeably here. Note that 'wants vs needs' is irrelevant, since a person's "wants" are generally considered to be a superset of their needs (barring a few exceptions, like children or severe cases of mental disability).
[Who decides what is 'most needed/wanted'?]
Each person decides for themselves. The person who knows what I want is me. I express this preference by buying shit. It's as simple as that. No one needs to "draw lines" for every want and need, because (again), I'm not talking about fucking Communism (in which, theoretically, all resources are explicitly and centrally allocated).
[How does one "create wealth"? Isn't one person's gain necessarily another's loss?]
No. In order for a consensual transaction to take place, both sides (by definition) must be willing participants. Barring asymmetric information, etc, this means that both people are better off. If both people are better off, a net gain in society's wealth has just occurred. This is how the poorest person in today's society is better off than the average person 500 years ago: the accumulation of half a millennium of wealth creation across society.
[What constitutes a "negative" vs a "positive" flow of capital?]
Using the above definition of wealth creation, capital should flow to the places where it creates wealth (remember, this means more people will get what they want). A negative flow of capital is to a place that either creates wealth extremely inefficiently, or destroys wealth.
[How can wealth be destroyed or created inefficiently? Didn't you just say that every transaction creates wealth for both sides?]
In a simple transaction, this is always true, since a participant would not willingly participate if he were not going to be better off. In more complex transactions (basically everything in the modern world), this isn't the case. If you dump toxic waste into a town's river to save on disposal costs, and you cause a spate of cancer cases across the town, the cost that is being borne by the townspeople is not reflected in the transaction. Neither you (the seller) nor your buyer knows (and cares) what happens to the townspeople, and thus that cost is not reflected in the supply/demand graph that leads you to complete the transaction. This is known as an externality. The people bearing the costs are not the people whose incentives matter to the completion of the transaction (the townspeople have no direct control over your manufacture or the price the buyer pays you). This kind of trade destroys wealth when the costs borne by the newly stricken cancer patients are higher than the savings from avoiding proper waste disposal. In that scenario, the "wants" of the patients have been violated to a greater degree than the "wants" of the buyer/seller in the transaction.
[What is an 'external factor'? Last I checked, the economy is everything]
I don't blame you for not getting this one; Externality is a commonly used term in economics but probably not one you'd hear without formal econ education. With that association in mind, I thought it was clear that I meant "external to the parties whose incentives determine the parameters of the transaction". For example, see the above paragraph's description of the consumer and the toxic waste-dumping producer.
TL;DR: No matter how many times you keep trying to twist my comments into advocating central planning and Communism, the fact remains that every single thing I've said is in support of capitalism in its purest form. Preventing market failures is one of the things that's necessary for capitalism to work. Defining free markets as "free from regulation" is as stupid an economic policy as Communism is. Free markets means that capital is free to flow where the most wealth will be created, and wealth creation is a universal goal (There are disagreements on the degree to which it should be sacrificed for humans rights concerns, but that's another subject entirely).
I almost feel like you're deliberately misunderstanding me. The only places you're disagreeing with me are _the places that I agree with you_. I am saying that capitalism is the best way to allocate resources, not centralized distribution as in Communism. Instead of trying to figure out where you're misunderstanding me, I'll start from extremely basic economics. I'm sure you know some (all?) of this, but just bear with me as we're clearly talking past each other here.
The goal of economics is generally to maximize utility. [What is utility?]
Utility is best (and simplistically) described as "what people want". This is the end-all and be-all of what economics strives for. I'll be using "wealth" and "utility" interchangeably here. Note that 'wants vs needs' is irrelevant, since a person's "wants" are generally considered to be a superset of their needs (barring a few exceptions, like children or severe cases of mental disability).
[Who decides what is 'most needed/wanted'?]
Each person decides for themselves. The person who knows what I want is me. I express this preference by buying shit. It's as simple as that. No one needs to "draw lines" for every want and need, because (again), I'm not talking about fucking Communism (in which, theoretically, all resources are explicitly and centrally allocated).
[How does one "create wealth"? Isn't one person's gain necessarily another's loss?]
No. In order for a consensual transaction to take place, both sides (by definition) must be willing participants. Barring asymmetric information, etc, this means that both people are better off. If both people are better off, a net gain in society's wealth has just occurred. This is how the poorest person in today's society is better off than the average person 500 years ago: the accumulation of half a millennium of wealth creation across society.
[What constitutes a "negative" vs a "positive" flow of capital?]
Using the above definition of wealth creation, capital should flow to the places where it creates wealth (remember, this means more people will get what they want). A negative flow of capital is to a place that either creates wealth extremely inefficiently, or destroys wealth.
[How can wealth be destroyed or created inefficiently? Didn't you just say that every transaction creates wealth for both sides?]
In a simple transaction, this is always true, since a participant would not willingly participate if he were not going to be better off. In more complex transactions (basically everything in the modern world), this isn't the case. If you dump toxic waste into a town's river to save on disposal costs, and you cause a spate of cancer cases across the town, the cost that is being borne by the townspeople is not reflected in the transaction. Neither you (the seller) nor your buyer knows (and cares) what happens to the townspeople, and thus that cost is not reflected in the supply/demand graph that leads you to complete the transaction. This is known as an externality. The people bearing the costs are not the people whose incentives matter to the completion of the transaction (the townspeople have no direct control over your manufacture or the price the buyer pays you). This kind of trade destroys wealth when the costs borne by the newly stricken cancer patients are higher than the savings from avoiding proper waste disposal. In that scenario, the "wants" of the patients have been violated to a greater degree than the "wants" of the buyer/seller in the transaction.
[What is an 'external factor'? Last I checked, the economy is everything]
I don't blame you for not getting this one; Externality is a commonly used term in economics but probably not one you'd hear without formal econ education. With that association in mind, I thought it was clear that I meant "external to the parties whose incentives determine the parameters of the transaction". For example, see the above paragraph's description of the consumer and the toxic waste-dumping producer.
TL;DR: No matter how many times you keep trying to twist my comments into advocating central planning and Communism, the fact remains that every single thing I've said is in support of capitalism in its purest form. Preventing market failures is one of the things that's necessary for capitalism to work. Defining free markets as "free from regulation" is as stupid an economic policy as Communism is. Free markets means that capital is free to flow where the most wealth will be created, and wealth creation is a universal goal (There are disagreements on the degree to which it should be sacrificed for humans rights concerns, but that's another subject entirely).
Market failures are cases where purely free markets fail to deliver the best outcomes (as defined by wealth creation). http://en.wikipedia.org/wiki/Market_failure