Defining Capitalism: The Traffic Intersection Theory of Economics

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Posted on: 01/04/2014 by Pat O'Brien

In "The Radical Moderate", I made the baseline assertion that "Many of our political debates are really arguments over the definition of capitalism." In light of the recent comments by Pope Francis about capitalism and unfettered markets, it is timely to revisit what I was talking about in the book. First, some history is needed.

The definition of capitalism that has dominated economic thinking for over two centuries originated from Adam Smith, the Scottish moral philosopher who wrote The Theory of Moral Sentiments (1759) and The Wealth of Nations (1776). In these two works, Adam Smith raises the idea of an "invisible hand" that is guiding the economy. That hand is the tool by which self-interested individuals create economies, wealth and everything that goes along with those things. Smith sums up this notion of self-interest with the quote: "By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it." In other words, human self-interest leads to advanced economics. And, back in 1776, I think that Adam Smith was right. But, in 2014, this principle is overly simplistic and vastly outdated. Smith was describing a world where "butchers", "brewers" and "bakers" were on the cutting edge of business. The "invisible hand" theory was a nice start but it is time for Economic Theory 2.0.

The principle introduced in my book is "The Traffic Intersection Theory of Economics". Here is how it works:

Imagine the intersection of two main thoroughfares in a big city. The intersection has several turn lanes and a complicated light system. There are hundreds of cars waiting for their chance at any given point to pass through the intersection. Sometimes, it is rush hour and the intersection is at its peak in terms of traffic flow. Sometimes, it is late at night and the ebb and flow is dramatically lower and much more manageable.

Imagine that the cars represent the private sector players in the economy such as businesses and consumers. The intersection light system and speed limit represents the laws and regulations placed upon the private sector by the government. The size and scope of the entry points to the intersection represent the particular segment of the economy. There is an intersection for banking, retail, agriculture, etc. There may be multiple intersections clustered very near to each other representing the complexity of that economic sector. In short, the economy is much like the traffic flow through a big city and the intersections represent the critical junction points which determine the back and forth of economic activity.

Now that you have a mental picture of how the traffic intersection and the economy are analogous it’s possible to examine some more specific attributes of the system. The timing of the intersection lights are agreed upon economic laws. For example, one green light is on for thirty seconds allowing enough traffic to pass through on one thoroughfare. Then, another green light allows the other traffic artery to proceed forward for forty seconds because it has a higher car count. Some people are allowed to turn with a protected arrow while others are not. The timing of the lights ensures that each car has a fair opportunity to proceed through the intersection unabated.

If you have ever sat back and watched a busy intersection for an hour or so you understand this analogy. Because of holding political signs I have witnessed the beauty of a well-managed traffic intersection many times. I have also seen how close the entire system is to breaking down if people don’t follow the rules.

Most people pass through intersections and respect the basic structure of how it works. However, some people intentionally push the envelope. Those people see the yellow light in the distance and speed up thereby passing through the intersection after the light has already turned red. Their attitude is they are going to get their way and everyone else can wait. These overly aggressive drivers occasionally create accidents which slows down the intersection for everyone else who followed the rules and did nothing wrong.

To further illustrate this point, let’s examine what would happen to traffic patterns if intersections existed in a different format: First, an intersection that has no lights at all; second, an intersection that is over-regulated; and, third, an intersection designed to benefit only certain kinds of traffic.

A busy intersection without any traffic lights would be survival of the fittest. The most aggressive drivers would have their way. Those people willing to take great risks would pass through the intersection with the most frequency. The people driving the largest vehicles would also have an advantage. The threat of losing their life in an accident would be far less for those drivers thereby making them more daring. Less aggressive drivers in smaller cars would wait for longer periods of time before passing through the intersection. In fact, many would decide to just avoid the intersections completely and instead take a longer and less efficient path to their destination. The aggressive drivers would get into a lot of wrecks and the intersection would have to be cleared during the day with some frequency. This activity would back-up traffic at the intersection forcing cars to move in other directions. However, if the other intersections did not have a light system either then the same issues would soon arise at those locations as well. It wouldn’t take long for an entire city to become paralyzed by the accidents, back-ups and uncertain travel patterns of the vehicles. This result is undesirable for traffic or for the economy. A traffic intersection without a light system is very inefficient.

At an over-regulated intersection, the traffic would move very slowly. This type of intersection would have a reduced speed limit and each car passing through would have to be stopped by a police officer who would conduct a safety inspection of the vehicle. The officer would check for cracks in the windshield, working lights and whether the muffler was adequate. The vehicles would be very road safe but the drive times for people would increase dramatically. People would soon avoid the hassles of the intersection and find different travel paths to their destination. A traffic intersection that is over-regulated is also very inefficient.

At an intersection where certain kinds of traffic are favored, a traffic cop would direct particular lanes of cars to move through faster than other cars. This direction would create a distinct advantage to the traffic favored by the police officer. The people in cars that were not favored would soon look for other travel paths. Again, this would be very inefficient and possibly unethical unless there was a legitimate reason to treat this traffic differently.

In practicality, the only way to allow traffic patterns to have a natural flow is to create a light system that takes into account the number of cars that should naturally move through the intersection. This means that someone must determine what is in the best interests of all involved and that person is responsible to make the rules of the game for everyone. In a city, this person is usually an engineer that is skilled in determining traffic patterns. When drivers believe that the rules are not fair they have the right to air their grievance to this official. If enough people lobby the official and a modification makes sense then the traffic flow can be changed. This is the same thing that happens in an efficient and moderately regulated economy. Instead of engineers, the government empowers regulators to set the rules and handle the flow of the economy. When done properly, the economy will proceed forward in the most efficient way possible.

The next time you go through a large intersection in an urban area please think about The Traffic Intersection Theory of Economics. I bet that it makes sense to you. If it does, you will now have a new way to view capitalism. And, you might appreciate the comments of Pope Francis a little more. My reading is that the new Pope believes in a form of capitalism that allows the small cars to travel safely through the intersection in the same way that the large cars can. We're not talking about redistribution of wealth as much as a set of rules that gives everyone an opportunity to raise themselves out of poverty. 

Regardless of what Pope Francis meant, I very strongly believe that the popular conception of "capitalism" is way off the mark. There are many more nuances to capitalism than just "free markets" that somehow manage themselves. Particularly in the United States, we live in a regulated economy that has generally evolved well over the years because of moderate oversight by various government entities. When entrepreneurs understand the rules of the game and those rules are consistent, economies thrive. Like an efficient traffic intersection, capitalism works best when it is regulated at a proper level. Finding that proper level will always be the challenge but it lies somewhere near the pragmatic middle of the pendulum. The complexity of our economy has come a long way since the days of Adam Smith and it is now necessary for our economic theory to catch up with the times.

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