In other words: "Because there are externalities, the negative ones will outweigh the positives"?

In a rational market, the skew will be toward increasing negative externalities and away from positive externalities. That is: the market exacerbates the problem.

How prudently do people use other people's money?

That generalizes to "how well do people make decisions affecting others". Free-market capitalism optimizes for the "spending your own money" part of this, but as we've already discussed, not the "taking into consideration others' costs". Money is simply a subset of this.

Traditionally, in cultures with a stable economic base (that is, not radically growing or shrinking, and with a relatively stable technological level), much of this is determined by custom, taboo, and institution, where the overall goal is stability. Much of the response of Smith, Ricardo, and the Age Enlightenment generally, was to a world in which the underlying resource base had substantially expanded (first from coal, then with the addition of oil and natural gas), with resulting massive shifts in technology, the economy, customs, and institutions. Free market capitalism was, in many ways, a response to be able to make more effective (and rapid) use of this resource base. Countries which resisted were "backwards" (though stable). Japan would be a case in point, characterized as indolent and lazy at the beginning of the 20th century (already over 40 years after the end of Sakoku). Ultimately, however, most countries found they had to accept the game, at least in part, merely to stay even and/or sovereign.

For more on management through bottom-up or top-down methods for long-term survival, see Jared Diamond's _Collapse_, in particular chapter 9. Effectively they address your question, optimized for social survival, not individual wealth.

No matter how much Coercion you throw around, there will always be some people who don't give a fuck about other people, or nature, or whatever.

You can avoid giving them legal sanction, which is a damned good first step.

Well, I didn't say that voluntary exchanges constitute all economic activity ever.

ORLY? "voluntary exchanges are the basis of all economic activity ever".

I mean, you're more than welcome to admit you were wrong. I prefer to make a practice of not insisting on being wrong myself, but that's just me.

For example, it's safe to assume that slavery or blackmail have nothing to do with any of the exchanges you've made in your life.

You'd be wrong. Slavery indirectly, blackmail directly.

Regarding the former, one of many citations: http://www.washingtonpost.com/wp-srv/inatl/longterm/china/st...

What do you think the source of these particular problems might be?

(Referring to "the game is structured to explicitly benefit one side or the other."). My point is that these effects are endemic to the modern capitalist system, and are often championed by it. I'll note that Adam Smith himself argued for significant involvement on the one hand by governments to prevent such abuses, as well as a propensity for governments to be engaged by commercial interests in exacerbating them. Later pretenders to capitalism and in particular laissez-faire principles (which Smith never discusses and didn't endorse) make the problem rather markedly worse.

I'd chalk the problem up generally to the tendency of power to accumulate and consolidate, regardless of whether you're discussing political, corporate, military, communications, or social power. It's that old Iron Law of Oligarchy. The problem as exemplified in the present market-capitalist-financial system is that it fails to acknowledge or address the problem.

It's less a specific fault of capitalism than a general fault which it doesn't resolve. And it's a fault which can well destroy it (as Marx noted -- his diagnoses were insightful, I disagree with his prescriptions, however).

I can't tell what you mean by that.

Noting that one fault of capitalism (crony capitalism) doesn't mean it's fatally flawed, doesn't mean it isn't fatally flawed.

Humanity involves intractable problems.

Oh, they're tractable. You just may not care for the tracks. Or as GE CEO Jeffrey Immelt said: "We know what the solution is. We don't like it."