The Problem with Capitalism

“Capitalism is the worst economic system, except for all the others.”
~ Winston Churchill

Capitalism is failing humanity. It has captured and subjugated democracy through government corruption, both illegal (see Brazil as an example), and legal (see US election finance as an example). It’s assumption that economic growth is always good has created a grotesque, distorted, globalist, consumerist society, eliminating regional and local traditions and interests. Capitalism is literally killing humanity and the environment, yet there are few viable alternatives. This should scare people more than it does.

I surprise myself by coming to these conclusions, because I have undergraduate and graduate degrees in economics, and I am a strong believer in free market economics. Before I continue, let me lay my underlying beliefs on the table so everyone knows where I am coming from:

  1. I am a strong believer in individuality, individual preferences, and individual motivation. While there certainly is such a thing as altruism, and most people have moments where they are altruistic, it is a good rule of thumb to understand a person’s motivation and believe they will act in accordance with that motivation.
  2. I believe the pricing mechanism of free markets creates the most efficient allocation of resources in most instances (health care and the pharmaceutical industry are glaring exceptions that I will discuss later).
  3. I believe in unintended consequences. Economic systems (as well as social and political systems) are too complex to model and understand effectively. Nobody has the omniscience necessary to run a top-down economic system.
  4. Economies of scale are real, however they have diminishing returns – bigger isn’t always better. In fact, I prefer smaller scale, both in business and, especially in politics. I prefer local politics, where you know your elected official and can voice your opinion to them, over state or national politics, where your vote is meaningless (no matter what all the political commercials state).

Given this mindset, one would expect me to be strongly in favor of free market capitalism, and I am. Yet, real world experience shows there are many failures of modern capitalism, some are distortions caused by interference in free markets (such as monetary policy), while others are a direct result of the incentives created by capitalism (the size effect of companies such as Amazon and Walmart), and others are failure of government (government has effectively been captured by large business through political contributions and outsized impacts that business decisions have on society). If both economics and politics are failing society, how do you fix it before the whole thing blows up?

The first step is to identify existing issues. While there are many, below is my list of what I see as the major failings of capitalism:

  1. By its very design, capitalism rewards improving efficiency. Reduction in input costs hits the bottom line just as effectively as increased sales revenue. This is exacerbated by size. Large corporations such as Amazon and Walmart constantly work to drive down costs and improve efficiencies through automation. The effect is more wealth is extracted from the chain of production, making shareholders wealthier to the detriment of vendors and employees.
  2. Externalities. Crony capitalism and its captured government do a poor job of internalizing externalities. Companies do not pay for all the damage they do to the environment, communities, regions, and nations. They push off as much cost to others as possible and walk away when they no longer have financial motivation to remain.
  3. Growth & Consumerism. Any system that’s end goal is continual growth cannot, by definition be long-term sustainable. The advent of the consumerist society and advertising have created a world in which people work to create things then convince people they need them to be happy. People then waste the money they earn chasing happiness through consumerism, yet we wonder why we have so many cases of depression and mental illness in our society.
  4. Education: our educational system is failing us, designed more to pass tests than to learn and develop critical thinking skills.
  5. Health care & delivery: the market mechanism creates incentives, not to find a cure (which wouldn’t maximize profit), but to sell more health care services and drugs. A sane society would promote healthy living and prevention to avoid doctors, medicine, and hospitals in the first place.
  6. The state, immigration & borders: People should be free to live wherever they want, that would be truly free markets, however the state has a vested interest in protecting borders.
  7. War!!! – We are killing each other so a few companies and banks make billions of dollars.
  8. AI, robotics & the future: what happens to entire system with advances in AI & robotics – an end to work is a real thing. Without work in a capitalistic system, there is no money to buy necessities or luxuries. The wealthy will be producing for each other and trading existing wealth while poor die. The transition will see huge sums of capital consolidated in very small group of individuals.
  9. Growing inequality/ownership of wealth/resources: any system that creates such a mis-allocation of resources between rich and poor is fatally flawed.
  10. Incarceration: privatizing our prison system creates odd incentives (bolstered by political contributions from corporations to politicians and judges) to be “tough on crime” and create the largest prison population in the world.
  11. Banking system, monetary system: any capitalistic system that sees the price of money set by a political organization rather than the free market is not really a very good capitalist system. The most fundamental price, that of money, is not set by the market and, therefore creates distortions throughout the economy. We are seeing this played out through the various asset bubbles that have grown and burst.

This is not an exhaustive list, but hopefully it is enough to show that capitalism is fatally flawed. The question remains: what is the alternative?

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