Is capitalism the best economic system?
Have you ever been just browsing the internet, maybe watching Youtube, then you decide to check the comments on whatever you were looking? Big mistake. Doesn’t matter what you’re watching, it always somehow manages to devolve into politics. Through the slurs being thrown left and right, you might have heard the terms capitalist, and socialist, definitely not as terms of endearment. So how did we get to this point? Shouldn’t this debate have ended,several decades ago? How i wish that were true. After the cold war, consumer confidence was up, the market was strong everything seemed to be going great, it was an age of prosperity. This all came grinding to a halt in 2008 when the housing market crashed, with few lucky survivors. Coupled with the slowest recovery from a recession since WW2 (and certainly not helped by the controversial election of Donald Trump) people have begun turning towards more radical solutions, to either “fix” capitalism, or replace it. This has presumably brought you here, where I’d like to take you through a quick briefing of both systems, and to decide whether capitalism is or isn’t the best system afterall.
So let’s first start off with defining capitalism. It’s an economic system where the exchange of goods and services are done privately. That is to say, that government interference is limited, or in some cases not present. However, there is no major nation that operates solely on this system, not even the US in its current state. While it certainly is true that the US government has a lesser influence on the market as compared to many other countries, it still has some presence in things such as education, food safety and public infrastructure. As such, it is considered a mixed economy, where there is blend of private and nationalized elements working together. Many economists who advocate for free markets such as F.A Hayek and Milton Friedman accept the role of government in places where the market can’t provide, for example, law enforcement. Capitalism can also be broken down into different schools as well, so for the sake of this blog’s topic I’ll narrow it down to a matter of market economies and command/centrally planned economies. Because honestly, talking about the different interpretations of capitalism warrants a blogpost of its own.
On the flipside, there’s Socialism. While not quite as far reaching globally as capitalism ever since the cold war ended(communism and socialism were closely linked), there are still some strongholds left in this world. Almost the polar opposite to capitalism (and perhaps that’s why the debate is so heated), the state plays a major role in planning the economy, and owns large portions of the elements within. As they are considered a command economy, they have control over the production output, and the pricing of their goods.
Now that we’ve answered the question of what and socialism are, it’s time we took a look into the closer details as to why they are so fundamentally opposed to each other.
Capitalism, is primarily concerned with the generation of profit, which has been called both a strength and a weakness of the system itself, but i’ll cover the latter afterwards. Now, why would the pursuit of profit be ideal? Using economic terms of scarcity and incentives, we can come up with an explanation. Capitalism uses economic incentives to motivate people to innovate and to create better products for the consumer market. By dangling the possibility of striking gold and becoming rich, people are drawn towards the opportunity like moths to the flame. As Milton Friedman states:
“Well first of all, tell me: Is there some society you know that doesn’t run on greed? You think Russia doesn’t run on greed? You think China doesn’t run on greed? What is greed? Of course, none of us are greedy, it’s only the other fellow who’s greedy. The world runs on individuals pursuing their separate interests”
Now, one might ask how does this relate to capitalism? It’s quite simple, capitalism understands that there will always be greedy folk, in turn uses that hunger for money into something productive to society and then rewarding them for it. In that sense, greed is good. More greedy folk trying to get into the same market will drive down the price through competition, ideally of course.
If anything, markets are very efficient at allocating resources. Think of it this way, if you make a bunch of things that no one asked for, you’ve just spent time and effort all for nothing, and you’d have wasted resources, making no profit. You’ll also have to figure out what to do with those products that people didn’t buy, and chances are, you probably have a loan to repay too. In effect, if you’re considering taking your chances at becoming the next gorillionaire, you’ll have to consider the three production questions if you plan on getting anywhere.
- What to produce?
- You should be producing what the market is demanding for, yet at the same time is profitable. Ideally, the demand and the supply will meet
- How to produce it?
- Ideally, you do so with the lowest costs for the highest gains. This of course, within legal boundaries
- For whom to produce?
- It all depends on the scope of the market. It could be aimed towards more local markets, or it can be international if the demand is there.
Does this mean that it’ll automatically give everyone the ability to make the right decisions? As much as that would be great, I don’t think any system could do that. In some ways, it can be seen as both a positive and a negative economic incentive, as you either gain money for making good choices, or lose it if you don’t.
Now that may sound harsh, and it has been a point of criticism, that the system is too insensitive, too unfeeling and that the only thing it cares about was money. As stated by Michael J Sandel, a writer for the Atlantic:
“The most fateful change that unfolded during the past three decades was not an increase in greed. It was the reach of markets, and of market values, into spheres of life traditionally governed by non market norms. To contend with this condition, we need to do more than inveigh against greed; we need to have a public debate about where markets belong—and where they don’t.”
Returning to the point I made about the primary goal of profit, it’s important to also explain why some people can see it as a problem. It essentially puts a price tag on every aspect of life, and is invasive, as some things such as art reflect on a more personal level, slapping a monetary value certainly removes such an element. The greed factor may also cause a monopoly, if the government doesn’t take proper measures to prevent this, especially in markets with higher fixed costs like hydroelectricity. A final critique on market economies is that they are prone to market crashes and instability, as seen most prominently in the 1930s great depression, as well as the 2008 housing market crash. It is commonly cited that the lack of regulations promoted irresponsible spending, and making high risk bets that didn’t pay off are what caused it, and that in such cases the government had to step in and spend to fill the sudden lack of spending from consumers.
Now, in a socialist economy, things are much more rigid, and in some circumstances less prone to crash(less risk taking).
- What to produce?
- You will produce what has been decided and planned ahead by the government.
- How to produce it?
- You’ll likely use state owned or communal equipment
- For whom to produce?
- In socialism you produce for your people as a whole. This isn’t to say that all socialist governments are self reliant, North Korean juche style(ironically though, North korea receives quite a lot of help from neighboring china)
One of the most prominent criticisms socialism’s efficiency is that there’s been no example where economies that place more weight on this model have actually succeeded economically. Bold statement, but let me explain. Looking at nations that outright call themselves this(not the ones that call themselves social democracies), none of them can be considered prosperous. While most of the leaders that hold the power like to claim their virtue and how they have helped the people, a cause for concern is that having such unchecked power under one group or person could invite corruption, or equally bad, incompetence. As an example of this which seems to fit a broader trend(Zimbabwe under Mugabe, Cuba, North Korea ) Venezuela under current president Nicolas Maduro and his United Socialist Party, the bolivar has been devalued to such a point that the premium currency in the popular online game World of Warcraft was deemed to be worth more. At one point, the government decided to print new bank notes to help cope with the hyperinflation, yet there was a shortage in the amount of bills(quantity shift left in supply, upwards movement of price equilibrium as demand either increases or stays same), which incidentally made a good portion of the nation millionaires overnight.Unfortunately for them, the money had very little purchasing power, and there was a lack of items to even purchase. Keep in mind that this is a country that has the most oil reserves in the world, surpassing even Saudi Arabia and Canada, yet is only the 11th in terms of production. Not to mention, the number of barrels produced has declined by nearly 30% recently. As 50% of their gdp is reliant on petroleum, which also accounts for 95% of their exports, this severely hurts the country. What we can see from here is that centralizing market wide decisions tends to make things less efficient. Another thing that is less mentioned(all though brought up in the article about the WOW currency), is the centralized control tendency to create black markets, as some products are heavily regulated and taxed, or sometimes outright banned.
One of the most major criticisms of capitalism in modern day economics, is the large gap in the wealth distribution between the upper and the lower classes. According to statista, in the US the 50% that comprises the lower income brackets only accounts for 1.1% of the nations total wealth, while the top 1% represent 35%. Since “fair” is a very subjective term, this is something that is very difficult to decide.
To a free market capitalist, fairness is that someone is entitled to reap the rewards of his own intellectual labor and to decide what their workers’ pay will be, and not be forced to hand it away to someone who, in their view did not contribute as much to the success. The worker on the other hand should be able to move around by their own volition and bring their trade elsewhere if they are unsatisfied with their salary.
Socialism operates on a platform that focuses on social and moral incentives, as you are to work for the good of people. In such a case, wealth is redistributed so that the gap between the highest and lowest earners is shrunk. The famous phrase popularized by Karl Marx “from each according to his ability, to each according to his need” is a perfect way of describing the principle behind their views on equity. One of their most prominent platforms that we see in modern mixed economies is the universal healthcare system, which while is free for up front usage, gets covered in taxes later on. As a whole the system helps care for those who aren’t able to and raises the equity, at the cost of making another person worse off.
As much as pursuing fairness can be an admirable goal, it certainly hinders to a crippling degree the efficiency of the country’s economy. For one, this causes a lack of incentives for development or innovation, or more specifically the wrong motivation. As economist John Kay writes:
“These planned economies failed in the development, not just of consumer products, but of business methods. Their technological development was disappointing in almost all not related to military hardware. Centralised systems experiment too little.”
Without the prospects of economic movement as well as a general averse attitude to taking risks for greater reward, people aren’t as motivated to push themselves harder than the next person, if they know the government will redistribute it so that they end up in similar places.
So with this in mind, do i think that we should move towards more regulations, or fewer? Personally, I’d rather a freer market, though i am not opposed to all government regulations. In citing the housing market crash and the great depression, I am still very unsure on the causes or the handling of it, as they are both very hotly debated even to this day(interesting articles on the handling of the great depression and financial crisis). And that’s the thing, economics is such a speculative study that it we can’t scientifically prove regulatory policy properly.
However, from what I can observe, most successful mixed economies focus more on the market side, while splicing some elements of social benefits such as healthcare. Clearly, this is only sustainable because these countries were economically prosperous before they implemented these changes.
Until we can find better alternatives, I believe capitalism is currently the best economic system among the various choices because it incentivizes people to push harder and allows for anyone to succeed. It also is more versatile, in being able to afford more social programs, while socialism unfortunately tends to turn to some forms of privatizing out of a necessity. In having to pick a system that doesn’t always work, and a system that hasn’t worked, I believe the choice for me is clear.