OP-ED: Capitalism has a problem
Capitalism has created more wealth than any other economic system; material wealth is not the only measure of happiness, but conservatives are right to credit capitalism for lifting millions of people out of poverty. Adam Smith was a genius, and “The Wealth of Nations: is one of the most important books ever written. So I understand why many people love capitalism. But it has a problem. While it thrives on competition, this competition inevitably creates winners and losers, and the winners are eventually able to rig the game to reduce the competition that makes it so productive.
The other inherent flaw in a capitalist system that spurs growth through competition is that it creates winners and losers. In the state of nature, where the Darwinian survival of the fittest literally means that losers don’t survive, no one worries about the losers because they become food for the winners. But, fortunately, our economy is not quite so primal. Unless we want to exhibit Darwinian callousness toward the fate of individuals, society must make some provision for people who don’t win.
One of the most beneficial aspects of capitalism is that it transmits information very effectively. Unlike a command economy, such as those under the old communist regimes (the USSR, e.g.) where resources are allocated (often misallocated) by central decision-makers, capitalism relies on the decisions of many people (anyone with money) to demonstrate demand, and business owners then act to satisfy demand to maximize profits (Adam Smith’s “invisible hand”). But this only works effectively if there is consumer choice, consumers have enough money to create demand, and money is a common language.
These are three areas where capitalism can break down. First, successful capitalists often have excess profits, and may not always have enough new ideas in which to invest. A tempting alternative is to use this money to buy their rivals, and reduce competition. Corporations can gain economies of scale, and reducing competition allows them to charge higher prices and be less efficient. This is a virtuous cycle for corporate profitability, but not for customers or workers, who have fewer alternatives and may face higher prices and lower wages.
Economic inequality creates a second problem: money has different value to the rich and the poor. It will take a minimum wage worker roughly an hour to earn enough to buy a simple meal, while someone in the top 1 percent (family income greater than $421,926 in 2015) would earn that in about two minutes. Price becomes less important to the wealthy, and businesses that cater to them don’t have to be as efficient as those that cater to the poor; this tends to encourage resources to be allocated to satisfy wealthy consumers at the expense of the poor (upper income neighborhoods have numerous grocery stores, while poor neighborhoods are often bereft, leaving them “food deserts”, e.g.).
Along similar lines, if you have a lot of money, you don’t need to be a particularly good shopper. You don’t need to search for good values. Price loses its meaning. When I was younger, I worked in a ski shop in Vail, Colo. I found it ironic that the masters of capitalism were the ones who didn’t care about price, which is one of the most important factors in a capitalist economy. Trying to find good values takes time and knowledge; if your primary concern is quality, and you have essentially unlimited resources, you can overpay to get it. This means the providers don’t have to be as good; they can be less efficient and just charge more.
Another problem with inequality is that if too many people don’t have enough money to spend, economic growth declines because of a lack of demand. If factory owners have all the money, who will buy their products? Weak demand has been a major factor in the slow growth of the GNP in recent years.
Capitalism works best under competitive conditions; to make that happen, successful capitalists cannot be allowed to game the system to make their life easier. The government needs to create conditions that allow everyone to participate (things like a living wage) and reduce the power of people who would rig the rules to their benefit (preventing monopolies and reducing vast inequalities of wealth). Capitalism creates great wealth, but if most of that wealth only accrues to a few people, the system will no longer function efficiently. Jeff Bezos, Bill Gates and Warren Buffet seem like nice people, but they have more wealth than the half of the country. Concentrating wealth like that starts to replicate a centrally planned economy, where economic decisions that affect everyone are made by only a few people. Capitalism and democracy both thrive on participation. For capitalism to function effectively, the government must create and enforce rules to ensure competition and provide financial support to allow everyone to participate, otherwise inequalities in wealth and power will create social tensions that will inevitably lead to social disruption.
Kent James is an East Washington resident and has degrees in history and policy management from Carnegie Mellon University.