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11 Problems with Capitalism

John Spacey, September 12, 2020

Capitalism is an economic system based on economic rights and freedoms whereby governments allow markets to develop and run on their own without too much interference. This is the dominant economic system that prevails in all but a handful of countries such as North Korea. As such, capitalism has a great many strengths, particularly the ability to produce goods efficiently. The following are common problems with capitalism.

Inequality

Capitalism is based on free and open competition. As such, those who produce and capture the most value can end up with a large share of the world's resources. In practice, most capitalist societies are social market economies that use taxation to redistribute some of this wealth with public services such as education, healthcare and basic income. However, it is common for the wealthy to use aggressive tax structures and strategy to avoid taxes resulting in a high tax burden for the middle class and less resources for those in need.

Consumerism

As capitalism efficiently produces products and services that people want, it is often blamed for social ills related to greed, materialism and consumerism. For example, some feel that capitalism convinces people to be greedy and materialistic with mechanisms such as advertising. It could be argued that as an economic system capitalism fulfills its role of producing goods and it is culture that shapes behavior.

Commoditization

Commoditization is the process by which things that were once viewed as unique become viewed as indistinguishable parts. For example, the commoditization of labor is the process by which firms begin to view workers as interchangeable. This begins with an education system that produces standard skills as opposed to unique humans with special talents.

Monopolies

Under capitalism, firms compete to grow market share. With time these firms can control markets such that competition ceases to exist. When this occurs, customers have no alternatives such that prices rise, quality declines and the firm may impose unfair terms on customers. In order to preserve capitalism, governments may break up firms that control markets. Otherwise, capitalism would begin to resemble socialism whereby a single entity controls all capital.

Monopsony

A monopsony is a large firm that is the only customer for a product or service. This also applies to firms that are the only employer in a particular geographical area or profession. For example, a town that only has a single employer such that the employer can drive down wages and impose poor working conditions as workers have no alternatives. Socialism makes this problem worse by imposing state control of all employment.

Anti-Competitive Practices

Many of the problems with capitalism have to do with anti-competitive practices whereby firms prevent fair competition. For example, a firm that controls what software may be installed on a large number of mobile devices thus preventing open competition for games and other apps†.

Undermining Democracy

Capitalist interests that work to undermine the power of people to shape their own societies. For example, global agreements and backroom deals that have governments ban traditional farming practices in order to push the interests of large agrochemical and biotechnology firms††.

Rent Seeking

Rent seeking is a behavior that seeks to capture value without creating value. For example, an individual who buys medical supplies in the midst of a shortage to resell them at a higher price online.

Crony Capitalism

Crony capitalism is undue influence over a government exercised by firms. Capitalism works when the government serves as a balance to the excesses of firms by regulating and taxing them. Crony capitalism subverts this and allows firms to profit at the expense of the public. For example, a government that conducts spending programs not aimed at improving anything for the people but rather aimed at assigning contracts to friends of the government.

Economic Bads

Economic bads are negative results of the production of economic goods. In many cases, nobody pays the costs of economic bads such as air pollution that damages quality of life. For example, a factory may produce widgets worth $8 that each create $42 in environmental damage. This could be addressed with markets for economic bads whereby producers and consumers pay to damage the environment with total damage capped at a sustainable level. However, these markets are currently missing.

Capitalist Realism

Capitalist realism is the reality that capitalism is an extremely dominant and successful system that produces almost all world GDP†††. The quality of life of the current world population of 7.6 billion people depends on capitalism. Capitalism has been extraordinarily successful at improving this quality of life. For example, world life expectancy has risen from 31 years in 1900 to 72.6 years in 2020. It can be argued that this success has led the capitalist elite into a smug complacency whereby they feel they can continue to push out economic bads, inequality, aggressive tax strategy, anti-competitive practices and crony capitalism.

Notes

†,†† Examples are illustrative and hypothetical.

††† Social market economies such as Sweden are often incorrectly identified as socialist when they are in fact based on capitalism with limited redistribution of wealth based on taxation that funds public services. Most developed countries can be considered social market economies. Socialist countries with no features of capitalism are extraordinarily few with North Korea serving as a rare example.