Capitalism creates inequality.
Nature creates inequality. Different socioeconomic systems reward different natural inequalities – intelligence, physical health, strength, and beauty – by the incentives they create. Capitalism rewards the “bourgeois values” at which the left sneers: thrift, honesty, persistence, hard work, prudence, tolerance, and civility. Socialism rewards ruthlessness.
Material inequality is the inescapable result of material progress. If a new product is created, it cannot possibly be instantly and simultaneously distributed to every person on earth. So, the first time someone invented something – the stone hammer, perhaps – inequality instantly appeared in the world.
To demand complete material equality is to demand an end to material progress.
Capitalism results in the concentration of wealth in the hands of the few.
Wealth is more concentrated in many socialist and socialist-leaning countries (e.g., South Africa, Zimbabwe, and Nicaragua) than it is in free market countries. Moreover, the free market automatically channels resources to those who most efficiently use them to improve the lives of consumers worldwide. By contrast, socialism and communism have historically channeled resources to the most ruthless and murderous: Lenin, Stalin, Mao Zedong, Castro, Pol Pot, Mugabe, Ortega, Chavez, Maduro.
Trade used to mean the literal exchange of one good or service for another good or service. Today, it more often means the exchange of goods or services for paper IOUs that we call “money.” In a free market, money is documentary proof that the bearer has provided goods and services that others valued as demonstrated by the fact that they willingly exchanged the products of their own labor for them.
In other words, people with money in their pockets have benefitted others but have not yet received anything of comparable value in exchange. The idea that such people “owe society” or should “give back to society” is exactly backwards. They don’t owe, they are owed.
Unregulated markets result in wealth inequality.
Regulated markets result in even more inequality. In fact, much regulation is designed to enable the “haves” to retain and increase their material advantages. The problem of “regulatory capture,” in which regulatory agencies work to benefit the industries they were intended to control is very real.
First, when an agency is initially created, it needs experts on the industry it is supposed to monitor. Where can it go but to the industry itself? Second, no one has a bigger interest in lobbying the agency than do the companies being regulated. Third, if the industry were to disappear, the agency’s reason for existence would also disappear, so agency employees have a vested interest in keeping “their” industry alive, even if it’s at the expense of consumers.
Finally, there is no such thing as an “unregulated” market or “unfettered” capitalism. A company’s heaviest fetters are forged by its customers and its competitors. In a free market, no company, however large, can long survive if it doesn’t satisfy its customers with products and services that are at least as good as those offered by its competitors.
Capitalism is a winner-takes-all game.
Free market countries tend to have the largest middle and upper classes, which means that most people who “play the game” do quite well.
Yes, the 1% owns the lion’s share of “symbolic” or “paper” wealth, but they don’t own most of the physical wealth and they certainly don’t own more than a tiny fraction of the country’s human capital (e.g., knowledge and experience). Jeff Bezos is a multi-billionaire, but most of his wealth is in the form of Amazon stock. He doesn’t own a significant share of the country’s houses, cars, aircraft, computers, TVs, microwaves, dishwashers, washing machines, and so on and on. Confiscating his wealth would mean that he would have to sell his stock in Amazon, which would tank its value, causing much, if not most, of that “wealth” to vanish.
Most of us are neither geniuses nor inventors, but the free market enables us to benefit from the genius and inventions of others. When someone “wins” and gets rich by producing a good or service that improves our lives, we win too.
Capitalism turns workers into wage slaves.
Slavery is an economic system in which people can arbitrarily demand others’ time, labor, and produce. Socialism is an economic system in which the politically favored can arbitrarily demand others’ time, labor, and produce.
In a capitalist system, no one can enslave me or compel me to work. But by the same token, neither can I enslave others; I cannot compel them to provide me with food, clothing, and shelter. If I want those things, then I must either make them myself – in which case I will likely live in abject poverty – or I must produce goods and services that I can exchange for them.
Capitalism rewards merit and rewarding people based on merit is discrimination.
Well, yes. Selecting people on merit is discrimination – that is, it’s the “recognition and understanding of the difference between one thing and another.”
But if I’m faced with the necessity of choosing between candidates – whether for a job, a promotion, or for admission to a university or club – I’m forced to, well… choose. And if I have any basis at all for making the choice, then I’m looking for differences between one person and another.
My responsibility to my organization requires me to discriminate on “merit” as defined by those traits that my organization deems will best help advance the goals of the organization.
Capitalism drives corruption.
After the Civil War, corporations repeatedly tried and failed to form cartels to keep prices high and to prevent competitors from entering markets. Every attempt failed because none of the cartels could employ force to keep cartel members from cheating. Incentives to lower prices and grab market share were too great.
The problem was “solved” during the Progressive Era, when government created cartels to prevent “ruinous” competition and created agencies like the Interstate Commerce Commission, the Federal Trade Commission, and the Federal Reserve Bank to enforce the rules.
FDR’s New Deal extended cartels to agriculture and to the automotive and airline industries, while LBJ’s Great Society Medicare and Medicaid programs extended them to healthcare.
In short, progressives created government-backed cartels and monopolies and now blame capitalism for the unfortunate results.
Richard Fulmer worked as a mechanical engineer and a systems analyst in industry. He is now retired and does free-lance writing. He has published some fifty articles and book reviews in free market magazines and blogs. With Robert L. Bradley Jr., Richard wrote the book, Energy: The Master Resource.
READER COMMENTS
vince
Jul 13 2022 at 2:04pm
“Capitalism rewards the “bourgeois values” at which the left sneers: thrift, honesty, persistence, hard work, prudence, tolerance, and civility.”
That’s cherry picking. Capitalism rewards more than that. And it’s those other things that has given capitalism a negative connotation. The irony is that socialism–or any political system–rewards those other things too.
As Federick Bastiat said: The state is that great fiction by which everyone tries to live at the expense of everyone else.
Richard W Fulmer
Jul 13 2022 at 3:11pm
Free markets also reward productivity, innovation, efficiency, and the acquisition of skills and knowledge. What did you have in mind?
vince
Jul 13 2022 at 7:21pm
Monopolization and exploitation of externalities.
Richard W Fulmer
Jul 13 2022 at 8:27pm
Please explain to me why so many people demand actual government monopoly to prevent potential corporate monopoly. Why is an unaccountable, permanent, and heavily armed monopoly preferable to companies that can be “fired” by consumers or made obsolete by competitors?
The most efficient way to deal with many externalities is to properly define and defend property rights. During America’s industrial revolution, pollution was worse than it needed to have been because the courts refused to enforce property rights. When people sued factories for polluting their air and water, for example, judges decided in favor of the factories on the utilitarian basis of “the greatest good for the greatest number.” Judges reasoned that more people – employees and customers – benefitted from the factories’ activities than were harmed by their pollution.
Had property rights been enforced, the factory owners would have been required to pay restitution for the harm they were doing, giving them an incentive to find ways to reduce that harm. Settling ponds, for example, could have been used to eliminate the heavy solids released into streams and rivers. Perhaps, the companies could have even found uses for those waste solids.
Standard Oil, for example, found uses for gasoline, which, before, had been considered a waste product and dumped into the nearest river.
vince
Jul 14 2022 at 12:00pm
That’s a lot to respond to. I will try to be brief.
1. When you say people demand government monopoly to prevent corporate monopoly, I assume you refer to regulation. They probably do it out of desperation, naivety, and lack of simple alternatives.
2. On externalties, you mentioned Standard Oil dumping in the nearest river. I’m sure they would continue dumping today if they could. Companies want to maximize profit. Passing costs to others is one way to do it.
Richard W Fulmer
Jul 14 2022 at 1:01pm
The history of antitrust law isn’t one of desperate consumers demanding relief from high monopoly prices. Instead, it’s one of desperate competitors demanding relief from companies who were so efficient that their prices were “too low.” Standard Oil is a case in point. The company captured 90% of the oil refining market by driving kerosene prices down from 58 cents a gallon in 1865 to 8 cents in the 1870s.
As to your claim that Standard Oil would have kept dumping gasoline in rivers if it could, the company found a market for gasoline decades before the Federal Water Pollution Control Act was passed in 1948. Standard Oil thrived precisely because it did things like finding profitable uses for resources that other companies threw away.
Jon Murphy
Jul 13 2022 at 10:03pm
Capitalism rewards neither. Monopolists find their position transitory due to capitalism and capitalism rewards overcoming externalities.
vince
Jul 13 2022 at 11:15pm
You’re joking, right?
Jon Murphy
Jul 14 2022 at 9:10am
Not at all. There’s a very deep literature on these two items:
For monopolies, their position is transitory due to contestable markets. Monopolies face competition constantly, even if it is just the threat of potential competition. Monopoly profits incentivize people to overcome the barriers to entry and claim some of those profits for themselves. And the competition tends to come from unforeseen places (for example, who would have thought cell phones would kill taxi monopolies by allowing for Uber?). Furthermore, the Second Law of Demand states that the longer a price remains relatively high, the more elastic the demand curve becomes as people search out and develop substitutes. Thus, even if other firms do not find a way around the barriers to entry, consumers find a way to move away from monopolies. Consequently, monopolies tend to be transitory in free market societies because of the incentives created. They only end to persist in areas where the market does not reign (eg industrial planning, socialized markets).
Now, to be clear, monopolists would love to keep their monopoly position. That is part of the reason why they spend so much in regulatory lobbying and other forms of rent-seeking. But the incentives of capitalism mean that there will always be challenges, even if they are protected by the state (see Uber and the taxis).
For externalities, a similar story exists. Remember that an externality is a cost (or benefit) that is foisted upon a 3rd party in a transaction. But the presence of a cost also means that there is a profit opportunity if one can reduce/eliminate the cost! As Ronald Coase showed in his Nobel Prize-winning work, externalities can be internalized through market means. Elinor Ostrom, who also won the Nobel Prize, found many different ways people internalize externalities beyond simply the market. The freedom that capitalism provides allows for all sorts of creative solutions to the problem of externality. As we are seeing with Sri Lanka and other places, externalities tend to persist and get worse when they are deliberately managed.
Richard W Fulmer
Jul 14 2022 at 9:11am
Monopoly status is a benefit under any economic system. What is unique about capitalism is that high monopoly profits quickly attract other entrepreneurs who enter the market and drive down prices. This assumes, of course, that government doesn’t restrict market entry.
vince
Jul 14 2022 at 11:43am
It seems we agree on monopoly, somewhat, after all.
On monopoly, Jon wrote: “… monopolists would love to keep their monopoly position. That is part of the reason why they spend so much in regulatory lobbying and other forms of rent-seeking. ”
And Richard wrote: “Monopoly is a benefit under any system.” And profits quickly attract competitors, assuming government doesn’t restrict entry.
Whether those competitors are attracted quickly is debatable. And businesses lobby, as John said, to restrict entry, as Richard mentioned.
The terms monopoly and oligopoly are associated with capitalism. I would agree that a socialist or communist government is the ultimate monopolist, but the term typically refers to a company owned by individuals.
vince
Jul 14 2022 at 12:14pm
Time for a joke. An economist was pursuing MBA degree but was struggling. He turned it around after an epiphany. What the School of Economics was calling market failure, the School of Business was calling business strategy.
Jon Murphy
Jul 14 2022 at 1:04pm
Not really. You don’t really support the claim that I and Richard are refuting: that capitalism rewards monopoly powers. We show that capitalism does not.
vince
Jul 14 2022 at 1:40pm
Jon wrote: “..capitalism rewards monopoly powers. We show that capitalism does not.”
In a cherry picking way.
In capitalism, the reward is profit. Competition erodes that reward. Monopoly enhances that reward. A capitalist would like to limit competition.
vince
Jul 14 2022 at 2:31pm
Once again it depends on which aspect of capitalism one wants to focus on.
“The history of antitrust law isn’t one of desperate consumers demanding relief from high monopoly prices. Instead, it’s one of desperate competitors demanding relief from companies who were so efficient that their prices were “too low.””
Monopoly prices were obtained by capitalists who wanted to maximize profits. Those competitors who wanted relief would themselves try to protect their positions and seek monopoly profits once they got a foothold. Capitalism rewards monopoly with higher profits. Sure, it creates incentive for others to try and enter the market, but that doesn’t change the monopoly incentive and the monopoly profits, transitory or not. And it’s also incomplete to say that only competitors don’t like monopolies, ignoring consumers.
As for dumping, why did Standard Oil dump to begin with? It was a way to pass cleanup costs to others, enhancing profit. Sure, in that case they found another use, but that doesn’t always apply. And it might apply too late.
Richard W Fulmer
Jul 14 2022 at 2:52pm
I didn’t say that Standard Oil dumped gasoline. I said that other companies dumped gasoline while Standard Oil found a market for it.
Jon Murphy
Jul 14 2022 at 5:46pm
Anyone, not just a capitalist, wants to maximize their benefits by limiting competition. That is not unique to capitalism. What is unique is that capitalism punishes those who try to do so precisely because of the profit motive
vince
Jul 13 2022 at 4:05pm
“The problem was “solved” during the Progressive Era, when government created cartels to prevent “ruinous” competition ”
What cartels? The Federal Trade Commission?
Richard W Fulmer
Jul 13 2022 at 8:14pm
No, as I wrote above, the agencies were enforcers, not cartels. For example, the ICC ensured that existing railroads stayed in business and faced minimal competition by regulating railroad routes, lading, and rates.
vince
Jul 14 2022 at 11:23am
Thanks for the clarification. But that’s an example of how capitalism gets a bad name. Agents use any means necessary to monopolize and reduce competition. including government. Private bankers secretly designed the Federal Reserve.
Richard W Fulmer
Jul 14 2022 at 2:13pm
Government opened the door to these sorts of shenanigans when it began to regulate business. Industries exert enormous influence over the government agencies created to control them – a phenomenon economists call “regulatory capture.”
Industry sway over government agencies is a natural result of the incentives inherent in the regulatory process. First, no one has more incentive to lobby regulatory agencies than do the companies they regulate. And regulators’ self-interest gives them a powerful incentive to listen.
There is also the “revolving door” phenomenon whereby personnel leave industry for jobs with government agencies and vice versa. Some see this as proof of corruption, but there is a simpler and less sinister explanation. When an agency is created to oversee an industry, one of its first needs is employees with knowledge of that industry. Where can it go for such people but to the industry itself?
Similarly, when government employees retire and wish to begin second careers, where can they go other than to the industry about which they have spent their professional lives learning? Moreover, regulators who know they may one day work in the industry they regulate have a strong incentive to remain on good terms with people in that industry.
Reformers, believing that the problem of regulatory capture is due to an imbalance of power, often seek to remedy the situation by increasing the authority of the regulatory agency. But that will only increase the incentives for special interests to “capture” all that new power.
vince
Jul 14 2022 at 2:39pm
Richard, we agree more than you might suspect. Regulatory capture for example is a huge problem. But who is to blame? Government is at fault for letting itself be captured. But if businesses were content to operate in a fully competitive environment and accepted all externality costs of their activities, we wouldn’t need regulation.
Richard W Fulmer
Jul 14 2022 at 3:01pm
Government is at fault for trying to regulate business, thereby creating the incentive for business to try to control the regulatory process.
Yes, businesses did try to create cartels, but their repeated attempts failed because they could not use force to ensure that cartel members stuck to the agreements. That changed when Progressives in government created cartels and enforced the rules. Progressives were disgusted with the “chaos of the marketplace” and wanted to replace it with a more orderly, technocratically-led, regime.
Businesses may or may not be “content to operate in a fully competitive environment,” but they had no choice until the government stepped in.
It seems to me that the source of America’s worst disgraces – slavery, the mistreatment of Native Americans, Jim Crow, eugenics – was not difference of opinion, race, sex, class, talent, wealth, or religion. Rather, it was that people divided along such lines were able to subvert government’s coercive power to advance their own ideas and interests.
Progressives’ conceit is that they have the knowledge and the wisdom to choose the factions that should be granted the use of government power.
vince
Jul 14 2022 at 4:25pm
“Government is at fault for trying to regulate business, thereby creating the incentive for business to try to control the regulatory process.”
Trying to regulate for a good purpose or to solve a problem is not a fault in itself. Businesses try to maximize profit, and one way is to reduce competition. If they can use the government, they do. If they can’t use the government, they try in other ways. Why blame the government but ignore the capitalist that does the capturing?
As you say, businesses tried to create cartels but failed. They continued the effort and found a way to succeed.
The government is the people, including shareholders. Let’s blame them all.
robc
Jul 15 2022 at 12:24pm
When they start trying to use regulatory capture, they stop being a capitalist. So there is no capitalist to ignore.
A well designed government doesn’t have the power to be captured, so the point becomes moot.
vince
Jul 16 2022 at 11:30am
“When they start trying to use regulatory capture, they stop being a capitalist. ”
That’s your own arbitrary distinction. I disagree.
Richard W Fulmer
Jul 14 2022 at 10:39am
Here’s a passage from Murray Rothbard’s book, “The Progressive Era”:
[T]he Federal Reserve was designed to act as a government-sponsored and -enforced cartel promoting the income of banks by preventing free competition from doing its constructive work on behalf of the consumer. The Federal Reserve emerged in an era when federal and state governments were embarked on precisely this kind of program in many sectors of industry, and it was designed to do for the banks what the ICC had done for the railroads, the Agriculture Department for the farmers, and the FTC for general industry. These actions of the Progressive era came after widespread attempts, in the late 1890s and earlier, to cartelize or create monopolies voluntarily, attempts that almost all came to swift and resounding failure. Various large business groupings, therefore, came to the conclusion that government would have to play an active and enforcing role if cartelization was to succeed.
Jim Glass
Jul 14 2022 at 10:11pm
Ah, Rothbard! When I was young and still fond of libertarianism I used to imagine an “Austrian All-Stars baseball team”, the left side of which had Hayek ranging left field, a Hall of Famer like Ted Williams, Mises playing a pretty good third base, and Rothbard in the left field stands drinking beers and throwing his empties on the field.
Let’s see. Rothbard claimed that fractional reserve banking is a “fraud” that should be illegal because it lends out deposits. This of course required him to change the definition of the word “fraud”, which inherently requires intentional deceit. I mean everybody knows banks lend out deposits, Hollywood tells people it’s so, and bank counters are stocked with brochures explaining the fact — so the “deceit” thing wasn’t going to work for him. His new definition seemed to be that … well … he just really, really didn’t like it.
“Rothbard’s position is as absurd as claiming that it’s fraudulent to sell non-organic bread.” — Bryan Caplan
Check with Orwell about what needing to change definitions like that to make one’s argument says about one.
ALSO, Rothbard said there were only two just wars fought in US history, namely…
Yes, this libertarian said that the only just war fought since 1789 was the one fought by the Confederacy to create a new nation with the word’s first constitutional regime formally based on race slavery. Yeah. Oh, my.
IOW … Rothbard saying something doesn’t make it so.
Richard W Fulmer
Jul 15 2022 at 9:38am
Rothbard saying something doesn’t make it false, either. If you disagree with what he wrote disagree with it. Provide alternative facts and reasoning. Yes, Rothbard became a bit of a kook, but he was also quite brilliant.
Jim Glass
Jul 15 2022 at 10:30pm
If you disagree with what he wrote disagree with it. Provide alternative facts and reasoning.
I already did (including link for reference). His basic description of banking is wrong, justified with Ministry of Truth logic, and “as absurd as claiming that it’s fraudulent to sell non-organic bread.”
And you are citing him to criticize the Federal Reserve. Umm….
Yes, Rothbard became a bit of a kook.
Yeah. He was a libertarian anti-state anarcho capitalist who (1) endorsed war, (2) to create a state, (3) based on race slavery.
A bit of a kook. A teeny little bit. And this doesn’t motivate you to read him a little bit critically? And maybe look around for other authors and sources you may be sympathetic with who are a tad less Ministry-of-Truthy and kooky?
Richard W Fulmer
Jul 17 2022 at 12:02pm
None of which has anything to do with the government-sponsored cartels that were created during the Progressive Era.
vince
Jul 15 2022 at 3:07pm
“… this libertarian said that the only just war fought since 1789 was the one fought by the Confederacy to create a new nation with the word’s first constitutional regime formally based on race slavery.”
Wasn’t the Confederacy more about states rights than slavery?
Richard W Fulmer
Jul 15 2022 at 6:16pm
I think that the claim that the South seceded to protect states’ rights is little more than an attempt to sanitize the South’s history.
First, the South’s veneration of states’ rights went only one way. For example, the Fugitive Slave Acts, gave southern slave hunters the right to conscript Northerners into their slave patrols. People who refused were subject to large fines and prison. If I believe in a principle only when it benefits me and discard it when it harms me, then I don’t really believe in that principle.
Second, read Confederate Vice President Alexander Stephens’ “Cornerstone” speech justifying secession. Here’s a slice:
“The new constitution has put at rest, forever, all the agitating questions relating to our peculiar institution — African slavery as it exists amongst us — the proper status of the negro in our form of civilization. This was the immediate cause of the late rupture and present revolution.”
Third, check out the book, Apostles of Disunion: Southern Secession Commissioners and the Causes of the Civil War. It tells the story of the “commissioners” sent by the first states to secede to convince other southern states to follow suit. Their speeches make it plain that they were seceding to protect their “peculiar institution” and to keep from having to deal with African Americans as equals.
Jim Glass
Jul 15 2022 at 11:32pm
Wasn’t the Confederacy more about states rights than slavery?
Noooo … Not at all.
Before the Civil War the most important federal law in the land to the South was the Fugitive Slave Act, which prohibited Northern States from enacting laws that freed slaves who came into their jurisdictions. “No States Rights For YOU!” not about that! was the voice of the South to the North.
After the Civil War the politicians and generals who had led the South out of the Union to mass death, economic ruin, the end of their social system, and epic physical destruction, well … they had some ‘splainin to do. Right then, and for later, to the future.
“Granddady, why did you lead us to defeat, ruin, and poverty, all to defend SLAVERY?”
“Well, Sonny, it wasn’t about slavery, not at all! And the defeat and the rest, that was just tragic ill fate …”
The Noble Lost Cause history of the Civil War was born in the South, with the “not slavery, it was states rights!” tale being one of its big props. It’s all bogus-to-toxic bunk, but it had quite a run in popular history for about 100 years.
To give some empathy to the Southerners who pushed it so much, psychologically it’s very hard to lose a war on your own land, and really hard to lose one you fought for a cause as bad as slavery. I know some (former) East Germans and Russians who’ve had a really hard time explaining to their kids how they were loyal Communists.
vince
Jul 16 2022 at 11:27am
Jim responded: ”
Wasn’t the Confederacy more about states rights than slavery?
Noooo … Not at all.”
It’s not that simple. When the states joined the Union, they had the constitutional right to govern how they wanted, and that included the insttution of slavery. The Constitution, for example, included the Fugutive Act. The seceding states felt, for reasons in addition to slavery, that the Constitution was being violated.
And Rothbard believed in States Rights. He also opposed slavery.
Jim Glass
Jul 17 2022 at 5:19pm
Vince wrote:
Rothbard believed in States Rights.
Yup. He was a Lost Causer, War of Northern Aggressioner, the whole bit. Which might be understandable for grandpa sitting on the porch explaining to the grandkids how the family plantation got burned down. But for someone claiming to be some kind of “historian”, it’s just dreadful.
I’ve just been re-reading some Murray for the first time in a long while thanks to this exchange. He was very favorably impressed by how the Confederate Constitution limited the powers of the states – to collect taxes, start wars, etc. He doesn’t mention how it guaranteed their power to ENFORCE HUMAN SLAVERY, but maybe he didn’t want to pick nits.
Hey, the Constitution also prohibited the individual Confederate states from ever eliminating slavery. Where’s the “states rights” in that?
He also opposed slavery.
Yup, he sure did, well, apart from endorsing war to create the first ever nation explicitly founded on the principle of race slavery, and praising the Constitution that institutionalized the slavery upon which that state was built.
Apart from those things, he opposed slavery.
Murray Rothbard, does anybody really want to rely on his reading of history?
Richard W Fulmer
Jul 17 2022 at 7:42pm
No, the Fugitive Slave Act was passed in 1850. While the Constitution gave slave owners the right to the return of runaways (Article IV, Section 3), it didn’t give them the right to draft Northerners to help them do their dirty work. The Act of 1850 did that, making many Northerners realize that their own freedom was the cost of enslaving African Americans.
vince
Jul 18 2022 at 4:18pm
Richard wrote: “No, the Fugitive Slave Act was passed in 1850. ”
Thanks for the correction. The similar Constitution provision is called the Fugitive Slave Clause, which gave enslavers the right to seize enslaved people who escaped to free states.
vince
Jul 14 2022 at 5:59pm
Jon wrote: “What is unique is that capitalism punishes those who try to do so precisely because of the profit motive.”
Also unique to capitalism is accumulation of profits. Limiting competition helps with that accumulation. The capitalist seeks to limit competition in order to avoid its punishment. By capturing government, the capitalist has succeeded.
We seem to differ on capitalism in theory and capitalism in practice. In theory, one could argue that socialism was perfect. Everyone maximizes their productivity for the good of all their comrades.
Jon Murphy
Jul 15 2022 at 7:36am
Again, no. Accumulation of profits is a phenomenon of all economic systems because the economic problem consists of exchange, production, rights, etc that maximize profits. The profit motive exists throughout humanity, not just in capitalism. What capitalism does, both in theory and practice, is weaponize that motive in service of everyone. Contrast this with socialism, fascism, or other forms of planning, which seeks to weaponize the profit motive in the service of various interest groups.
As I say above, it is true that firms will try to capture regulators to enhance their position (and vice versa). That is a given of humanity, not capitalism. Capitalism weakens that power, such as the example I gave with Uber and the taxi cartels.
vince
Jul 15 2022 at 11:34am
In capitalism, accumulated profits belong to the capitalist. In socialism, production is collectively owned. Capitalism provides greater incentive to limit competition. Sure, it provides greater incentive for competitors, but the capitalist generally has power of incumbency and all that goes with it. And they use it to protect their position. And missing from this thread is that they also exploit externality to increase profit.
Jon Murphy
Jul 15 2022 at 12:45pm
Yes. Residuals belong to the capitalist (that is revenues minus costs).
Incorrect because of the definition of profits: revenue minus costs. Revenue depends on the demand curve. Costs depend on numerous factors. Capitalism encourages people to look to reduce costs or increase revenue (ie, increase the value of the product to the consumer).
Socialism, on the other hand, only has one consumer: the state. In socialist systems (and fascist or any kind of planning), there is more incentive to limit competition because there is the only one buyer and one cannot adjust costs.
I assume you mean “monopolist”? Again, as I discuss above, the “power of incumbency” amounts to about as much as a warm bucket of spit. Because of contestable markets and shadow competition, it is very difficult for firms to exploit monopoly power. Very rarely, if ever, do we see it happen.
Again, no, for the reasons I laid out in my original response to you.
I’m not really sure what more I can say here.
Richard W Fulmer
Jul 15 2022 at 6:43pm
“Also unique to capitalism is accumulation of profits.”
As Jon noted, capital accumulation is essential regardless of the economic system. Think of Robinson Crusoe. He’s got to consume enough Calories every day to offset the Calories he burns when he gathers, prepares, and digests his food and to power all his other daily activities. In other words, he’s got to make a net energy “profit” to survive.
If Crusoe wants to do more than just survive, he’s got to spend time and energy doing things other than gathering, preparing, and digesting food. Because he must eat every day, he can spend several days working on something other than hunting – perhaps fashioning clothing or a shelter – only if, beforehand, he gathers enough food to sustain himself during those days; wealth must be accumulated before it can be invested. By obtaining food and delaying its consumption – that is, by saving – Crusoe buys himself time. The greater his energy profit, the more time he has to invest in improving his life.
What’s true for Robinson Crusoe is true for every economy – saving (i.e., accumulation of profits) must precede investment. The difference between a capitalist system and a socialist one is who it is who is doing the saving and the investing. In capitalist systems, it’s done by individuals who understand local conditions, who can quickly respond to feedback, and who will pay a price if they choose poorly. Under socialism, it’s done by central planners who have limited knowledge and imperfect feedback mechanisms, and who pay no price for being wrong.
vince
Jul 17 2022 at 12:31pm
Richard, you shift from profits to capital accumulation. Not a big deal. But the issue is who gets to accumulate the capital, and what incentives that creates. Private profit accumulation creates incentive to produce–better than any other system. It also creates incentives to do things that need to be checked. The Great Financial Crisis is a good example of how incentives plus unchecked greed create problems.
You offer Robinson Crusoe as an example. A big difference is that Robinson Crusoe was an individual, not a society. He didn’t have competitors whom he wanted to eliminate, and he couldn’t pass the costs of pollution on to someone else in the society.
Richard W Fulmer
Jul 18 2022 at 5:03pm
Without profits, there is no capital to accumulate.
Inefficiency is waste, waste is pollution. Free markets reward efficiency, while socialist nations do not. Small wonder, then, that socialist nations are far more polluted than are those in the West.
As I wrote in response to one of your earlier comments on pollution, one of the best ways in which to reduce the problem of externalities is to properly assign and defend property rights.
vince
Jul 19 2022 at 2:24pm
Whether you can have create capital without profits depends on how you define these terms. A company can break even yet have created capital.
We can also distinguish good regulation and bad regulation. Good regulation should do what you mention, protect property rights. For whatever reasons you want to attribute to it, regulation is necessary, and that includes capitalism. That’s why nowhere is there a truly laissez faire economy.
Maybe your argument is that capitalism is perfect, but people mess it up. In practice, you can’t separate the two.
Richard W Fulmer
Jul 20 2022 at 9:08am
Nothing this side of Heaven is perfect and, yes, government is necessary. Free markets work only within a rule-of-law framework. Government regulations work best when they set standards and goals. Where they tend to cause harm is when they dictate means.
So, for example, specifying maximum sulfur emissions for a coal-fired power plant makes sense. Specifying that coal plants must install scrubbers does not. Emissions standards could have been met by using low-sulfur coal. However, most low-sulfur coal deposits in the U.S. are located in western states. Eastern coal tends to be high sulfur. But unions are stronger in the East, so we got the law.
Scrubbers use a lot of scarce resources that have alternative uses to build and they consume as much as 10% of the power produced by the power plants.
vince
Jul 20 2022 at 1:40pm
“Free markets work only within a rule-of-law framework. Government regulations work best when they set standards and goals. “
Now we agree. Still, a company can increase revenue and profits by passing costs to the public. They can resort to lobbying and engaging in the regulatory process to reduce those standards and goals. Many companies do this. Whether you want to call that capitalism, selfishness, greed, or something else, it happens. And the more profits at stake, the greater the incentive. Don’t misinterpret. I am a full supporter of free markets. Competition and transparency are the best solutions to almost all economic problems. But I don’t implicitly trust the agents.
vince
Jul 15 2022 at 1:25pm
“I’m not really sure what more I can say here.”
Probably nothing. Socialism provides greater incentive than capitalism to limit competition in order to increase profits? Holding a position of market power is worth a warm bucket of spit? Companies don’t pollute in order to increase profit by passing costs to others? We can agree to disagree.
Jim Glass
Jul 15 2022 at 10:10pm
unique to capitalism is accumulation of profits.
Ridiculous. Why do you think Stalin starved four million Ukrainians? Answer: So the Union of Soviet Socialist Republics could take their farm production (that they needed to eat to live) sell it for profit, then use those accumulated profits to invest in factories to industrialize the state.
In socialism, production is collectively owned.
Tell that to those starved Ukrainians. Let’s stick to real life examples. I spent some time in the Soviet Union while it was still there, a real socialist state just as its name said. I’ll model on that. Production that is “collectively” owned is actually owned by nobody but the state, with its apparatchiks distributing it according to their personal and political interests.
In the USSR their interests obviously did not at all include the welfare of those Ukrainians, and never much included the welfare of consumers at all — except for the nomenklatura, of course.
Capitalism provides greater incentive to limit competition.
Bah! Joke? A cardinal principal of socialist economic planning in practice has been that competition is duplicative waste! Who needs six (or however many?) management-operational structures to do what one can? An economic philosophy that fit very well indeed with the reality that the socialist apparatchiks politically running economic fiefdoms hate competition even more than capitalists do, for reasons that should be obvious — and since only they can create it, they don’t!
The USSR was a land of state monopolies centered variously across 11 time zones, which proved a very bad thing to start with and got a lot worse when the whole place broke up into pieces. (Because, you know, it produced so much “collectively owned” production so productively.)
but the capitalist generally has power of incumbency and all that goes with it. And they use it to protect their position.
Which is why the IBM monopoly crushed all those garage start-up computer and software companies, the AT&T monopoly still rules all things telephonic (today’s AT&T actually is a start-up that took the name), A&P buried that store Sam Walton tried, Sears Catalog is the biggest online seller in America, Yahoo and AltaVista buried Google … and my lifetime membership at Blockbuster Video gets me all the movie rentals I will ever want!
Meanwhile, the USSR’s famous GUM (General Universal Store) served consumers, to the glorious extent it did, from 1917 right though to the end in 1992.
But hey, maybe I’m old and cynical. And unimaginative — I need to see real facts to understand things. All these arguments of socialist theory versus capitalist theory … theory without facts rapidly spins into absurdity.
I’m very interested in your socialism that does the superior job of creating innovative competition while also happily distributing “collectively owned” production to consumers. I’ve missed it. Example in reality, that I can see, please? In what country is it operating?
vince
Jul 16 2022 at 11:47am
Jim, let’s go back to dictionary definitions. Capitalism is an economic system in which means of production and distribution are PRIVATELY OR CORPORATELY OWNED and development is proportionate to the ACCUMULATION and reinvestment of PROFITS GAINED IN A FREE MARKET.
Socialism is a social system in which the means of producing and distributing goods are OWNED COLLECTIVELY and political power is exercised by the whole community.
Jim Glass
Jul 16 2022 at 3:55pm
Jim, let’s go back to dictionary definitions…
Vince, Vince, you totally duck my question. So weak. Here, try again:
I showed you real socialism in action for most of a century across a major part of the real world. And it was very different from your socialism, no?
So where in the real world is your version of socialism existing and operating as you describe? Nowhere? That means it is just a fantasy, a delusion you enjoy.
Do you believe in unicorns? If someone objected to you that unicorns aren’t real, and you replied by repeating the dictionary definition of a unicorn IN ALL CAPS, would you think that makes unicorns real? 🙂
Your fantasy socialism is a unicorn. Keep enjoying it! That’s what fantasies are for.
vince
Jul 16 2022 at 4:04pm
Jim, you’ve fallen ridiculously off track. Never did I say socialism was superior.
Jim Glass
Jul 17 2022 at 1:08pm
Jim, you’ve fallen ridiculously off track.
Aw, Vince. Still running from my question, eh? Next time try some misdirection, like, “Look! Over there! A snark!” 🙂
Never did I say socialism was superior.
Hmm…
https://www.econlib.org/socialist-claims-about-capitalism-2/#comment-299298
But the question again is, where does the version of socialism you describe with your dictionary definition in ALL CAPS actually exist? So we can all see that ALL CAPS-defined socialism in real life action? (And decide for ourselves whether it is better or worse.)
Can’t name even one place?
Well, then we have to fall back to the USSR version, which flatly contradicts every single claim you made. Check out that link again.
Of course your proper, honest answer is: “Nowhere.” It’s so simple to be honest!
But I’m going to go get my snark-hunting hat out of the closet now. 🙂
Jon Murphy
Jul 16 2022 at 7:16am
If you want to disagree that is fine. Just be aware your theory does not explain the empirical evidence. Your theory cannot explain:
1) Falling real prices and increasing standards of living in capitalist societies
2) Vastly reduced externalities in capitalist societies
3) Vigorous and robust competition in capitalist societies
Vince: you repeat one of the main arguments that socialists used in the early 1900s. But the experiences of the last 120 years shows those arguments are false.
Theory is all well and good, but theory for its own sake is not helpful. It needs to be able to explain reality.
vince
Jul 16 2022 at 11:19am
One question: Would we have vastly reduced externalities such as pollution without regulation. I’m sure your answer is yes. I disagree.
Jon Murphy
Jul 17 2022 at 7:19am
I am sure you disagree. But, again, it’s an empirical point: regulation is largely ineffective (and inefficient) at reducing externalities. Sometimes, it even creates them (take a look at how the catalytic converter increased pollution in the US. Or the inefficiencies created by the Jones Act).
Your theory does not explain reality. And when your theory conflicts, you should at least try to understand why.
vince
Jul 17 2022 at 12:21pm
Jon, you refer to my theory. I haven’t proposed any theory. I merely pointed out some flaws of capitalism. For example, you mentioned externalities that capitalism has reduced. Let’s take pollution. Who pollluted to begin with? Why did they pollute? It doesn’t take a theory to notice that a company can increase its profit by not paying for cleanup costs.
vince
Jul 20 2022 at 1:46pm
“Emissions standards could have been met by using low-sulfur coal. However, most low-sulfur coal deposits in the U.S. are located in western states. Eastern coal tends to be high sulfur. But unions are stronger in the East, so we got the law.”
And that’s a good example. Private interests are looking for what’s good for them, not society. They can’t be trusted, but that’s not an endorsement of socialism.
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