Capitalism’s Greatest Defect

The many apologists of capitalism argue that capitalism is a neutral or valueless system whose sole objective is to enable people to create wealth and provide them with the things they need and want in order to lead better lives while fulfilling their potential as human beings. However, capitalism, in particular free-market capitalism, inevitably creates inequalities in wealth. Some writers like Friedrich Hayek and Ludwig von Mises have argued that these inequalities are beneficial, by encouraging those who have little to work hard so they too can succeed and thereby reap the bounteous fruits of capitalism, while those who are able to accumulate much wealth are incentivized to use that wealth in order to invest and thereby help create employment and even more wealth. But among its many other defects, such as pollution and environmental degradation, capitalism has one grave defect: although it is very good at creating wealth and producing things that people want and need, as a means of getting money and financial help to those who need it most, capitalism is a terrible and extremely inefficient mechanism for doing so. This is because of the general belief that there is little or no profit to be made by investing in the poor, such as by educating them, helping them to find jobs, and helping them to better themselves and their lives in general. As is clearly evident in today’s wealth-obsessed world, far from channelling money to those who need it most, capitalism channels much of the wealth and income it creates to those who have absolutely no need for it. This is an inevitable consequence of giving free rein to human greed, for those with money and power will do everything they can to accumulate as much as possible for themselves, just as gluttonous dogs that have already feasted, by growling and baring their fangs, keep starving dogs away from their food. Moreover, it deludes these fortunate – or perhaps it were better to call them rapaciously human, since there are no other animals that are as inordinately greedy as human beings – individuals into thinking that they have earned all that money solely from their own ingenuity, efforts, and sacrifices, and therefore they should not have to share it with anyone else, such as by paying taxes to the government of the country in which they live or in which they amass their profits.

If they are not corrected, the inequalities in wealth that are created by capitalism can, and very frequently do, lead to class differences. These differences between the rich and the poor are made more and more pronounced by the fact that the children of rich parents grow up observing their parents, while the children of poor parents grow up observing their parents too. In both cases, when there is a large difference in their lifestyles – in the kinds of dwellings and neighbourhoods they inhabit, the clothes they wear, the way they speak, the work they do, the expectations they have in life, the people they know, and so on – this means that, in most cases, their children will grow up to resemble their parents, including the kinds of work they do, the kind of lifestyle they live, the people they associate with, and how much money they earn. In many societies, there is a complete separation between the lives of the rich and the poor – in the places where they live, where their children go to school – if they go at all, the places where they work, and the places where they spend their leisure hours. Hence, the naive but widespread belief that all people, regardless of their income level and societal background, have the same opportunities in life is completely wrong, for the models of behaviour one has grown up observing determine the things one will be able to do, the things one will aspire to do, as well as the social and professional situations in which one will feel comfortable. It is obvious that a person who has grown up in an English-speaking country is more likely to be able to speak English well than a person who has not grown up hearing people speak English. The same is true of all other human abilities, including the abilities to work hard and be financially successful.

The belief that huge amounts of wealth concentrated in the hands of a few individuals or a tiny portion of a country’s inhabitants – which is the inevitable result of unregulated laissez-faire capitalism – is beneficial to society is clearly wrong, especially when those individuals use that wealth, rather than in socially or economically productive ways, such as by investing in new companies that need money in order to grow, simply to accumulate even more wealth, as many financial speculators are presently doing with their money. By their rapacious behaviour, these greedy individuals have become human dragons that sit on hordes of financial treasure and want to increase their horde as much as possible in order to resemble all the other treasure-hording human dragons they know and admire, while they zealously protect it from everyone else, such as by concealing it in the financial equivalent of dragons’ dens from their country’s government.

There have been various measures and systems that have been devised and implemented to mitigate this grave defect of capitalism. Two of the most prominent are communism and socialism. But neither of these grandiose systems was able to retain the wealth-producing capacity of capitalism, and so they failed. In fact, far from retaining it, communism destroyed this wealth-generating ability. The challenge, then, can be stated as follows: How can we preserve the wealth-creating capacity of capitalism while mitigating its many harmful effects, chief among which are inequality and injustice, which are both due to the fact that, as social creatures, human beings are not very evolved, and are much less evolved than bees or ants, which are far more adept at organizing large social groups than we are?

The form of capitalism known as free-market or laissez-faire capitalism brings out, encourages, and even legitimizes some of the very worst qualities in human beings: greed, selfishness, myopia, deception and dishonesty, ruthlessness, indifference to the welfare of others, and an unwillingness to share what one has, even if one has far more than one needs. It is for these many reasons that democratic governments started taxing people’s incomes in order to correct these serious imbalances in wealth and income that are inevitably produced by capitalism. The history of democratic governments in the twentieth century illustrates the ongoing effort on the part of elected leaders and governments to address these important problems, while trying to balance them with a respect for people’s freedom. These problems have become more pronounced as societies have become increasingly numerous, since the social and familial bonds that formerly protected people from penury and want have been weakened or destroyed.

In the human world that we live in, money is equivalent to power, since it enables its possessors to command the labour of others to do their bidding. Instead of consisting of armies of soldiers or mercenaries, as was the case in the past, today, due to the taboo against using military power in many countries in the world, power consists primarily of armies of politicians, lawyers, marketers, employees, advertising agencies, think tanks, media companies, and others who are controlled by the money they are paid for their services or consent. And it obviously follows from this that those who have more money have more power – which power, if they employ it in selfish ways, as is often the case, will tend to increase their power even further, while it increases the gap that separates them from those who don’t have power. Hence, not only does free-market capitalism beget inequality and injustice, it tends to increase these things by giving those who have money and power a very strong motive to protect what they have from everyone else, while seeking to increase their wealth by whatever means possible, whether these means are legal or illegal. For example, competition has often been used as a cover by those with power to increase their wealth at the expense of ordinary workers, who are less able to evade taxes than the wealthy, and of society in general. Examples are corporations that ask for or demand tax concessions or large financial subsidies from the government before they build a manufacturing plant in a certain region or country.

It is obvious that these power imbalances which are created by capitalism can seriously undermine democracy, since democracy is based on the principle that all the citizens are equal to each other, and the interests of one individual should never dominate over the interests of another. These lofty ideals are expressed pithily in the rule, “One person, one vote,” and the maxim, “All people are equal in the eyes of the law.” But when the power that money bestows on its possessors is used, or more accurately, abused, to protect and promote the interests of the rich, which often means protecting their property and wealth and their ability to acquire even more wealth, then the basic principle on which all democracies are founded has been corrupted and debased, just as money is debased by the addition of base metals or counterfeit currency.

At present, there is no developed country in the world where this harmful process of monetary corruption is further advanced than the United States, where the wealthy enjoy far more political power and influence than is justified by their small numbers. It is truly pitiful how so many Americans continue to believe, against all the evidence to the contrary, that their debased and corrupted democracy is still the greatest and best example of democracy in the world, while they continue to advocate policies, such as lower taxes, weaker government, and fewer government services and regulations, that tend to weaken and degrade their democracy even further. Ordinary people, even when they number in the tens or hundreds of millions, are no match for the wealthy, when the latter are determined to keep for themselves as much wealth and power as possible, and use all the means at their disposal – whether political, legal, intellectual, economic, corporate, propagandistic, the media, police, and occasionally the military – to achieve these usually narrow and selfish aims.

In the view of many people, including myself, the countries that have been most successful in answering the question that was posed earlier are less populous countries like Sweden, Denmark, Iceland, Switzerland, and Singapore. It is not an accident that smaller and more-or-less ethnically homogeneous countries have been more successful in this regard, for there are problems that arise as a country’s population increases and becomes more diverse and heterogeneous, especially when it numbers in the hundreds of millions. First, there is less social cohesion, so that its members feel less concern and responsibility for those who are less fortunate than them. Second, it is difficult for most people to care about the tens or hundreds of millions of others whom they will never meet and get to know personally. Third, it becomes more difficult to reach a democratic consensus on important issues, including passing laws that are appropriate for, and have the approval of, the entire population, or at least a majority of the people. Fourth, whereas economists talk about economies of scale in the case of large enterprises, as governments get larger, there is a sort of inverse “diseconomy of scale” which is due to increased bureaucracy and regulations.[1] And fifth, as government budgets increase, so too do the opportunities and motives for corruption, as well as the mismanagement and misallocation of funds. A country like the United States, with 320 million inhabitants, clearly faces governmental problems and challenges that a country like Switzerland, with only 8 million inhabitants, does not have to deal with, or at least not on the same scale.

If the goal of human endeavour in modern times is to provide a decent standard of living for the greatest portion of a country’s population, while offering to as many of its inhabitants as possible the greatest number of opportunities to fulfill their human potential, whether personal, professional, familial, or social, then free-market capitalism is most certainly not the best solution. And it is precisely because, in spite of the great wealth it is capable of producing, capitalism is terribly inefficient at distributing this wealth in an equitable manner. There is something very obviously wrong with a system that takes from those who need to give to those who don’t need. What the world clearly needs is a new model of society that is able to avoid the grave and inherent defects of both communism and capitalism, while it manages to preserve their beneficial aspects, namely, the prodigious productive capacity and efficient economic organization of capitalism, combined with the egalitarianism and concern for others of communism. For only then will we be able to eliminate poverty, ignorance, inequality, and injustice from the face of the Earth.

[1] This phenomenon is not limited solely to government, for private companies can also exhibit diseconomies of scale. In other words, in the corporate world, larger does not necessarily mean better or more efficient. The ignorance of this important fact has led to many mergers between large corporations that have not begotten the expected savings in costs. Alfred Chandler, who studied the history of large corporations in detail, argued that, in many cases, it is not due to greater size, but to the more efficient use of their plants and factories that enables large companies to become more efficient. He coined the term “economies of speed” to describe this effect.