As I am writing now, sipping a latte in a Starbucks cafe in Mexico City, I reflect upon the wonders of capitalism, and its obvious flaws. For your sanity I will just compare capitalism to the obvious alternative - socialism (or communism, depending on how far you want to go), and leave out what could be a fascinating dive into anarchism for another time.
TL DR
The TL,DR version of this piece is simply that capitalism, while flawed, is probably the least crappy option. And that is a philosophy that has warmed my heart the older I get. I could probably write a book now called “the least crappy option - my life philosophy”, as it has got me through some very tough times. Now that I’ve told you the central thesis of my argument, you can skip me triumphantly emerging from the smoking ashes of the other the arguments that are opposed to my point of view. Gunned down in their prime to leave mourning relatives at home and a lost generation, because my intellectual brilliance shines too brightly for them to stand it. Except personally I hate that style of politics, and while there is somehow nothing more enjoyable than watching someone being proved blatantly wrong still clinging to their position, it is just that - entertainment. Galloping in on the horse of righteousness as you bring truth and enlightenment to the heathens, while it’s good for your ego (and entertaining for others to watch), does little to forward people’s thinking. There is something deep inside the soul of a human being that will rebel when they start to feel that they got something wrong.
In a confusing world filled with confused individuals, the comfort of a confidently articulated, uncompromising point of view is a drug more powerful than heroin. So I apologise in advance for sowing deeper seeds of confusion with my incredibly well thought-through and balanced ideas. Ok enough about me, let’s get on with it.
We will never know for sure
The common argument for communism is that we never tried “real” communism. The issue is, we’ve never tried “real” capitalism either. The 2008 GFC was a prime example of capitalism for the masses, socialism for the elite. When banks started failing and running short of capital on their balance sheets, the government printed money. And did they hand that money over to the account holders who had done nothing to contribute to this crisis? The ones who would also be most affected by it? Even though that would have totally solved the problem in a really fair way? No of course not. The extra currency was poured into capital markets, resulting in one of the largest and longest bull-runs the stock market has ever seen. And who benefits from that? Rich people that already own stocks and other assets. Brilliant.
Real capitalism would have simply let the banks fail, and punish all those foolish enough to lend their support to such unethical people. Maybe deposit holders at Nationwide and the Co-Op or other building societies would have emerged victorious, standing as a shining example against the greed of the foolhardy. Maybe the pain of that lesson would have taught people to be more financially prudent - the criminals punished, the honest rewarded. That is the true message of capitalism. But of course we don’t have that, so while a lot of people complain about “Capitalism”, they should understand that we have plenty of government intervention. The purists would argue then that the antidote to society’s modern problems is actually MORE capitalism.
This is all pretty naive in my opinion. Society is made up of individuals, all with their own beliefs, values and ideals. Whatever we end up with will ALWAYS be a compromise of one form or another. It’s simply not possible to try and force a dominant philosophy on an entire population. Even if you can scare them into cowering down and toeing the party line, they will resist at some level even through simply not participating with the enthusiasm and zeal your philosophy demands. We have to accept we will never see “true communism”, or “true capitalism” in action, and live with that and move onto something more practical.
The flaws of capitalism
It’s kind of easy to look around at environmental devastation, corporate crime, dishonest media outlets, and point the finger squarely in the face of “the profit motive” and feel all smug that you’ve pin-pointed the problem. People are greedy! Capitalism rewards greed! Problem solved.
And in some sense, I couldn’t agree more. To shine a light on an example from the country I currently call my home - New Zealand, as you drive into the town centre from the main motorway on Fanshawe Street, you will see a large white building called the “The Kauri Timber Co”. The last relic of a once all-encompassing Kauri industry. Where the city of Auckland now stands, once stood a vast expanse of ancient Kauri trees. If you’ve ever had the awe inspiring experience of standing next to one of these majestic plants, you will understand the sadness I feel to think of how ruthlessly this natural treasure was butchered in the name of profit.
The relentless pursuit of profit can also incentivise something I call the “Marks and Spencer Hummus Effect”. Allow me to explain. The best hummus money can buy in the United Kingdom is of course, Waitrose Duchy Organic Hummus. Unparalleled in texture and flavour, and with the cleanest and most healthy ingredients, it quite frankly puts all other available hummus to shame. It is however not the most expensive hummus product available, and you can (if you are an idiot), wander across to M&S and waste your hard-earned on their more expensive yet clearly inferior product.
The perception of value is more profitable than actual value. If you can persuade (i.e. trick) people into believing your product is better, then you can charge them more. You could certainly argue that in some industries, you will get a higher ROI on your marketing dollar than you would on product development, because it’s cheaper and easier to just tell people that your product is better and convince them of that, than it is to waste time and effort actually making your product better. You could lay some blame at the feet of the consumers here as well, and I will, but nevertheless there is a perverse incentive there.
The other major issue I think is that power begets power. Once you have a dominant market position, you can leverage that through negotiating pressure on your suppliers to get more favourable pricing, you can spend more eliminating your competition through nefarious corporate practises. The best product certainly does not always win. I recall a story by Richard Branson, that his Virgin Cola was starting to disrupt the market, and sales were quickly gaining ground on Coca Cola. What he only found out years later, after watching his sales collapse, was that Coca Cola just started giving away free refrigerators to shops (you’ve probably seen them everywhere). They are expensive and the shops happily obliged. Of course the only condition for the free merch was that they didn’t stock Virgin Cola.
It is certainly not the capitalist utopia we all wish it was.
The flaws of socialism
However far you want to take it, whether only as far as Sweden, or full Mao, the principle remains the same. Socialism recognises inherent unfairness in society. Not everyone was born with the same opportunities as me. Did they have my dashing good looks? My searing intellect? My irresistible charm? Sadly for the rest of the planet they are not blessed with the gifts the universe has bestowed upon me. So am I entitled to a better life than a mentally disabled person? You could argue not, and I think they have a fair point there. However, I had this debate while working for a large insurance company in London, right before I quit my job to work part-time. The person I was debating this with brought up this point, and I pointed out that we had the exact same job, very similar social backgrounds in terms of wealth and education opportunities. There wasn’t a lot between us, yet since I was about to volunteraily leave my full-time job in London to work part-time in Sussex, and take a lower pay, was it fair that some of his money be redistributed to me?
His main argument was that he was willing to accept some unfairness to do what’s right. Sure, there are some people that abuse benefits and commit fraud, but that’s a price he’s willing to pay to ensure those that really need the help can get it. But the further you go down this line, it’s not difficult to find unfairness all over the place. In fact you are also creating incentives for people to be lazy and sponge off other people.
My other issue with communism, is that you fundamentally cannot eliminate the concept of capital. It’s built into our universe. Let’s imagine for example, a totally egalitarian society. Everyone works on the commune, sings their praises to Lenin, and smiles warmly at their comrades as they all work for the common good. Pure bliss. But people need to eat, they need shelter, they have needs - so the state provides those needs. But what happens when one person voluntarily gives up some of their short-term gratification? What happens if one person eats one less tin of peaches every week than everyone else? Over the course of many years, he would accumulate many tins of peaches. These have value. You might even say, stored value. Hmm, this is starting to sound like something, not sure what it is… wait I know, that’s right - capital! Aha!
How exactly do you stop that? And then what happens if a famine approaches, everyone needs food - he has it. Does he not deserve the extra food that he accumulated? He was paid the same as everyone else, they all worked just as hard. But he went without, he sacrificed his present for his future. Why should he be punished now? Shouldn’t he be able to cash that in at some point? It’s only fair.
So while communism seeks to eliminate imbalances in the distribution of wealth, uneven distribution is not automatically a sign of unfairness. In fact, even distribution can also be a sign of unfairness. Not everyone works as hard, not everyone makes the same quality of decisions, not everyone is as responsible and prudent. If we don’t reward good behaviour, you get bad behaviour.
Socialism also teaches that the capital owner is abusing the workers. Labour is the only real commodity, and someone who is able to provide capital and reap the benefits of labour is a parasite. That can actually be true to be honest, it does happen. But it is not exactly true either. Often business owners take risks. When the business fails, workers move on, the capitalist loses everything. The rewards and riches of correct capital allocation encourage prudent investment, and the pain of loss punishes those incapable of managing things responsibly. If you are a government that is simply taking in tax receipts, and whether a project succeeds or not doesn’t really matter to you, it’s obvious you can get a lot of wastage, vanity projects, or things that don’t provide real economic return.
Also wealth does need to be managed. If managed poorly, or snorted up your nose, it will eventually disappear. There is no such thing as “passive income”, and staying wealthy still requires good decision making and winning more than you lose.
Again, it’s not a difficult task to scan your eyes across this planet and find all sorts of terrible examples of poor government spending.
People matter more than systems
For my money, and the main trust of this article, is that the system is less important than the people. Even in communist countries, like the USSR, where it’s theoretically impossible to build wealth, you had massive inequality. There are laws of power that transcend any rules that you try and put in place. Someone, somewhere, has to decide how to allocate the wealth of the state. Even if they live in the same-sized apartment as everyone else. Problem is, what if that person becomes tempted to abuse that power? What if they start favouring projects of their political allies? What if through cunning strategy they manage to accumulate a power base. What if they then use that to get a really nice apartment building project approved? And then all their friends mysteriously get transferred to it, and they somehow end up in the penthouse?
Maybe somebody objects to that, only to find the chief of police calling them (from his nice new apartment), informing them that the investigation will not be taken any further. The reality is, not matter what rules you have in place, once the enforcers of the rules get corrupted the rules have no meaning.
Corruption is the real enemy, not the political system.
I would argue that a lot of the issues of capitalism are also a product of corruption. Why do nearly all government departments (including public schools) use Microsoft Windows? When Linux is a totally free and viable alternative? Huge government contracts are routinely awarded to massive corporations. I even saw a story of a guy who was supplying the US military in Afghanistan with their ration packs. Since there were billions of dollars of expense being approved every month, he worked out he could slightly increase the unit cost of every ration pack he was supplying each month and nobody would notice. He got to a point where he was charging $10,000 USD per ration pack and still nobody realised, because it was a drop in the ocean of what was being spent. He eventually got caught, but unfairness can exist in both systems quite easily.
I think if everyone was honest it really wouldn’t matter whether we had capitalism or communism, because people would be treating each other right, and everyone would benefit.
Systems have incentives
So if we can acknowledge the real problem is people, and that no system is going to make people honest, we need to look at which system results in the least dishonesty. I.e, which is the least crappy option! Ah my favourite conclusion.
Does the profit incentive of capitalism lead to more corruption than the sponge incentive of communism? Does forcing people to help each other (as communism aspires to), lead to more benevolence than giving people the choice to assist their fellow man?
Sorry to disappoint you here, but I am not entirely sure, and as I said before we will never be able to run the experiment that would answer that question once and for all. I think a strong argument could be made that some sort of hybrid is the best approach, and there’s plenty of evidence to support that. Solar-heated water is an Israeli success story that die-hard free-market capitalists could learn from. They never really took off in the USA (even in hot states), due to their higher unit-cost than gas or electric heaters. But this was a problem of scale, and network effects. Solar heaters were more expensive to make, install and maintain for the sole reason that they were less popular. Israel simply passed a law and forced everyone to buy them, and once production ramped up, and maintenance engineers were bountiful and abundant, they actually became cheaper to make, install and maintain. It just needed some force to push the market in the right direction.
On the flip side, you have China building ghost cities from paper-mache masquerading as concrete, high-speed rail links to nowhere, and the Saudi governments “excellent” plan to build a mile-wide city in the desert. Large government budgets with a lack of accountability can also be a recipe for disaster.
Rather than dogmatically and relentlessly pursuing one or the other, we should probably look case-by-case, and realise that some things will benefit from centralised planning and a bit of government force. And other things can safely be left alone and will sort themselves out better than any one individual trying to control everything.
I would say though, I will always have a leaning towards freedom, and here’s why. First of all, regardless of how entrenched a private entity is, no matter how dominant their market position, no matter how ruthlessly they suppress their competition, they are always at risk of someone just coming along and doing it better. If the organisation itself becomes corrupt, inefficient, stops delivering value to consumers, we have the democratic power of voting with our wallets. Eventually a competitor will arise that people simply prefer, and not enough can be done to stop them just switching. People still have the choice to buy Virgin Cola, and if people really liked it a lot, they would walk the extra distance to go and get it, and there’s nothing Coca Cola can do about that!
With capitalism, the possibility is always there. The sum of individual choices does in a sense, keep companies honest. At least in the long-term. Sure, right now, your phone options are Apple or Android. There are no realistic alternatives (yet). But people are working on them, open-source phones are in production. Bugs are being resolved. It’s possible than in 5-10 years time, you can buy an open-source Linux phone at half the cost of an iPhone, and have it work just as well if not better. And if that is the case, you will not see people just buying a worse product and spending more just for the sake of it. Apple is not entitled to its dominant market position. And while it has more capital to do R&D, product development, marketing etc., they are not immune from market forces, and people’s preferences.
When I look at a country like North Korea, once you have the power of a rifle, and total dominion over the law, I feel like that level of legal control is a different beast altogether. You’ve crossed a threshold where you can simply imprison people that aren’t happy with what you are doing.
Imagine that, imagine if Apple had a law passed where they were allowed to build prisons, and hire security personnel, and literally jail anyone that doesn’t use an iPhone. You are not going to find product development really going forward any more. iPhone prices would soar. They could literally do whatever they wanted. And I think that’s a fundamental difference between the two types of corruption you get in free-markets vs centrally controlled ones. Laws provide a higher level of immunity to market forces, and I think that is the tipping point for higher overall levels of corruption.
The second point is, I genuinely believe that while people are flawed, and can be selfish and so on, I do think people also like to help each other. And I think you will get better overall results if people are free to support the charities they want to support, than simply being forced to provide government welfare. Again, I’m talking extremes here, and I’m not totally opposed to welfare when used judiciously. But as a general principle, if people can work hard and be rewarded for that, they will be more generous. The psychos who are only out for themselves will do the same thing in both systems - crush all opposition. But ordinary, honest people, if you give them prosperity and wealth, they will have a natural desire to share that and help their fellow man (or woman!).
So I suppose my position could be summed up by, free-market capitalism as the default. Then when it falls over, step in and try and correct it. But don’t make the mistake of seeing private individuals profit from government corruption, then believe that we need more government intervention to correct a problem they created in the first place.
At the time of writing, you have in the UK soaring energy prices, and people can’t afford to heat their homes. They look at wealthy people and say, why can’t we tax them? Why do we have to suffer? Well the main reason for high energy prices, is high government taxation for “green” energy projects. But these projects don’t produce as much energy, and they cost more per megawatt to produce. And guess who owns these incredibly inefficient green energy companies? Rich people. So here you have wealthy people literally stealing money from ordinary citizens via taxation and subsidies. How does then adding additional taxes to people that have earned their wealth, just so we can transfer it to poorly managed energy companies so that they can get wealthy instead, make things right?
Sadly life is complex and we have to use our noggins from time to time and think about stuff, instead of jumping on a philosophical bandwagon and just relentlessly beating the drum to feel any sense of meaning and accomplishment in our lives.
Sorry to disappoint.