X.3: Problems with Capitalism

Socialism and communism have always led to economic failure, but there are problems with capitalism as well.

For example, competition makes capitalism work. But at the same time every capitalist seeks to eliminate his competition. In other words, if a company grows without bounds, it will eventually destroy its competitors. And there are other problems with capitalism like “too big to fail” and “too big to jail”.

Another problem relates to regulation. That is, a capitalist economy works well only if the capitalists act as entrepreneurs and not as manipulators. And that requires regulation. But in our current system, companies easily gain control of the agencies designed to regulate them. They do that through “regulatory capture”, as I will detail in my next post.

But basically the problem is that the regulator and the capitalist have every incentive to work together for their mutual gain. And on the other hand, you and I have no incentive to go to the colossal effort and expense needed to stop them. Furthermore, activities that are illegal for you and me are wide open to the politically connected. That’s because politicians control the law.

And there are still more problems with capitalism, like the “low road” problem:

[T]he capitalist is always trying to cut down what his servant demands, and in doing so is cutting down what his customer can spend. (Chesterton 1927, II.9)

One way a company can profit is by taking the “high road”, which means paying its employees well to ensure their hard work. That allows the employees to buy that company’s (and other companies’) products. However, a company can also profit by taking the low road and squeezing its employees to lower its costs.

If all companies take the high road, then all employees are able to buy many companies’ products. But if one company takes the low road, its employees cannot afford many products, even though that company can sell its products cheaper. And then competition with that company forces other companies into the low road. This causes a “race to the bottom”. In the worst case, then, no employees can afford anything and the economy collapses.

Moreover, our grossly overgrown public debt and tax code are both obviously the result of manipulators and their crony politician friends.

I am shocked and stunned by people who don’t understand that government debts will eventually obliterate our economy if they continue to grow faster than the economy. Likewise, John Adams, Thomas Jefferson, and James Madison all warned us against public debt:

The consequences arising from the continual accumulation of public debts in other countries ought to admonish us to be careful to prevent their growth in our own. (Adams, John 1797) – John Adams

Funding I consider as limited, rightfully, to a redemption of the debt within the lives of a majority of the generation contracting it…. (Jefferson 1816) – Thomas Jefferson.

War is the parent of armies; from these proceed debts and taxes; and armies, and debts, and taxes are the known instruments for bringing the many under the domination of the few. (Madison 1795) – James Madison

How can we prevent too-big-to-fail companies? And what kinds of incentives would drive companies to follow the high road? Moreover, is there a way to bring our government debts under control? In addition, hat policies would encourage entrepreneurs and discourage manipulators? Please believe me that answers exist. Unfortunately, they’re not simple.

This site is for discussing how to improve our political system. It is NOT for discussing party politics or political figures. So if you have a non-partisan question or comment, feel free to leave it below.

Sources:

Adams, John. 1797. “State of the Union Address”. Everything2. https://everything2.com/title/John+Adams%2527s+1797+State+of+the+Union+Address (Accessed July 4, 2017).

Chesterton, G. K. 1927. The Outline of Sanity. G. K. Chesterton. http://www.gkc.org.uk/gkc/books/Sanity.txt (Accessed Oct. 6, 2016).

Jefferson, Thomas. 1816. Letter to Samuel Kercheval on Jul. 12. American History. http://www.let.rug.nl/usa/presidents/thomas-jefferson/letters-of-thomas-jefferson/jefl246.php (Accessed Feb. 11, 2019)

Madison, James. 1795. “Political Observations”. Founders Online. https://founders.archives.gov/documents/Madison/01-15-02-0423 (Accessed Jul. 4, 2017).