The Machinery of Capitalism

In the realm of economic systems, each country is represented by a machine with three crucial inputs: labor, capital, and natural resources. The machine's purpose is to convert these inputs into goods and services, ultimately creating value through transactions. The question arises: what determines the nature of the economic system—whether it be capitalist, communist, socialist, or something else? Three dials hold the key.

The first dial determines the ownership of capital. At one extreme, the government owns all capital, exemplified by economies like North Korea. At the opposite end, private citizens possess complete ownership, as seen in the United States where approximately two-thirds of capital is privately held.

The second dial regulates the level of government control over production. High coordination implies significant government influence, as was the case in the former USSR, where the government dictated and determined production. Low coordination grants more decision-making power to the private sector, with the government primarily mandating certain aspects.

The third dial governs the extent to which markets are employed to establish prices. At one extreme, economies with no markets witness the government setting all prices without consumer input. At the other end, markets determine the price of almost everything, including critical aspects such as healthcare. This dial also signifies the scope of government regulations, encompassing areas like foreign trade tariffs, antitrust laws, and regulations on topics like net neutrality.

Capitalism, therefore, encompasses a broad range of economic systems rather than representing a singular type. Answering the question of whether capitalism is broken becomes complex due to this diversity. However, an exploration of historical and contemporary contexts allows us to delve into this inquiry.

During the height of the Industrial Revolution, the dials were set closer to what we now call free-market capitalism. Regulations were minimal, with economists of that era believing that capitalism's "invisible hand"—individuals acting in their self-interest—would yield optimal outcomes for both the economy and society. However, this laissez-faire approach led to concerning incidents, such as the inclusion of embalming fluid in milk during the late 1800s in the United States. Public outrage prompted regulatory measures, including the passage of the Pure Food and Drugs Act in 1906, laying the foundation for the Food and Drug Administration.

In the present day, no economy practices pure laissez-faire capitalism. Yet, concerns arise regarding the ability of any capitalist system to address pressing issues like climate change and rising inequality. Capitalist economies incentivize growth, which has fueled demand for inexpensive energy sources like fossil fuels, contributing to climate change. Additionally, the pursuit of profit often leads corporations to disregard inconvenient truths, akin to how tobacco companies initially denied the link between cigarettes and cancer, and oil and gas companies downplayed climate science.

Inequality presents another challenge. In many countries, income inequality has been on the rise, with the top 1% capturing a larger share of total income. However, this trend varies among nations and different periods. For instance, England experienced a decline in income share for the top 5% during the advent of capitalism but has witnessed an increase in recent times. Similarly, European countries and Japan have seen a decrease in the top 1%'s income share since the early 1900s. Therefore, whether capitalism exacerbates or reduces inequality depends on specific contexts and settings.

Capitalism generates substantial value and offers economic prosperity to individuals, but it also concentrates a significant portion of wealth in the hands of a few. While capitalism's proponents argue that anyone can join the ranks of the wealthy through determination, the reality is more complex. In a free-market capitalist system, the wealth generated by successful companies primarily benefits owners, perpetuating disparities in education, health, social standing, and power. This concentration of power within a select few can lead to the establishment of a de facto aristocracy.

Considering these challenges, the critical question emerges: can contemporary capitalism be fixed by adjusting the dials or restricting their control, or is a complete overhaul necessary? While pure laissez-faire capitalism is flawed and no country practices it, contemporary capitalism, as practiced globally, faces pressing issues related to climate change, inequality, and the potential emergence of an aristocracy. Addressing these concerns requires thoughtful examination and evaluation to determine whether reform or a fundamental transformation of the economic system is needed.

Henrik Leandro