Three Problems with Capitalism

Arnold Kling
Jun 13, 2019 · 4 min read

Capitalist societies have three problems:

  1. They elevate material values over others.
  2. They create winners and losers.
  3. They undermine communities.

We have known about these problems for centuries. This essay will explain why they persist.

Elevating material values

Who receives high status in society? Cultures can vary. We may assign high status to the brave warrior, to the gifted athlete, to the talented artist, to the holy priest, to the martyr, to the politician, to the craftsman, or to the intellectual. Because relative status is a zero-sum game, the more status points we assign to merchants, bankers, and entrepreneurs, the less status points are available for other categories.

For many centuries in many societies, people engaged in commerce were assigned low status, far beneath other occupations. Finance and other commercial activities were associated with Jews or other despised groups. Economic historian Deirdre McCloskey says that capitalism emerges when and only when a culture gives respect to commerce.

In capitalist societies, people can still value beauty, honor, generosity, and other virtues. Nonetheless, it is quite true that in relative terms, capitalist societies value material success more highly than it is valued in more traditional societies.

To have a modern, wealthy society, the culture must accord some respect to leaders in commerce, finance, and business growth. But we can question how much respect for these fields is too much.

Creating winners and losers

Markets create winners and losers. As markets get larger, successful individuals accumulate great wealth. As innovation proceeds, this displaces some means of earning a livelihood.

The larger the market, the greater the inequality. If you can make a profit of $1 per widget, then selling one million widgets earns you $1 million. Selling a billion widgets earns you $1 billion.

The capitalist system runs pretty much the same way in Scandinavian countries as it does in the United States. Everyone is expected to work. Businesses seek profits. Profits accrue to owners, who have control over decisions.

The main difference is scale. With about 25 times the population of a Scandinavian country, American firms have much larger domestic markets. With English the dominant language of commerce, American companies also have advantages in global markets.

With larger markets, American firms earn higher profits. This increases the disparity between the highest incomes and the income of the typical worker. Winners take home bigger prizes.

Capitalist societies also produce losers, as part of the evolutionary process of innovation. We no longer have the village blacksmith or the telephone switchboard operator.

The loss of livelihood that takes place as jobs become obsolete is a constant source of concern. People lament the loss of past jobs, the losses of existing jobs, and the prospect of more jobs being eliminated in the future.

Loss of community

Small communities are governed by the principle of caring for one another. This works when people know each other and tasks are simple.

Can we take turns cleaning the bathroom? It works if we are talking about a group of 20 kids sharing a bunk at a summer camp. It doesn’t work if we are talking about several hundred people toiling in an office building.

Can we just operate without markets or organization charts? We can if the task is simple, like pitching a tent or cooking dinner for 10 people, which we can manage just by talking with one another. But for designing, manufacturing, and shipping a new smart phone, coordination involves more than just “You do this and I’ll take care of that.”

In a large, complex economy, almost everything we consume has been made possible by the contributions of thousands and thousands of people, few of whom we know personally. The coordination involved cannot be governed simply by people caring for one another. It requires management organization within firms and market transactions among firms.

The inhabitants of a small village will know one another. That is not going to be the case in a large city.

The more advanced an economy becomes, the less we depend on personal interaction and the more we rely on people we do not know. I remember when a household that needed someone to mow the lawn would hire the neighbor’s son to do the job. Today, people hire strangers.

Conclusion

These three problems with capitalist societies are all real. To attempt to deny them would be unwise. What is less clear to me is what to do about them.

If I would like to assign fewer status points to merchants and entrepreneurs and to elevate the relative status of other values, I can do that. But should I try to impose my values on everyone?

A capitalist economy does lead to winners and losers. But does that mean that government should try to change the outcomes, or merely mitigate them through tax-and-transfer mechanisms?

As capitalist society evolves, people move away from small villages and transact more with strangers. I would not want to reverse those trends, but how can we avoid a sense of loneliness and absence of belonging?

Arnold Kling

Written by

Author of nonfiction books, primarily in the area of political economy. In a previous life, I started one of the first commercial web sites. Ph.D in economics

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