What is Capitalism?
Capitalism refers to an economic system in which free market (supply and demand) determine the prices of goods and services. No central or authoritative entity meddles in settings the prices.
There are many versions and variations of capitalist economies across the world. To keep things simple, let’s go over some of the fundamental principles of Capitalist economies:
- There is private ownership of capital.
- Prices for goods and services are decided by the buyers and sellers (i.e. free market)
- Individual entities in the market compete for increasing their capital.
When there are many buyers and sellers in the market and there is competition, if a product’s demand goes up and its supply stays the same, the price will naturally go up. Conversely If the demand goes down and supply stays the same, the price will go down.
That is currently the most accurate way of setting prices and performs better than a centralized system like that of the communist countries in the 20th century.
However almost all economies and markets are regulated today. Even in the United States that is known for Capitalism and free market, there are many regulations over the market. Socialism is a term even more vague than capitalism! But in general, the more we limit a free market for the sake of everyone, we say it is more socialist.
For example:
- Minimum wage laws limit the price of labor in the market.
- Anti-trust laws prevent pricing schemes that are predatory.
Why don’t we just let the market be as free as possible? Doesn’t that bring in the most amount of capital and hence the best option overall?
Here are a few things that go wrong in a purely capitalistic economic system ruled by free market forces.
Capitalism is about maximizing capital, it has no concern for basic human rights
In a free market, there is no concern for basic human rights. If entities in market can benefit from crimes against humanity, they will!
You might be surprised to know that slavery was the biggest market in the United States before it was banned! As a business, it was far cheaper to use slaves than pay wages to free human beings, and so it went for centuries. Ships would go to Africa, capture and transfer people from there to the United States and sell them as slaves.
Illegal markets like human trafficking and drugs exist today despite strict laws banning them. They make good money and hence are compatible with free market.
Capitalism is about maximizing capital, it has no concern for our survival
Capitalist economy constantly push are to consume more, produce more and breed more. You read that right! More people means more consumption so more users for Netflix and more beef to feed them!
World’s population grew by 7 times in the last century and we are facing man-made catastrophic environmental problems for the first time in history. These are new problems.
If we pollute earth to the point of extinction, capitalism should be blamed as a significant reason why we headed in that direction.
Capitalism is about maximizing capital, it has no concern for fairness and competition
It is well known that capitalist economies work because of the competition between suppliers and buyers. If for some reason there is no competition (aka there is a monopoly) in a market, then that system fails. The single or few non-competitive suppliers could then charge what they want for their products and the buyers simply don’t have other options.
This case is different than the previous two, because in this case, the capitalist system fails at what it was designed to do! The monopolies will make fortunes where as the rest of the entities will take severe losses, go bankrupt and homeless.
There are examples of this in the US history.
Standard Oil (ended 1911)
Standard oil was the first American oil company and they dominated the market for decades. In 1911 the company was split into 34 smaller companies because of a ruling by the US Supreme Court. Shell, Exxon, Mobil are remnants of Standard Oil.
Insulin Prices (2020)
Three major drug companies control insulin in the US market. The price for insulin for US patients is %1000 that of the global market. Meaning you could buy insulin for only 1 / 10 the cost you can get it in the United States, in Canada!
So capitalism without restrictions leads to violation of our most basic human rights, pollutes earth and basically fails as a whole. It is not a fail-free orb that magically fixes economy.
Solution: Rules and Regulations
What most of the modern western countries have is a capitalist economy within rules and regulations that protects our planet and our rights. It is up to each nation to set those rules and regulations.
European countries have adopted more socialist policies. They tax the rich at a much steeper rate than the US, expand healthcare and give out unemployment benefits. Within that framework, companies and individuals try to maximize their profits. In the US the rules are looser and the businesses have more freedom. But we should not forget the even the US market is regulated and is not a pure capitalist economy. It is a hybrid market just like Europe, but with more freedom for businesses.
It is important to note that the political system that makes the rules and regulations, aka the government, should be independent of the market. If the market can influence the politicians and the laws they make, then they could corrupt the system and make the “wrong rules”. As we have seen the businesses could utilize slaves, make predatory prices for essential goods like insulin and destroy jungles for their benefit.
Unfortunately the freedom of businesses seems to have gone beyond what is reasonable in the US. But that’s the topic for another article.