What You Think Is Capitalism Isn’t Actually Capitalism

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What You Think Is Capitalism Isn’t Actually Capitalism

This op-ed from Bloomberg has been making the rounds this morning, and its naivete is getting dunked on by almost every progressive in my Twitter feed.

So instead of snarkily writing something like “lolz Karl Marx was right you dummies” (he was on most of his capitalist critiques and about the dynamic between capital and labor, but not so much on other economic theories and dynamics that we're still trying to understand now—but that's a column for another day) and in lieu of preaching to my leftist choir, I'd like to speak to those people who are still in favor of capitalism, because I was one of you not too long ago.

This piece aims to do two things: address the actual history of capitalism—not the propagandistic image that we get inundated with every seven-ish minutes in between our favorite TV shows—and point out two glaring flaws in its basic theoretical model. This is not an Econ 101 lesson and as someone who took it, it's more of a critique of Econ 101 lessons in general. I did not really become anti-capitalist until last November, when I realized that it had been a long time since I questioned my basic beliefs, and I found that my near-decade in the labor market taught me very different things about it than I learned as a political science major/economics minor in college.

First off, the dynamic in the Bloomberg chart of wages stagnating while productivity and profits steadily rise isn't just confined to the post-Great Recession. It began in the 1970s, just as we were beginning to completely unshackle Wall Street from the chains that we placed it in after the Great Depression.

A lot of you may hold the following belief. I did. But you're wrong. The first half of this tweet is not the definition of capitalism.

What You Think Capitalism Is

It's the equilibrium price in supply and demand. Here's the gist of this fundamental economic principle, per Investopedia (emphasis mine):

In figure 3.1, we can see that at the price of $1, the suppliers are willing to provide one million widgets (Point A), while the quantity demanded will be much higher – eight million (Point B).

At a higher price, such as $5, suppliers will be willing to provide six million widgets (Point D), while the quantity demanded is only one million (Point E).

Finally, at the price of $3, the quantity demanded is equal to the quantity supplied (Point C). This price is also referred to as the “market clearing” or equilibrium price because no suppliers are left with the desire to provide goods at that price and no buyers are left wishing to purchase the goods at that price either.

Finding an acceptable monetary value in which to exchange goods and services is a basic economic principle that we should pursue. It's fairness personified through economics—an attempt to tokenize The Golden Rule. If you love capitalism because of this basic principle, I'm not asserting that you're wrong—in fact, I'm saying that you're right—I'm just telling you that you're not talking about capitalism.

For example, how is the ancient barter economy—a cashless economic system where goods and services were traded directly for one another—not a way to express this basic principle of supply and demand? A farmer bringing a chicken to pay for his doctor's visit is about as pure of an expression of the “equilibrium price” as it gets. Supply and demand has existed as long as goods and services have, and capitalism is a far younger economic principle—yet American capitalism has convinced us that it created the economic truths discovered by our ancestors in the distant past.

Which brings me to my two biggest critiques of capitalism's theoretical model.

Private Property

Wikipedia's first two sentences on capitalism's definition is about as good of a “too-long, didn't read” summary of it as you could ask for.

Capitalism is an economic system based on the freedom of private ownership of the means of production and their operation for profit. Characteristics central to capitalism include private property, capital accumulation, wage labor, voluntary exchange, a price system, and competitive markets.

See how that complex theoretical model is dramatically different from the incredibly basic notion of an inherent equilibrium price resting at the base of all activity in this economic system?

The word “property” evokes an image of home—of safety. Owning a slice of land is actually a fairly radical principle in the larger context of humanity's history, and having a roof over everyone's head is a benefit that society should strive to guarantee. However, “private property” has an incredibly vast definition under capitalism. A company is private property. An idea that hasn't even been created yet is private property. Throughout much of American history, people have been private property.

The maxim of private property doesn't really apply to you and me. We can snag slices of land here and there, and if we work really hard and get enough luck, we can create our own means of production to supply our livelihood—but we exist in a $19 trillion per year economy. To put all of our “private property” in context, the median house price in America is $200,000, and at a 64% home ownership rate amongst our 126.22 million households, the collective equity that all of us have in our homes only reaches $16 trillion total (and this figure drops dramatically if you remove the top 1% from it).

Private property is mostly a wealthy man's endeavor.

And who wouldn't want to own private property? If you had the choice to own a business valued at $1 million or not, why wouldn't you choose to add a $1 million business to your portfolio? The demand for private property is basically infinite, while the supply is limited. Going back to the laws of supply and demand, this means that the price of private property should increase into infinity until demand for it wanes, and why would it ever wane when the benefit of private ownership is so clear?

As John Oliver's brilliant dive into our economy which is dominated by a small cabal of companies in each sector demonstrated, given the incentives of our capitalistic economy, what is happening shouldn't be that surprising. Our oligarchic world is simply following the laws of supply and demand when applied to our current economic incentives.

Profit

The other massive flaw in capitalism's theoretical model is the chase for profits. Profit is what capitalists pitch as inherently valuable, as it creates prosperity. As a basic principle, it's true: you're creating something where nothing existed before, and that's literally the definition of creating value. But in practice, profit isn't always virtuous, and it's actually pretty easy to poke a gaping hole in that idea.

For example, the chemicals used in mining and oil and gas extraction are incredibly toxic and difficult to dispose of. Taking the “profit” angle to its logical conclusion, so long as a mining company didn't have to worry about legal repercussions, the most profitable thing to do would be to dump chemicals in the river, as opposed to investing in the complex and intricate process of disposing of their poison properly.

“But Jacob, they do have liability for dumping their chemicals! Look at the 2014 Elk River Chemical Spill that poisoned 300,000 West Virginians' water. Eight lawsuits were slapped on them immediately, trapping them in profit-sucking litigation for a long time, while they paid a six-figure fine. Your extreme 'profit' angle is just that—extreme.”

So you're saying that a vast public bureaucracy is absolutely necessary for your “efficient” private system to operate the way it should? The problem with asserting that capitalism will work under the right regulations is that if the private market is more powerful than government (and it is), how can you really expect government to effectively regulate it? This was my “ah-ha!” moment where capitalism lost me for good.

Profit can be inherently good, but it's not a universal panacea like it's depicted. For capitalism to not capitalize on its incentivized predatory instincts, government intervention is necessary. This very fact disproves the “efficiency” assertion at the heart of capitalism's insatiable desire for profit. Yes, creating value is a good thing and it is objectively positive in a theoretical light, but when applied to reality, the chase for profits leads to charts like this.

It makes sense that this chart would exist under a hyper-capitalist economy like ours. Labor is almost always your largest cost as a business, and profit is simply total revenue minus total costs. Why do you think capitalist interests have spent billions this past century campaigning against unions, which by definition, represent the financial interests of their labor?

Profit.

Capitalist ideas have existed in smaller pockets of humanity for centuries, but as a large-scale system, it has been around since roughly the 16th century, when landlords began to scoop up larger and larger plots of land in England, and the country moved away from serf-based labor to monetary-based labor, which kicked off the worldwide chase for profits.

Know what else began in the 16th century?

The Atlantic slave trade.

These two events are related.

If capitalism’s incentive of “profit” is to be achieved to its maximum ends, its costs must be reduced to zero while pushing revenue into infinity. Capitalism simply cannot be followed to its logical ends without some outside force restricting its worst impulses, because it would surely cannibalize itself, as the world surrounding you is presently demonstrating. We are barreling towards another revolutionary and dramatic change to our economic order (like the vast expansion of capitalism in the 16th century), and pleas to return to the supposed glory days of yore will fall flat on the ears of a new generation who largely prefers socialism to capitalism.

Jacob Weindling is a staff writer for Paste politics. Follow him on Twitter at @Jakeweindling.

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