Problems with Capitalism

Ayn Rand makes the case that capitalism is the only “objective system of values” (Capitalism: The Unknown Ideal). She distinguishes between three types of social systems: 1) Intrinsic theories – ones in which the ‘good’ is inherent in some things and ideas, which she equates with many religions. These systems are inherently unjust because someone who believes themselves right has no trouble in forcing others to their will. 2) Subjective theories – in which their is neither ‘good’ nor ‘evil’, but that each person may define value for him or herself. She argues that in such systems, individuals would also have no trouble in forcing others toward their will since they would feel righteously motivated by their actions. 3) Objectivism – in which the only good is an evaluation of the rational standard of value of a thing based on the facts. She equates objectivism with a rational, non-personal, basis for a social system.

In Ayn Rand’s view, objectivism is the only theory of value compatible with captialism.

“The objective theory of values is the only moral theory incompatible with rule by force. Capitalism is the only system based implicitly on an objective theory of values. The free market represents the social application of an objective theory of value.”

“In the free market, all prices, wages, and profits are determined – not by the arbitrary whim of the rich or the poor, not by anyone’s ‘greed’ or by anyone’s need – but by the law of supply and demand. A man can grow rich only if he is able to offer better values – better products or services, at a lower price – than others are able to offer.”

According to Ayn Rand, economic problems in the United States are caused by a corrupt application of these ideal principles. That is, she argues that government regulation under the Sherman Act (1890) which established anti-trust to break up monopolies, was a turning point in which the ‘free market’ was manipulated and regulated by the government – a responsibility it should never have had. In her view, the sole purpose of government is to act as “the only legalized use of physical force” to break up internal (civil) and external (foreign) disputes, and that its should have no role in economic markets.

We might begin a discussion by noticing that her concept of an ideal capitalism relies on an ideal democracy as its starting point. The purpose of government, as set down in the Bill of Rights, establishes its role as the only legalized use of force (law and judgement) on the reasoned principle that men in conflict should be arbitrated by a third party, thus removing physical disputes to a central legal power. However, Ayn Rand also extends the principle of rational basis in fact to economic markets. She argues that capitalism had achieved civil rights and freedom of speech, but in fact it was the terms of democracy that did so. Michael Moore notes in his documentary, Capitalism: A Love Story, that the US Constitution makes no mention of economy and trade in the applications of basic rights.

Today, the concept of capitalism is being increasingly questioned, with socialism increasingly favored by the young (35% socialism, 33% capitalism, 32% other, according to Michael Moore). If we are to make solid arguments against capitalism, we should be able to do so on first principles, by examining its weaknesses and problems in relations to our assumptions. Several of these incorrect assumptions can be found in Ayn Rand.

Here are a few of these incorrect assumptions about capitalism:

1. That prices,wages and profits are determined by supply and demand in a free market, and not by greed – This assumes that supply and demand operate freely in all markets. However, in necessity goods markets, such as housing and health care, the demand does not decrease. Therefore, the supplier has a market advantage and may continue to increase prices.

2. That monopolies represent the greatest value to the people – Ayn Rand argues that the ‘monopoly’ is a reflection of the best value of a producer, capable of such a high degree of ‘goods’ that it was able to successfully win over all its competitors. However, this fails to acknowledge that many monopolies found their success through ethically questionable practices.

3. That economic production can increase indefinitely – The issue of unlimited wealth does not appear in the principles of a free market, yet it must be addressed since such an idea is theoretically impossible, and devastating in practice. The problem of indefinite wealth generally translates into unbounded abuse of natural resources, since this is the true source of wealth. Capitalism is largely responsible for many of the environmental abuses in the world.

4. That social systems and economic systems cannot be separated – In an ideal world, capitalism would provide an economic structure while democracy would provide the social structure. In practice, however, the wealthy leverage the social structures to increase their competitive edge in the market. This appears most obviously in the lobbying of politicians for policy, and the outright control of government influence by wealthy banks.

One might argue (such as Ayn Rand), that we have not yet achieved an ideal ‘free market’, and if we were able to do so then capitalism would provide the benefits it promises – an equal balance of wealth according to supply and demand. However, it is precisely its practical limitations which makes an “ideal” capitalism poor in reality. Any economic system must, if it is to be at all useful, take into account its the practical limitations of men if it is to be applicable.

Consider another economic system, that of communism. Ideal communism is the basic principle of the ‘common good’: that each member of society contribute to the common good according to his or her ability, and receives according to his or her need. Notice that this is primarily an economic law, it states how wealth flows in a society. However, in order for it to be accomplished, there must be some centralized state to which the ‘common good’ may be collected. This state is responsible for the collection of the products of society, and also its distribution. Pure communism was never tried in reality, as the December Revolt (1925) which created the Soviet Union was represented by several different movements (the February Revolution to overthrow government, and the Soviets to represent the working people). In practice, the flow of labor for the common good went into the control of the power of the state.

In both capitalism and communism, we see an idealized economic system leading to economic disaster. Although there were many other differences, one primary difference between the United States and the Soviet union was the presence of democracy, which established a principle of equal rights and civil law. It is with democracy alone that we should attribute our success with human rights. The US Consitution makes no mention of capitalism.

And unlike what Ayn Rand would have us believe, it does not necessarily follow that a set of rational principles for human law would apply just as well to a system for human wealth. The primary reason among these is that civil law is established for rights for which any human being would expect to be treated equaly. We can naturally expect a law against men killing another man, since we expect no one else to harm us. If a women is denied a job, we would expect her to be treated equally as there is no fundamental difference between men and women on the basis of labor.

However, we cannot say that the work of all individuals is equal. We cannot reasonably expect that the wealth of each individual is equal since their labor, and contributions are not equal. It is see as unfair that a man who produces nothing benefits greatly, as it is that a man who contributes much gets nothing. Thus in civil theory, as the basis of democracy, we can reason the concept of civil rights. In economic theory, we cannot reason a set of laws which brings about an equality of wealth (communism). Nor can we establish a system of free trade which brings about a proper assignment of wealth by supply and demand (capitalism), since in practice the imbalance of wealth creates an unfair social structure.

This might suggest a simple solution: We use democracy as our social structure, and we find an economic theory that works. Unfortunately, the problem is not so simple. Consider the current structure of China. It is possibly best described as a semi-free economic market, in a semi-socialist state. However, in order for a free market to prosper, it must allow freedom of speech (a basic civil right) since free speech is necessary for technological and knowledge innovation. In order to innovate, knowledge must flow freely. Thus, the economics of capitalism encourages a social structure of democracy because it requires freedom of speech to operate properly. This is, I believe, the key issue which China faces currently (how to ‘captialize’ without becoming democratic). Notice, however, that capitalism does not require the right to equality labor, or to women’s rights. We often mistakenly associate capitalism with democratic principles, but just because captialism encourages some civil rights, it does not mean that it requires all of them. The only way to ensure civil rights is through an explicit democracy. However, a democracy does not determine an economic structure.

We might reduce the problem to a simple experiment: Does the right to happiness include a guarantee to a certain amount of wealth? Franklin Roosevelt addressed this just upon leaving office, where he proposed an Economic Bill of Rights, which included:
– The right to a useful and remunerative job
– The right to earn enough to provide adequate food and clothing
– The right to home and property
– The right to adequate medical care
– The right to an education

Consider the right to home and property. What does it mean if I choose to live in a rural part of the country which is unsettled, with the government required to provide this right? Or the right to an education? It is not difficult to argue that a government should provide a communal source for each of these rights, since the only way to ensure these is to require a central state which can distribute and regulate them. Housing could be made a right, if the government centralized and regulated the price and location of homes. Notice that this is not in conflict with democracy, only with capitalism. In effect, what Franklin Roosevelt was arguing for was a more socialist form of government.

The central problem of our time will be to find a compatible compromise between capitalism and socialism. A completely capitalist economy is unworkable, as it places the power for necessity goods in the hands of the wealthy. A completely socialist economic is also unworkable, as it distributes the wealth of individuals evenly without concern for their differences in contribution and aptitude.

I believe a compromise might exist at the boundary of necessity goods. Notice that nearly all of Franklin Roosevelt’s items in the Economic Bill of Rights are necessity goods: shelter, food, clothing, education. Naturally, he was establishing a principle of economic rights based on fundamental need, while civil rights are based on life and human equality.

A central problem that America now faces is that – on a basic ideological level for many people – can be found in making no distinction between democracy and capitalism. In light of the economic collapse, this creates a paradox. How could a system which is democratic, which brought civil rights and freedom of speech, lead to such a poor and corrupt economic situation? The refuge of many is to step back even further, to turn to religion as a basis for value, yet this takes a step backward from democracy by not using reason to establish basic civil rights. The resolution to the large problem can be found by observing that democracy and capitalism are not one thing, but two: the first is a social system, the latter an economic system.

2 thoughts on “Problems with Capitalism

  1. I enjoyed your piece. I always enjoy people who debate the merits of capitalism and communism in an effort to find a functioning model that works. Your exposition is elegant, but you offer no real solutions. I also found a few problems with your details.

    You say:

    “If a women is denied a job, we would expect her to be treated equally as there is no fundamental difference between men and women on the basis of labor.”

    Really? I can think of many ways in which men and women are significantly different on the basis of labor. There are plenty of jobs that a women is incapable of performing and like wise for a man, be they in entertainment fields or in the areas of physical labor. As well, these differences are rarely attacked under civil rights laws, because as a society we accept these differences.

    You say:

    “In economic theory, we cannot reason a set of laws which brings about an equality of wealth (communism). Nor can we establish a system of free trade which brings about a proper assignment of wealth by supply and demand (capitalism), since in practice the imbalance of wealth creates an unfair social structure.”

    I’m always bothered when people say that capitalism, as a system, brings about an inherently unfair social structure, with little evidence to back it up. You say that in necessity goods, demand does not decrease and you specifically mention housing. Are you seriously saying that we are not seeing a decrease in the demand for housing right now? Of course we are and its driving supply up and prices down.

    You say:

    “In effect, what Franklin Roosevelt was arguing for was a more socialist form of government.”

    This is precisely what FDR was advocating. The Economic Bill of Rights is a socialist form of government. And that’s precisely the problem. You say that capitalism does not require democracy. While I disagree with that, it’s not the argument I’m going to make here. The argument I will make is this: socialism absolutely cannot work within a democratic framework, they are mutually exclusive. Given that, I will take capitalism and all its flaws over socialism and all its necessary evils.

    Thank you very much for posting this and I hope to hear more from you in the future.

  2. “You say that capitalism does not require democracy. While I disagree with that, it’s not the argument I’m going to make here. The argument I will make is this: socialism absolutely cannot work within a democratic framework, they are mutually exclusive.”

    These “arguments” are what I hope to hear, as they are the basis for your larger claims that you “will take capitalism and all its flaws over socialism and all its evils”. None of these arguments are actually made, only hinted at. I look forward to them, as a starting point for discussion.

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