OP-ED: Capitalism creates wealth, but it needs rules
Capitalism has created more wealth than any other economic system. Material wealth is not the only measure of happiness, but conservatives are right to credit capitalism for lifting millions of people out of poverty.
I understand why many people love capitalism, but it has some issues.
Free markets are an important component of capitalism because they transmit information very effectively. Unlike a command economy, such as those in the old communist regimes, where resources are allocated by central decision-makers, capitalism relies on the decisions of many people to demonstrate demand, and business owners then act to satisfy demand to maximize profits. But this only works effectively if there is consumer choice, consumers have enough money to create demand, and money is a common language.
These are three areas where capitalism can break down. First, successful capitalists often have excess profits, and may not always have enough new ideas in which to invest. A tempting alternative is to use this money to buy out their rivals and reduce competition. Corporations can gain economies of scale, and reducing competition allows them to charge higher prices without losing market share. This is a virtuous cycle for corporate profitability, but not for customers or workers, who have fewer alternatives and may face higher prices and lower wages. This is a common theme in the modern economy, with companies such as Google and Facebook buying up potential competitors that look like they might challenge them. Employers can exploit workers when there is no competition for their services and consumers when there are no alternate places to shop.
In the 1970s, Robert Bork pioneered a legal argument, “The Antitrust Paradox,” that as long as consumers did not suffer, the government need not try to diminish monopoly power. But the limitations of this argument were demonstrated by companies who began to dominate the market. First Walmart, then Amazon have demonstrated the ills of monopsony, which is when a buyer has excessive power, even while they offer low retail prices. Because Amazon and Walmart so dominate the retail space, they can dictate prices to their suppliers, knowing the suppliers cannot afford to say no. This squeezes not only the owners of the firms that sell to these powerful companies, but their employees as well.
Economic inequality creates a second problem – money has different value to the rich and the poor. It will take a minimum-wage worker roughly an hour to earn enough to buy a simple meal, while someone in the top 1%, with family income greater than $785,968 in 2022, would earn that in about a minute. Price becomes less important to the wealthy, and businesses that cater to them don’t have to be as efficient as those that cater to the poor; this tends to encourage resources to be allocated to satisfy wealthy consumers at the expense of the poor. For instance, upper-income neighborhoods have numerous grocery stores, while poor neighborhoods are often bereft, leaving them in a “food desert.” This creates a bifurcated economy, where the wealthy own multiple homes while low-wage workers struggle to find housing. People in different economic classes live in different economies.
Ironically, people who have a lot of money don’t need to be particularly good shoppers. Price loses its meaning. When I was younger, I worked in a ski shop in Vail, Colo. The masters of capitalism were the ones who didn’t care about price, which is one of the most important factors in a capitalist economy. Trying to find good values takes time and knowledge, and acting on that rewards sellers who provide value. If your primary concern is quality, and you have essentially unlimited resources, you can overpay to get it. From an economic perspective, when you make $400 an hour, it is hard to justify spending much time shopping around to save money. Careful shoppers impose market discipline. Careless shoppers don’t.
Another problem with inequality is that if too many people don’t have enough money to spend, economic growth declines because of a lack of demand. If factory owners have all the money, who will buy their products? That’s one of the flaws in trickle-down economics; if there is no demand, why would a capitalist invest in a new factory to increase production? In contrast, the stimulus checks sent during the COVID-19 pandemic were effective because they allowed consumer purchases to fuel production and employment.
Capitalism creates great wealth, but if most of that wealth only accrues to a few people, the system will no longer function effectively. Jeff Bezos, Bill Gates and Warren Buffet seem like nice people, but they have more wealth than half the country. Concentrating wealth like that starts to replicate a centrally planned economy, where economic decisions that affect everyone are made by only a few people. At a certain point, wealth is no longer about satisfying material needs and is more about status and power. CEOs demand higher compensation because they think they are worth more than their rival CEOs, not because their compensation is justified by their contributions to the company. Their compensation demonstrates their worth as a person.
Capitalism works when it taps the skills and drive of a large number of participants and the material wealth it generates is widely shared; it thrives on “the wisdom of the crowd.” For this to happen, the government must create and enforce rules to ensure competition and provide financial support to allow everyone to participate. Otherwise, it degenerates into a system that allows the powerful to live a life of luxury at the expense of everyone else.
Kent James is a member of East Washington’s borough council.