Capitalism is a Tool

Free market capitalism is awesome. But capitalism is a tool. Arguing about whether it is universally better than some other tool (socialism, communism, restricted capitalism, etc.) is as foolish as arguing about whether a hammer is a universally better than a screwdriver. The more relevant question is when it is appropriate (or in what form). Capitalism works fantastically well with a few conditions that create incentives that drive all parties to make decisions that benefit everyone:
1. Consumers have the ability to make a rational choice about what to consume.
2. Consumers have the freedom to choose between different products or services, creating competition that drives producers towards better value.
3. Demand drives producers to increase supply, benefiting consumers.
4. Consumers inability to afford a product/service does not represent an ethical violation.

When these conditions are present, capitalism generally contributes to a flourishing and just economies. For example with cars, consumers can easily research and test drive car to make a rational choice, they can choose between different makers and models, the demand pushes auto makers towards building more cars and increasing availability, and in general their is no basic inviolable human right to having a vehicle. This is a win-win situation, incentives benefit both producers and consumers in an relatively fair and accurate way that generally generates high and robust growth and production. Capitalism was integral in the industrial revolution were many growing sectors matched these conditions and showcased the benefits of capitalism in spectacular fashion.

However, if any of these conditions are missing, the effects can be negative. When a condition is missing, an otherwise free market may actually create perverse incentives rather than beneficial incentives. For example, when a monopoly occurs, consumers no longer have freedom, thus anti-competition laws are enforced. While many economic sectors fulfill these conditions, it is naive to assume that all do.

Education is sector where there is general consensus that it is ethically unacceptable to deny some children education due to economic circumstances (especially since such circumstances are usually beyond the control of the children). While a free market still exists with private education, allowing consumers to choose potentially superior services, this sector is supplemented with a public social structure because the ethical condition of capitalism is not fully realized. It is not appropriate to apply it as the only tool, thereby denying some children access to education.

Health care is a sector where consumers intrinsically fall short of rational and free choice. Some services are rendered in distress or emergency where there is little opportunity for research or alternatives. Other choices are made by specialists where the buyer isn’t involved (there isn’t a budget/value force towards low-price) or doesn’t understand the options enough to participate. Decisions also involved short-term vs long-term benefits where humans are notoriously poor at make rational decisions (we tend to choose short-term gains with little concern for long-term). Also insurance plays a buffering role further removing the consumer from direct value-based decisions. With these conditions for capitalism missing, perverse incentives are present, motivating increasing health care costs rather than reduction in costs. Predominantly privatized health care has struggled to produce good value (compared to government provided universal health care), not because capitalism doesn’t work, but because the conditions for capitalism simply do not exist (and it’s unlikely that they can be forced to exist) in health care. This is blatantly evident with the US health care system, one of the few developed countries still languishing with a privatized model. The US spends vastly more than any other country on health care, costs are rapidly increasing (since incentives are driving prices up instead of down), to the point where statisticians use it as an example of statistical outlier. In fact the US government spends more on our privatized health care (where the majority of expenditures are private), than do countries with universal health care (where the goverment covers the majority of costs), all while we have shorter life spans and higher mortality rates than most other developed countries. Finally, the health care also fails to meet the ethical condition. Denying basic health services due economic circumstances is a moral failure, even if the system was working efficiently.

Computers and the Internet are also creating situations where the demand-driven supply condition is started to evaporate in certain sectors. An example of this is the music industry. Duplication of music (and other products like software) has effectively reached zero-effort. This means that supply can be almost infinite as soon as music is recorded, as it can be distributed with no virtually effort from the producer. Consequently, perverse incentives are present, leading the music industry to create arbitrary constraints (DRM). With the absence of this condition for capitalism, the music industry is incentivized to create demand by reducing/constraining supply (a negative utility to society), rather than working to increase supply (benefitting society). The solution probably is not socialize the music industry, but we should acknowledge the suboptimal efficiency, and recognize that alternate post-capitalistic models may need to be exercised (and perhaps are already being used, many artists have opted for more of a gift economic approach ).

Of course there will be legitimate disagreements on the degree and type of different economic models needed in different sectors, but we should at a least start with the right question. We must start with a proper perspective of economic models as tools, not sacred institutions, that can be applied in differing degrees in different situations, rather than falling for simplistic overarching false dichotomies. Rather than leaning on our assumptions, the question of what tool to use should be driven by pragmatic look at works for the situation.

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6 Responses to “Capitalism is a Tool”

  1. bill zyp Says:

    very well done…some good food for dicussion…papa

  2. Paul D. Hunter Says:

    Thanks for provoking some of us, Kris, and expressing well what most of us would find difficult to put into words. My comment may find itself a little far afield, but here it is. Man seems to have an insatiable appetite for methods. It seems to be our default system to look for a method that is “the answer” resulting in a religious devotion to a single particular approach … hence we “preach” about the superiority of the hammer over the screw driver. In my field of ministry I find we are always looking for the perfect way to do something and when we think we have found it we begin to minimize or slander other methods. And, we can also become pretty defensive about “our” method. I think this tendency prevents or limits the search for different or new tools. Man was created in the image and likeness of the limitless Creator. Why wouldn’t one tool be more appropriate in one situation over another tool. All tools are limited, but where are the boundaries for creativity?

    Keep writing Kris. It keeps my heart and mind moving progressively. I appreciate it and always look forward to it.

  3. Jeff Patterson (@deTheos) Says:

    Kris, you’re charge at the end of your post is really good: “We must start with a proper perspective of economic models as tools, not sacred institutions, that can be applied in differing degrees in different situations, rather than falling for simplistic overarching false dichotomies. Rather than leaning on our assumptions, the question of what tool to use should be driven by pragmatic look at works for the situation.”

    I don’t find your assumptions questionable.

  4. Freedom and Immigration | The Zyp Family Says:

    […] way that has no equal in history. Now they are certainly problems with America’s economy, and economics is far more complicated than simply reducing rules (sometimes lack of certain regulations and interventions actually […]


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