In describing Capitalism, people mean many different things. Capitalism is said to effect freedom, social justice, economic fairness, economic efficiency, economic democracy, rapid technological improvement, and ever higher standards of living.
Indeed, one of the great difficulties in discussing Capitalism is sorting out the competing claims. In my experience, attacking from one-angle (e.g., challenging the claim of economic efficiency) is countered with assertions emanating from an entirely different paradigm (e.g., Capitalism as Freedom or Justice). The war of paradigms tends to reduce thoughtful discussion to unproductive shouting matches.
Would that we could be spared the difficult task of unraveling the Gordian Knot that is Capitalism’s justification. However, understanding the true effect of Capitalism is essential to any Progressive agenda, because key elements of Capitalism are not only blocking reform, but also rolling back prior reforms, and, worst of all, raising the price of future battles. This means that not only will our occasional victories themselves likely be rolled back, but indeed we are watching our opponents put in place political infrastructure that will make it even harder for our children to than it is for ourselves.
I write because this outcome is socially, politically, and morally intolerable.
There are two parallel power systems in the world today: political and economic. Despite some recent high-profile election fraud, It is the abuse of economic power that is most rapidly undermining our attempts to make gains in the realm of political power. And our political retreat will not cease until progressives can end the barrage of economic attacks that we can neither defend against nor answer.
To make this tangible, examples of economic attacks would be (1) Buying major media outlets and using them to propagandize blatantly (Fox) or to simply bias the discussion (CNN); (2) Funding conservative think tanks to flood bookstores and newspapers with well-researched conservative messages, and to increase the visibility of conservative student organizations; (3) Purchasing ballot access in Initiative states, and lobbying everywhere, to defund progressive organizations, tilt the political process against progressives, and create barriers to progressive change.
To put ourselves upon proper footing against the Plutocracy, we need to know how it works, how it can be subverted, and what strengthens it. And that means exposing the truth about Capitalism.
If you cannot tolerate Progressives’ repeatedly taking one step forward and two steps back; if it is unacceptable for Progressives to lose ferociously when out of power, but be unable to win back much ground when we in power; if you have realized that systemic, structural, and sometimes invisible forces are stopping us in our tracks, then you are ready for the truth about Capitalism.
I will say at the outset that most of the things you have heard about Capitalism are not true, and upon most of Capitalism’s promises, Capitalism does not — in fact cannot — deliver. Indeed, the whole theory of Capitalism rests upon a number of dubious empirical premises about what motivates people, how markets work, and how we should measure success. If any of these premises were to fall, the argument for Capitalism would suffer a serious blow.
For example, if individuals were not primarily driven by self-interest, then profits might not be the best incentive to pro-social behavior, and markets might not be rewarding those who had contributed most to the general welfare, and the resulting allocation of wealth might be neither economically efficient nor morally just.
This essay will show not only that a key premise underlying Capitalist theory is false, but that in fact EVERY premise underlying Capitalism is demonstrably false, and that Capitalism as a social/economic/political system cannot be counted on to deliver specific outcomes (e.g., economic efficiency; optimal allocation of investment; economic rewards commensurate with effort or social contribution; equality of opportunity). Our belief in Capitalism will be shown to have no greater empirical justification than a belief in Santa Claus, the Easter Bunny, or any other mythical narrative intended to motivate certain behaviors.
The argument in support of Capitalism consists of many interwoven stories about what people want, how they should satisfy their desires, and why. But from Capitalism’s many different narratives can be drawn five consistent themes that seem to form the core of the Capitalist Myth. Capitalism is about:
Individuals acting from rational self-interest;
Market competition to drive efficiency and allocate investment;
Profits as a motivating force and measure of success;
The intrinsic inferiority of government action compared to private action; and
A moral judgment finding virtue in wealth, and freedom in exchange.
From these five general principles are deduced dozens of more detailed premises, which together form the Dogma Premises of Capitalism, of which we will examine 43. They are called Premises because they are the basic assumptions upon which most pro-Capitalism or Anti-Socialism arguments are made. They are called Dogmas because they are not supported by much empirical evidence — in most cases the great weight of evidence is quite contrary to Capitalism’s assumptions.
The dogma-premises of Capitalism are recited so frequently that they are instantly recognizable to any schooled western mind. For example:
The profit motive is the strongest, most reliable incentive for productivity;
Markets are the most efficient method for an economy to allocate resources and labor;
Government functions should be privatized where possible to increase efficiency and decrease costs;
Recent technology advances demonstrate Capitalism’s effectiveness at raising the general standard of living;
Capitalism is fundamentally democratic because it allows people to vote with their dollars.
In my experience, the Capitalism Myth’s believers tend to resist probing into the factual
underpinnings of their beliefs. This is surprising, because unlike most myths, Capitalism purports to be an empirically true science, not a metaphor or an allegory.
For Capitalism to deliver on its promise, however, most or all of its premises have to be true. For example,
If the profit motive were not the best way to drive productivity;
If markets did not efficiently allocate goods;
If government action were not intrinsically less efficient than private action, then the conclusion that Capitalism delivered better economic results than any other system would be cast into doubt, as would the common belief that there were no superior alternative to Capitalism.
In this essay we will examine 43 of Capitalism’s key premises. If even one of these premises were proved false, Capitalism’s promise would become unreliable. I will argue that all 43 premises are demonstrably false – certainly more false than true. This will explain why Capitalism does not and cannot deliver on its material and moral promises.
Moreover, Capitalism’s weak empirical foundation precludes any assertion that alternative systems cannot deliver better results (more freedom, more justice, higher standard of living), and in fact makes more urgent the investigation into the viability of such alternatives.
Finally, if our assumptions about how Capitalism works lack empirical foundation, then we should resist using these common phrases in conversation: “Of course I’m not against Capitalism,” and “Of course markets are the best way to allocate goods and investment, and especially, “Although Capitalism has its flaws, it’s still the best system that’s ever been tried.” On the contrary, the evidence suggests that Capitalism may well be the worst system that’s ever been tried.
Showing that the Story of Capitalism is only a fairytale will not release its hold upon those who wish to believe. But we should view such devotees in their true light: They are religious zealots acting on faith, and their beliefs are not only without factual support, but in fact run directly against the great weight of evidence.
I know from experience that successful assaults on Capitalist ideology end in a kind of “last stand,” in which the Capitalist advocate challenges their opponent to describe a superior system. I am in fact committed to the project of describing a better system as are many others (see, e.g., Michael Albert, Parecon). However, I would hope that each person who comes to understand Capitalism’s mythical nature will take it upon themselves to help describe the requirements of a superior system, and how we might begin to implement it incrementally, rather than demanding that someone else do that work.
If Capitalism is the wrong road, it is everyone’s responsibility — not just mine — to set us on a better path, and we are collectively much more likely to describe that superior system than would be any one of us working alone.
So now let us elaborate in more detail the basic premises underlying the Capitalist system — what I call the “myth” of Capitalism. After we have toured the system as it is generally presented, we will examine the empirical likelihood of each premise. Finally, we will consider the implications of rejecting the myth, both individually and collectively.
Capitalism’s Five Basic Dogmas: Individualism, Market Competition, Profit, Government, and Virtue.
The Individualism Dogma asserts that people are fundamentally self-interested. They will work harder to benefit themselves than to benefit others. They will work to benefit groups only to the extent that they receive commensurate benefits as a member of that group.
The Individualism Dogma also assumes that people are hedonistic. They prefer pleasure to work, and they can be expected to work as little as possible and to engage in pleasurable activities as much as possible. If they are required to work for any reason, they will do the least amount possible unless specifically compensated for each additional unit of labor, and work will be avoided whenever a decrease in labor is likely to go undetected.
To the extent that Individuals are observed to engage in activities that appear altruistic (e.g., donating to charity, risking their own life to save another’s, or enlisting in the military out of patriotic sentiment), the theory predicts that there will normally be found a hidden subtext of self-interest (e.g., benefit to reputation, tax deduction, expectation of reciprocity, or other potential rewards sufficient to justify the apparent gift).
The Individualism Dogma generates these Dogma Premises:
2. Social safety nets reduce productivity by making unemployment less onerous, thereby limiting the amount of discipline that owners can impose on workers to achieve maximum productivity.
3. People will not participate in group efforts except to the extent that they get a greater benefit than they would get from not participating.
4. Group projects cannot be trusted, because there will inevitably be opportunity for free-riders, and people will attempt to benefit from others’ labor without contributing commensurately themselves, thus dooming even well-intentioned projects that theoretically might create a net-social benefit.
The Market Competition Dogma asserts that market competition will ensure that the promised benefits of capitalism – efficiency, fairness, opportunity, freedom — are actually realized. Firms that produce less effectively will be punished by lower profits, because if they match their competitors in quality and price then they will have lower profit margins, and if they sell at a lower quality or a higher price then they will have reduced sales volume.
The inferior position of the weak competitor, if not remedied, will eventually lead to the firm’s bankruptcy, because lower profitability will in turn reduce the availability of investment dollars, which will in turn impair the firm’s ability to investment in marketing, product development, and other innovations necessary to remain competitive, thereby igniting a vicious cycle leading to lower profits, and eventually bankruptcy.
Paradoxically, Capitalism asserts that its iron law of competition even applies in situations where there is little or no competition. If the lack of effective competition allows a firm to reap high profits or to produce inefficiently, then other firms will inevitably be attracted by the opportunity, until profits return to competitive levels.
The Competition Dogma generates these Dogma Premises:
5. Markets are effective to check abuse of power or inefficiency among private producers.
7. Firms will respond to the risk of bankruptcy by sustaining high efficiency.
8. Routine market distortions, such as market concentration, externalities, and public subsidy, do not seriously undermine capitalism’s effectiveness.
9. Centrally planned economies are inefficient.
10. Competition keeps markets competitive even when there are only 2-3 competitors because the profit motive is constant, regardless of the number of competitors.
11. Markets are the most efficient method for an economy to allocate resources and labor.
12. Capital markets ensure that investment is directed to the most profitable projects.
13. The most profitable projects are also the most socially worthy projects (as selected by the general population of consumers/purchasers, as if by an invisible hand)
14. Abuse of private power is self-correcting, because markets will punish unpopular behavior.
15. Markets are self-correcting in the sense that if a practice leads to a bad outcome (e.g., economic bubbles get created, or unsafe offshore drilling costs BP money, then other actors will be forced by the market to learn from experience and make sure it never happens again. See Thereisnospoon, It’s Not That You’re Wrong, You’re Just Evil.
The Profit Dogma explains how the possibility of private rewards ensures that producers will advance the public good.
Because people are intrinsically self-interested, producers are motivated to take every step possible to maximize their own profits. Profit maximization is said to result from providing the greatest possible value at the lowest possible cost, which in turn drives greater unit sales, and thus greater profit. If the producer fails to maximize profits, then the unrealized profit-potential will attract other producers to compete and do a better job, and take the profits for themselves. Therefore, the only way to make profits in an economy based on voluntary exchanges is to consistently give everyone as much of what they want as possible, thereby contributing to society as much as possible of whatever people want most.
The self-interested nature of producers means that the producers will single-mindedly pursue profits, which can only be achieved by providing better or cheaper products. As a result, the Profit Dogma predicts the following behaviors, as expressed in these Dogma Premises:
16. Better products or lower prices will lead to greater unit sales, and therefore more profits.
17. The only way to make a profit (consistently) in a market based on voluntary exchanges, is to give people what they want.
18. The profit motive ensures that owners will command maximum productivity from non-owners whom they control.
19. Greater profits to the owner will result in greater productivity by those whom the owner commands.
20. Taxes always reduce the efficiency of capitalism by reducing the profit potential of any project.
21. The private profit motive results in greater productivity than any other motivation.
The Government Dogma starts with the ideas that people only act to improve their own individual position, and that profit is the greatest motivator, and concludes that Government action must always be less effective than private action, because the rewards of any endeavor are shared, and thus diluted.
According to the Government Dogma, any project run by the government will be poorly managed compared to the same project in private hands because the project leaders for the government will not be allowed to keep any efficiency gains, and therefore will be inadequately incented to ensure that the project is done as well or as quickly as possible. Moreover, even if a government manager were well-intentioned, he or she would nonetheless be relatively incompetent, and thus will cause inadvertent errors, because the most talented managers will be drawn away from government work by the greater individual rewards available to those who manage for-profit endeavors.
The Government Dogma generates these dogma premises:
22. Because the private economy is a manifestation of social freedom, government should be restricted to just the few functions it is uniquely suited for, and should not compete if a product or service can be delivered by private enterprise.
23. Government is intrinsically wasteful (except for universities, military, nasa, darpa, public utilities, bridges, roads, airports, police, prisons, fire protection, hospitals, and libraries).
24. Government can never be as efficient as a private business because there is no profit motive to ensure that government workers be as efficient and effective as possible.
25. Government-run projects necessarily fail compared to privately run projects because government projects lack a single owner invested in the overall success of the project.
26. Government is theft, because taxation is involuntary, whereas market interactions with private businesses are voluntary;
27. Government does not create jobs; only business creates jobs;
28. Government is manifestation of slavery; business is a manifestation of freedom;
30. Government functions should be privatized where possible to increase efficiency and decrease costs.
31. Democracy is ineffective to check abuse of power or inefficiency in government.
The Virtue Dogma of Capitalism transforms the economic argument into a moral argument. The other dogma premises explain empirically how a system of individual initiative, markets, competition, and profits could result in economic efficiency and in the maximization of total wealth, and even the acceleration of technological progress. But the Virtue Dogma explains why these outcomes are morally good, and why freedom of enterprise, or market freedom, is among the most precious values achieved by the Capitalist system, and to which other values, including equality, justice, health, and public safety, may justly be subordinated.
According to the Virtue Dogma, maximizing profits is by definition a morally good act, and wealth is a sign of virtue. By contrast, poverty is an avoidable condition, with enough talent and effort. Therefore, poverty is a just punishment for those who are unable or unwilling to contribute to the economy as much as others.
The intrinsic moral virtue assigned by Capitalism to market outcomes is mostly based on utilitarian moral principles — successful Capitalists have by definition created the greatest good for the greatest number. However, the Virtue Dogma finds in market exchanges another, process-based form of Virtue: Democracy. According to this Dogma, Markets serve as a kind of perpetual election, in which buyers vote with their dollars. Thus, market outcomes, including what gets produced, who gets wealthy, and the ensuing Economic Order (who gets to be boss and who must take orders), is justified in the same way that democratic elections result in and justify a political order. In fact, according to the Virtue Dogma, market participants cannot justly challenge things like income distribution or wealth disparity, because the outcomes resulted from an entirely voluntary process in which everyone participated.
The Virtue Dogma generates the following dogma premises:
32. Non-owners benefit from owner profits because the firm is healthier and can provide better salaries and benefits, or at least continued employment.
33. Wealth disparities largely reflect individual choices to prefer leisure over industry, or vice versa.
34. Wealthy people are wealthy because they worked harder, or in any case contributed more to social net utility (and were in turn compensated for that).
35. Entrepreneurs provide more value to society than unskilled laborers.
36. Professionals who have trained for their jobs deserve higher compensation to make up for their years lost/invested in training.
37. Wealth results from hard work and/or special talents that have been applied to create something socially useful.
39. The advanced state of our current technology shows Capitalism’s effectiveness in driving innovation and increasing the standard of living, which could not have been achieved under another system.
40. Capitalist competition leads to more choices, and therefore more freedom.
41. Capitalism is a manifestation of economic democracy, because people “vote” with their dollars.
43. Poor people are better off economically under capitalism than they would be under any alternative system.