Addressing ‘The Inherent Flaws of Capitalism’

On April 22nd, a post was published on this site written by Brandon Yip. The following piece is a response from the editor. 

This post has been in development for a very long time. I have been busy with various things, but ultimately, it has been my own fault that I did not post this earlier. As such, although it is my longest work so far, it certainly may not be my best. Regardless, I apologize for the delay and I hope you enjoy.

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The article written by Brandon Yip on April 22nd cites a number of popular concerns people have with free market economics. Because the purpose of Yip’s piece was to expose flaws of a vast economic concept that refers not to a specific set of policy positions but rather a rather loosely defined doctrine, I will respond to some of them from an equally general perspective.

My main issue with his first two arguments is that some of them do not apply whatsoever to modern day capitalist societies; and for his post to have any relevance, it should have addressed real problems rather than hypothetical ones. While I shall primarily address his first two arguments from this perspective, I will briefly entertain alternate approaches as well.

 

Accumulation of Wealth

The first point made in the article is about the concentration of wealth. Yip argues that, in a capitalist society, due to lack of estate or inheritance taxation, wealth is perpetually concentrated in the hands of a few families, leading to class immobility and the diminishing of the equality of opportunity. He proposes a large inheritance tax to solve this issue.

Through the lens of modern capitalism, this argument has little to no relevance because most capitalist nations in the world have some form of inheritance taxes. The USA, for example, has a progressive estate taxation system with top rates being as high as 50%. In Canada, although there is technically no inheritance tax, the transfer of an estate to those inheriting is treated as a sale by the government; therefore, the appropriate taxes apply. In one form or another, inheritance is taxed in almost every modern capitalist nation in the world. Thus, from the perspective of relevance to the real world, Yip’s argument is irrelevant.

Something else to consider is that, according to well-documented research most recently conducted by the US-based Williams Group, between 70% and 90% of families lose all wealth after three generations. To clarify, this does not mean they live in absolute poverty, but rather that the wealth of most families alive today is completely independent of their ancestors four generations or more prior to them. The reason for this is simple: while inherited money can certainly improve one’s chances of success in life, it cannot guarantee fiscal responsibility or effort, both of which are needed to maintain wealth for a long period of time. The opposite is also true: those born to lower-income families are at a disadvantage compared to those from higher-income families. But, in most cases, this handicap can be eliminated by consistently working hard and making smart choices. Of course, compared to the more privileged, lower-income families must sacrifice a lot more and put in much more effort to arrive at an equal outcome, but it is not impossible. Inspiring ‘rags-to-riches’ stories of people like Mark Cuban prove this fact. Therefore, Yip’s description of the concentration of wealth is greatly exaggerated.

 

Monopolization in a Free Market

Brandon Yip’s second argument is about the topic of free-market competition. He claims that a completely unregulated economy allows for a few, privileged companies to abuse a snowball effect through which they grow perpetually, swallowing small businesses and establishing oligopolies or monopolies. He then explains that monopolies are unfair not only to small businesses but also to consumers as they restrict choice and hinder the effectiveness of competition in maintaining order in a market.

I am glad to say that we agree on the second half of this: monopolies and oligopolies are almost always detrimental to society. However, before I even begin explaining my opinion on the government’s role in protecting the public against monopolies, Yip’s argument must first be considered from the perspective of the modern capitalist nation. As is the case with inheritance taxation, almost every 21st-century capitalist country has a strong set of antitrust laws designed with the intent of preventing business actions that they deem would be unfair. Therefore, once again, Yip’s argument holds no relevance in the modern day.

However, one could go as far as to argue against the premise of antitrust laws. This is because monopolies are not all inherently bad. To understand this, we can break up the existence of monopolies into two parts: initial establishment and long-term survival.

Let us begin by discussing how monopolies are established. For any business to perform well in a free market, it must provide goods or services that are popular. This fact acts as a mechanism to ensure that most large companies in any given market are generally popular among customers and/or clients. In other words, as a general rule, the success of a business in a free market is directly correlated to the utility and popularity of its function. From this, we can conclude that monopolies are usually established by companies that are overwhelmingly popular. In such cases, most of the public does not have an interest in breaking up the monopolistic business.

The second aspect of monopolies is their long-term survival. Even after a company has acquired a large majority of market share, it still needs to continue competing with other free-market agents to retain its position of power. In order to maintain dominance, monopolistic companies must continue to engage in the sort of behaviour that propelled them to success in the first place: voluntary transactions. This means that they must continue being popular among customers to retain their market share. Failure to do this will open the door for innovative small businesses to slowly but surely chip away at their market supremacy. This acts as a non-coercive, non-governmental check in the free market created by nothing but human psychology.

Therefore, in a free market, businesses can only establish and maintain monopolies with massive public support. This then begs the question: why are monopolies so frequently perceived as being so unpopular and/or empirically harmful? The reason for this, much of the time, is government intervention. There are numerous ways in which the government decides to interfere with the two previously-mentioned aspects of monopolies (establishment and maintenance).

Most people expect the marketplace to be a dynamic battleground of competitive companies in a perpetual state of conflict that relies on the natural principle of “survival of the fittest” to produce victors. People expect competition without any unfair third-party interference. However, this is exactly what the government does by, for example, doling out subsidies. If the government believes it to be in the public interest to spend funds on saving or even simply boosting the growth of a company, it usually has the power to do so. Very often, large companies are the greatest benefactors of such policies. One reason for this is that they are often responsible for the employment of a large number of people; going out of business would, therefore, lead to high levels of job loss. Regardless, the fact that subsidies distort competition is undeniable and, at the very least, should be seen as an additional cost of the policy. The inadvertent side-effect of subsidies, therefore is that they can be used by companies to effectively hold the government hostage. Another reason why large businesses receive more help from the government is that they often represent special interests and thus have a lot of influence in public policy decisions through lobbyists. In fact, with the existence of antitrust laws, businesses would only be further incentivized to lobby to avoid being targeted. Regardless, any form of subsidy tampers with the ability of free markets to remain dynamic by giving unfair advantages to players who have not necessarily earned it through actual market competition. This along with the previously-mentioned reasons that government gives for subsidizing large businesses means that permanent monopolies are often formed by abusing public policy

Government involvement does not end here. General employment and production standards regulations are arguably less ‘crony’ but equally harmful to competition. This is because it is usually, if not always, much easier for large companies to deal with the financial burden of new regulations. A simple, yet significant example would be one that I have already written in-depth about: the minimum wage. When the minimum wage increases, all businesses take a hit by experiencing an increase in expenses with no expected return. However, while most large companies will have the financial stability to afford the wage hike, many small businesses may not. This is especially true for small businesses that have not begun turning a profit. Very few companies make money in their first year or so of operation. Added financial stress during this early period of a business’ life cycle may be enough to send it under. For prospective entrepreneurs, it may be enough to dissuade them from joining the industry. Therefore, the minimum wage increase has the effect of creating an additional barrier to entry and expansion for small businesses.

As a side note, it is worth considering the fact that all of the most unbreakable monopolies are directly and intentionally created by government. One reason is that government itself often creates monopolies in the name of upholding the public interest. A good example of this is the energy sector in many countries. Even though nations like Canada may have decentralized control over energy supply to the regional level (provincial in the case of Canada), publicly supported monopolies are still widespread. Ontario, for example, receives its energy solely from Hydro One, a company that the provincial government owns approximately half of. The rationale behind the existence of such monopolies is that market competition could supposedly lead to, among other things, excessive price fluctuation of a crucial commodity. Although the effectiveness of such monopolies can be called into question, that is a topic for another time. At the very least, this shows that even most governments agree that monopolies are not inherently harmful.

Therefore, Brandon Yip’s argument is flawed not only from the perspective of relevance in modern-day capitalism but also in the dual presumption that monopolies are always harmful and that antitrust laws can improve the state of competition reliably.

 

The Morality of Capitalism

Yip’s third argument deals with the moral aspect of capitalism. He claims that capitalism is not ethical as it supposedly disavows morals in favour of purely self-interested motivation. He also cites corporate exploitation of consumers as an example of immoral capitalist behaviour. He goes on to state that capitalists are hypocritical in their belief in the equality of opportunity because a purely profit-driven market will often distort opportunity.

The biggest problem with this entire argument is its foundation. Brandon Yip claims that capitalism actively advocates the irrelevance of morals. This is entirely untrue; it would be much more accurate to say that capitalism simply does not have a say in moral issues. Its defining characteristic is that it calls for little to no government regulation in the economy. Capitalism in and of itself does not represent anything more. Therefore, a good way of looking at capitalism is that it is the manifestation of the freedom of coercion in the market.

First, we must consider what exactly the role of the government is when it comes to morals. One position is that of moral relativism. Proponents of this position maintain that the concepts of ‘right’ and ‘wrong’ are subjective and ‘relative’ to one’s personal beliefs. Therefore, moral relativists submit that moral judgements are invalid because almost any position can be justified. I reject this idea because I believe it invites a dangerously destructive slippery slope into chaos. I think it is important for individuals to have a set of guiding principles in their lives and that there are certain rules that are universally applicable. On top of this, I believe moral relativism devalues the importance of guiding principles altogether. This is what leads to an epidemic of people feeling ‘lost’ in their lives and with no sense of direction. Dr. Norman Doidge makes this case well in the foreword of Jordan B. Peterson’s 12 Rules for Life: An Antidote to Chaos.

However, there is one aspect of relativism that I agree with, albeit for a different reason: the idea that government has no place in legislating moral behaviour. The reasons for this lie with the principles that I believe must guide government action. At the heart of it all, we must realize that each human is an individual and should be treated as such. With this admission, we must have a set of defined individual rights that apply to everyone. This is how we derive the idea of coercion; any action taken by any individual or entity that violates any person’s predetermined rights must be seen as an act of coercion unless it is done with the subject’s consent. Preventing and punishing this coercive behaviour is what the government’s job is. This is because the government itself is an inherently coercive organization. It has the power to pass legislation that needs to be coercive to be enforcible. On top of this, nobody is able to consent to their government at birth. However, for this very reason, the role of government must be heavily restricted. While criminal punishment warrants a public justice system, almost all other government action is unjustifiably coercive. In short, while an individual may have strong opinions on non-coercive moral issues and may attempt to use his or her right to the freedom of speech to spread those opinions, he or she may not use any means – including government legislature – to coerce others into adopting the same views. I may expand on this topic in a future post but for now, we have briefly explained the morally justified boundaries of government action: to do little more than to punish coercive behaviour (i.e. criminal justice).

With this conclusion, we may begin to understand the role of the government in the economy, especially in relation to capitalism. Capitalism is defined as an economic system in which the means of production are privately owned for the sake of self-interest. This means that the owners of the means of production need to engage in voluntary dealings in order to acquire wealth. These dealings manifest themselves practically as transactions between buyers and sellers of goods and services. The important thing to take away here is that capitalism is inherently non-coercive because it fundamentally relies on private ownership instead of statist intervention or collectivization. This also explains the invalidity of the claim that ‘capitalism is immoral’; it does not force anyone to believe in anything, moral or immoral. At the same, almost every single capitalist believes in a role for government to protect individuals from coercion. For example, while some capitalists may not believe in the minimum wage, everyone can agree that slave labour and forced employment should be illegal. One of the major differences between low-wage employment and slavery is that the former is a voluntary agreement between an employer and an employee while the latter is coercive and involuntary.

Yip argues that capitalism is immoral because it allows companies to engage in malpractice such as the intentional sale of faulty products to cut costs and increase rates of customer retention. In economics, such a concept is known as ‘planned obsolescence’. Yip’s mistake here is that he does not consider the response of the free market to such business practices. If a business does try to exploit their powerful position in the market and engage in planned obsolescence, it will eventually lose customers to competitors. Of course, this relies on the ability of new companies to enter the marketplace and compete without being burdened by government intervention. Such a demand-driven optimization of the market does rely on the public acting together and may take some time, but is usually more stable and certainly less coercive than most forms of government response.

Yip attempts to make the argument that for ‘equality of opportunity’ to exist, business malpractice must be regulated. He tries to expose the supposed hypocrisy of capitalists who tout support for the concept but do not believe in government regulation. While I cannot speak on behalf of all capitalists, I can say for certain that the idea of ‘equality of opportunity’ when used by right-wingers is intended to refer to the freedom for individuals to exercise their natural rights to life, liberty, and the pursuit of happiness. It does not refer to the idea that, as Brandon Yip tries to claim, entities engaging in a transaction must both benefit equally. Such a notion would be extremely difficult to legislate and enforce, let alone pointless.

Ultimately, players in a capitalist system are not forcibly told what to believe in or what morals to hold. They are not legally extorted into making money in any particular way. Instead, they are free to choose with whom to trade and on what conditions. This is why capitalism is the very manifestation of freedom in the market. Because all economic activity involves property, goods, services, and/or labour, most forms of restriction on capitalism must be seen as a form of coercion. Socialist policies either explicitly or implicitly disavow individual rights in favour of other values. Regardless of one’s view on these policies, one must at the very least agree to the fact that they are, therefore, coercive. For this reason, I submit that capitalism is far more morally correct than socialism, if for the simple fact that the latter, unlike the former, is inherently coercive. I may write a more in-depth post on this topic in the future.

 

Capitalism and the Collective Interest

I will not delve into great detail on Brandon Yip’s final point because I have already covered much of what I have to say about it. He puts forward the argument that a society ceases to function if every individual solely pursues his/her self-interest. I have two equally-weighted responses to this idea.

First of all, on a fundamental level, no individual owes any other individual anything simply by existing. Humans, as individuals, have the right to bodily autonomy and, therefore, the fruit of their labour. Thus, one cannot demand service from another person because that would be coercive. No one, including Brandon Yip, can dictate the actions of the individual. If Yip believes a society must act ‘more cohesively’, he is free to use his freedom of speech to convince them to do so. However, he may not directly interfere in the manifestation of freedom known as capitalism and promote a forcibly collectivist ideology.

Secondly, on a practical level, even self-interested agents in a capitalist society must engage in mutually beneficial activities with society in order to create wealth. The very basis of capitalism is that it requires individuals to engage in voluntary transactions. An entire society built on these voluntary engagements creates a massive web of positive externalities. For example, a self-interested entrepreneur may only become successful if he or she invests in a successful idea and provides a good or service for customers that desire it. The entrepreneur would also likely need to employ a number of people. Therefore, the entrepreneur benefits because he or she uses labour from the employees to provide a good or service to customers who pay for it and give him or her money. At the same time, the customers benefit because they receive a good or service that they desire from the entrepreneur and the employees benefit because they receive wages from the entrepreneur’s business. Thus, a society based on self-interest must cooperate to fulfill those self-interested desires.

The bottom line is that while individuals cannot be coerced into cooperating with society, they generally need to do so to pursue self-interest. Yip’s final concerns with capitalism are, therefore, both founded on a false premise and invalid.

 

Final Words

Yip made four arguments in his post which can be summed as the following: accumulation of wealth, monopolization, morality, and the collective interest. I have gone through each one of his points and explained why I believe they are either invalid in the modern day, illogical, or both. Capitalism is nothing but the representation of the values of individual rights in an economic system. Coercive government action in the economy is no different to coercive action elsewhere.

If Yip or any other reader wishes to respond or add to the points made in his original post, this may be done by commenting below.