Capitalism and Its Critics

by | Apr 29, 2019 | *Financial Awakenings, Business Owners, Money Psychology, The Economy, Weekly Column

Is capitalism broken? Increasing numbers of Americans, particularly younger adults, seem to think so. This idea is part of the motivation for those who, as discussed in last week’s column, are turning toward socialism. An Axios poll in January found 70% of voters want the economic system reformed. They think the economic system is skewed toward the wealthy and the government should do more to fix it—and they’re ready to vote for a 2020 candidate who agrees.

Many who claim that capitalism no longer works may not understand what capitalism actually is. In reading reams of articles criticizing capitalism, it seems to me those critical of the system believe that capitalism inherently embraces greed, corruption, oppression, and dishonesty. They appear at times to use the term as a disapproving synonym for “the wealthy” or “big corporations.”

More accurately, capitalism is an economic system based on the private ownership of the means of production, distribution, and exchange. It is characterized by the freedom of capitalists to operate or manage their property for profit in competitive conditions. It is also called free enterprise or private enterprise.

Who are capitalists? The wealthy owner of a large, successful business is a capitalist. So is a self-employed person who cleans houses for a living. A freelance artist offering works for sale but finding few buyers is a capitalist. So is a teenager earning money during the summer by mowing neighbors’ lawns. No matter their level of financial success, they are all operating competitive, free enterprise businesses.

Greed and corruption are not tied to particular economic models, but are aspects of human nature that have been with us for millennia. Yes, some business owners and wealthy people are greedy and selfish. So are some hourly-wage workers and poor people. These traits—just like generosity and altruism—are found in all parts of society. They appear in both the blue-collar worker who lies to a huge insurance company to obtain fraudulent benefits and the corporate CEO who doubles the price of life-saving medical products.

What capitalism provides, in a way other economic systems do not, is a method of distributing limited resources as efficiently as possible, as the dynamics of the free market and competition drive down prices and improve quality. Systems controlled by central planning have a track record of producing the opposite: economies where shortages prevail and those in charge prosper on the backs of the masses. Capitalism offers more opportunities than other economic systems to lift people out of poverty.

A true competitive marketplace results in improved goods and services and lower prices. Socialism results in no incentives to improve goods or services, and controlled pricing results in shortages.

Of course, as Investopedia points out, “Free market economies and command economies [such as socialism] exist more as abstract concepts than as tangible realities; almost all of the world’s economies feature elements of both systems.”

In practice, this means that capitalistic countries operate with a level of government regulations such as pure food and drug laws and minimum wages. If capitalism isn’t working, it’s often a result of government trying to over-control the production of goods and services through increased regulations. This takes away one of the necessary components of capitalism, which is freedom and competition. Increasing government control is one way that monopolies and oligopolies arise, which inherently stifle competition and give rise to corruption. Certainly, corruption does exist in pockets in capitalistic economies. Yet it is a mainstay of socialism.

In order to flourish, capitalism requires freedom. As capitalists who have achieved long-term success can tell you, a thriving capitalist system also requires virtue and integrity.

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