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Capitalism Requires Government

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The Inherent Problems of a Market Economy

The problem with market fundamentalism is the problem with all forms of fundamentalism – the faith of the adherents blinds them to significant portions of reality. In the case of market fundamentalism, it blinds them to most of the serious problems inherent in a capitalist economic system – the problems that necessitate government action. If pressed, most conservatives will admit that unregulated markets do suffer from a few “market failures,” such as a tendency to ignore pollution. But they see such failures as episodic and limited. For them, these problems only occasionally interfere with the smooth operation of markets to produce the public interest and thus only necessitate a modicum of government interference to set them straight. But they are wrong. The failures of markets are many, serious, widespread, and ongoing. This is not to suggest that capitalism is “bad” or to deny the many economic advantages and achievements of markets. It is simply to acknowledge that when left on their own, market economies will inevitably produce a whole host of economic and social problems. Let’s consider a list of some of the basic built-in problems, limitations, and failures of capitalist market economies.

  • Economic Bubbles. Market economies are susceptible to "bubbles" -- where the price of an asset rises high above its real value. These bubbles then burst, leading to the destruction of large amounts of wealth. Recent examples include the Dot-Com bubble crash that wiped out $5 trillion in the market value of technology companies, and the $2 trillion lost when the housing market bubble burst in 2008.
  • Environmental Pollution. Pollution is a classic example of one common form of market failure: externalities. Externalities are created when decisions by businesses cause costs to groups outside of the business. Since businesses don’t have to bear these costs, they typically ignore these side effects – but the public is harmed by them. So a company has no incentive to clean up air or water pollution caused by its production facilities, even though it will do great harm to the environment and to humans. This kind of problem cannot be solved within a market framework. Voluntarily assuming the costs of cleaning up its own pollution would be irrational for a business – it would lower profits and put it at a competitive disadvantage with rival companies. Only government can effectively address this problem by devising policies to ban or discourage pollution. Without government, a laissez-faire capitalist economy is inherently and inevitably bad for the environment.
  • Exploitation of Workers. Corporations and their employees have conflicting interests. Businesses want to pay their employees as little as possible and not give benefits like health insurance and pensions. Also, businesses do not have an incentive to invest in safety measures in the workplace, which would lower profits. Owners of sweatshops, mines, and other businesses found out long ago that it is cheaper to replace injured workers than to improve working conditions. Given that corporations are often in a position of power over their employees, only a countervailing power on the side of these workers – in the form of unions or the government – can protect them from exploitation.
  • Unsafe and Ineffective Products. Without government help, consumers are vulnerable to products that are unsafe or ineffective – such as tainted foods and worthless medicines. Some shady businesses engage in outright deception about their products, but even legitimate businesses have an incentive to pad their bottom line by not being overly concerned about how safe or effective their products are. For example, the auto industry fought for decades against such things as mandatory seat-belts, air-bags, and other important safety features because these safety devices lowered their profits. Without government, the reality of the market is “Let the Buyer Beware!”
  • Marketing Bads. Left alone, markets and businesses will sell anything for which there is a demand. But there are many things that shouldn’t be sold. We don’t want women sold into slavery in the sex industry, or the peddling of child pornography, or the sale of dangerous and addictive drugs. Only government can control what should or should not be marketed. Where appropriate, it can try to eliminate markets entirely (such as underground markets that provide Stinger ground-to-air missiles to terrorists), or act to limit markets (as in not allowing cigarettes to be sold to minors).
  • Resource Depletion. Like individual businesses, capitalist economic systems must grow or die. But as the worldwide economy grows, depletion of non-renewable resources necessarily increases dramatically. For example, the United States, with five percent of the world’s population, currently consumes twenty-six percent of the world’s energy – most of it in non-renewable forms. If the rest of the developing world were to rise to our levels of energy use, non-renewable energy resources would quickly be used up. A worldwide capitalist economy engaged in unlimited growth is fundamentally incompatible with a world where many vital resources are limited.
  • Corporate Fraud and Theft. Without the government playing watchdog, there is a constant and strong temptation for companies to cheat their investors and their customers. The Bernie Madoff ponzi scheme that defrauded investors of $50 billion is simply the latest example of this problem. This happens so often, it cannot be considered an aberration. In just the last decade, many large businesses, including Enron and WorldCom, have used deceptive accounting procedures to give the illusion of profitability, defrauding investors out of billions of dollars. Insurance brokers have rigged prices to steal hundreds of millions from their customers. Investment companies have routinely told customers to buy stock in companies they have underwritten, knowing full well that these are poor investments. Several prominent mutual fund companies have been convicted of allowing illegal “late trading” by a few favored customers that lowered the profits of other customers. Drug companies have paid hundreds of millions in government fines for bribing doctors to prescribe their medicines. Corporations also routinely cheat the public by using questionable, unethical, and sometimes illegal strategies to avoid paying taxes, thus forcing citizens to pay more to fund public services.
  • Neglect of Public Goods. Another classic example of market failure. A public good is something that is hard or impossible to produce for private profit – primarily because once it is produced, you can’t limit who enjoys or consumes that good. The classic example is a light-house, because you can’t prevent any ships from using it. More important examples are national defense, law enforcement, and clean air. Such goods are inevitably under-produced or neglected in a market economy and we must produce them collectively through government.
  • Neglect of Social and Public Investments. Typically, businesses will not invest in large public projects that are necessary for the long-term health of our economy or society. A typical example is infrastructure facilities like roads, bridges, harbors, airports, etc. Such projects are usually too risky and provide too little profit for most businesses or investors to want to take them on. Education, sanitation, and public transportation are other examples of important social investments that would be neglected if left to the market.
  • Hidden Information. For markets to work effectively in the public interest, consumers must have the information they need about products to make an intelligent choice about what meets their needs. But businesses often have an interest in not fully disclosing all relevant information. So government must step in and force companies to reveal that crucial information, such as what is in their food products, how safe their cars are, how efficient their air conditioners are, or what side effects their drugs have.
  • Inability to Plan. Markets cannot plan. Capitalism is basically an anarchical economic process. Economic development is a function of the activities of separate and uncoordinated businesses and customers – all largely oriented toward the short-term. While this arrangement produces great economic efficiencies, it has the disadvantage of disallowing any coordinated planning to make our lives better. Planning is essential if we want to have cities with livable neighborhoods, to create an efficient interstate highway system, to have an energy system not so dependent on foreign oil, to save rare ecosystems for future generations, and so on. Only government can provide rational, long-term plans for the development of society.
  • Boom and Bust Cycles. As history has shown, laissez-faire capitalism is subject to regular cycles of boom and bust, where economies heat up too rapidly and then cool down into a period of deep stagnation. This process produces run-away inflation, recessions, depressions, rampant unemployment, etc. – and the widespread and profound human suffering that accompanies these serious economic problems. Government policies are often the only way to dampen these swings. For example, in an economic downturn, when businesses are shrinking, consumers are not buying, and banks are not lending, only government is in a position to revive the economy through the use of monetary and fiscal policies.
  • Lack of Markets. Not everything we need for a good society can be provided by markets and business – especially things such as justice, fairness, equality, or basic rights and freedoms. Even if markets were possible for these things, we would not want them. For example, when the well-off are able to buy more justice in our court system, we consider that illegitimate and unfair. Only government can properly supply things like justice and freedom to all Americans.
  • Monopoly. Competition in capitalism does not foster more competition – it eventually creates monopoly. Unrelenting competition eventually drives many companies out of business or forces them to merge, thus allowing fewer companies to take over increasingly larger shares of a market. Unchecked, this process leads to monopolies and oligopolies. This inevitably produces price-fixing, low-quality products, and other abuses of overly concentrated economic power. The only cure? Government anti-trust laws and other “regulation for competition” policies.
  • Ignoring Needs. Markets and business do not respond to our needs, they respond to demand, as expressed in money. Thus social needs are sometimes neglected. What concerns producers is not what social needs or functions are fulfilled by their products, but how much people will pay for them. Henry Ford put it best when he said that he was in the business of making money, not making cars or providing transportation. So while there is a pressing need for low-cost, affordable housing in America, what are being produced are huge McMansions and luxury condominiums – because these are more profitable. And while we may desperately need universal health care in this country, it will not be provided by the market alone. It can only be mandated by government policy.
  • Devaluing the Future. As a rule, businesses are only oriented to the short-term. The accounting practices of firms utilize “discount rates” that require them to consider money, goods, and resources in the future to be worth less than those in the present. So it is better to develop resources like oil and old-growth forest now, rather than leaving them for later. The result: values like long-term environmental sustainability and the welfare of future generations tend to be neglected in corporate calculations.
  • Poverty and Economic Inequality. On their own, market economies tend to produce high levels of poverty and economic inequality. In the last twenty years, the distribution of income and wealth has become more unequal in the United States, and we far surpass other Western democracies in our poverty rate. Also, the top 10% of wealthy Americans now own 70% of the wealth of the country. Economic inequality inevitably produces unequal distribution of other vital goods. The poor, for instance, have less access to health care, adequate housing, and retirement security. Only government action can address the low wages and lack of jobs that fuels poverty and can provide an economic safety for citizens. Studies have shown that Western countries that spend more on social programs and do the most to promote worker interests are the ones who have the fewest poor and the lowest economic inequality.7
  • Lack of Opportunity and Economic Mobility. The economic inequality characteristic of market economies also undermines equal opportunity. The poor face many obstacles to financial success, while the well-off enjoy the advantages of superior education, social connections, and family wealth.8 Unsurprisingly, studies show that citizens in countries like the U.S. with relatively high levels of poverty and lower government spending to equalize educational opportunities have less intergenerational economic mobility.9 Even the Wall Street Journal has admitted that “Despite the widespread belief that the U.S. remains a more mobile society than Europe, economists and sociologists say that in recent decades the typical child starting out in poverty in continental Europe or in Canada has had a better chance at prosperity."10 Only government programs – like Head Start, high quality public schools, federal student aid, and low cost public colleges – can begin to level the economic playing field and help to equalize life chances for all Americans.

Taken together, all of these failures and problems totally undermine any notion of the “perfection” and “self-regulating” nature of the market. Virtually all of these problems are built-in to a capitalist, free-market system. They are systemic problems – products of the normal operation and the inherent attributes of this kind of economic system. This means that they occur irrespective of who is running our businesses. They are not the product of greedy owners or evil corporate CEOs; they are a product of the systemic priorities that all companies must adhere to if they are to stay in business and prosper. It is the internal logic of capitalism that forces firms to pay low wages, ignore the environment, devalue the future, and hide information from consumers.


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