Is capitalism a good idea? If so, is there any way to improve our capitalistic system? These are the sorts of questions that motivate us to face the challenges to capitalism. Many people believe that our capitalistic system has problems that need to be solved. Either they are wrong, or we should start looking for solutions. I will discuss the nature of capitalism, moral justifications of capitalism, challenges to capitalism, and new problems capitalism is facing. My discussion is based on chapter four of Business Ethics (Third Edition, 1999) by William Shaw.
What is capitalism?
Capitalism is a type of economic system that emphasizes the importance private property including at least some private ownership of the “means of production” (resources and machines). There is no precise definition of capitalism, but a libertarian laissez-faire system (a free market with no government regulation, taxation, or tax-funded public services) is a clear-cut extreme sort of capitalism at one end of the spectrum. The United States has one of the most capitalistic systems insofar as it has relatively little government intervention and regulation. The opposite extreme of laissez-faire is an extreme form of communism where none of the means of production are privately owned (and are instead shared by communities). Most governments are somewhere in the middle of having an extreme form of capitalism and communism because almost all governments have a somewhat free market with some taxation, regulation, and tax-funded public services (such as public education).
There are many key features of capitalism, such as the following:
- Companies – Capitalism has companies, business organizations “that exist separately from the people associated with them” (129). The capitalism of the United States is now greatly influenced by powerful companies, corporations, that can fight for their own interests though lobbying, public relations, and political donations.
- The profit motive – Capitalists assume that people will be motivated to make a profit—more money than is necessary to run a business—in part because it really is possible for people to do so. The desire to attain riches might have always existed, but attaining profit is now one of the main goals (if not the central goal) in many people’s lives (ibid.). One of the assumptions of capitalism is that being productive will lead to profit, so the profit motive will also motivate people to be productive.
- Competition – Capitalism expects and encourages competition because of the assumption that people will have better products and services at a lower cost due to competition (ibid.). Without competition one business can dominate civilization by selling a product everyone needs (such as food) and inflate prices to make more profit. It is assumed that competition will eliminate inflated prices and shoddy products because you can just buy from the company that gives you the best deal. A company with artificially high prices will suffer the consequences. Similarly, a company that tries to exploit their workers can lose employees who find better jobs elsewhere (130).
- Private property – Private property is a bundle of rights and rules that assure us that we can own objects (such as food) and abstract entities (such as companies) (ibid.). If you own something, then you have a great deal of control over it, you can give it to someone else, and others can’t take it from you without permission. Capitalism not only requires that many people have private property, but it requires that a great deal of the means of productions are privately owned; such as farmland, factories, and crude oil. Some private property, including the means of production, is capital—investments used to make more money (131).
Moral justifications for capitalism
To decide if capitalism is a morally justified economic system, we would have to compare and contrast capitalism with every other kind of economic system. That is a huge undertaking, but we can certainly consider possible benefits capitalism has over other systems. These are arguments for capitalism that don’t sufficiently prove that capitalism is morally justified once and for all, but they are considerations in favor of capitalism. I will discuss two such arguments: (1) The natural right to property and (2) the invisible hand.
The natural right to property.
John Locke argued that people are entitled to the fruits of their labor. “When individuals mix their labor with the natural world, they are entitled to the results” (121). All things equal, it would certainly seem immoral for someone to seize all your crops after you worked all year to create them. Property rights can keep that from happening, and Nozick’s theory of justice supports our natural right to property.
However, many object to the idea of having any natural rights. Perhaps there is an ideal set of rights that we can discover once we know which theory of justice is correct, but we can’t just assume that property rights as understood by capitalists is that ideal. Consider that everyone agrees that there are limits to property rights. We can’t just claim to own anything unclaimed by others just by calling dibs, and we can’t own other human beings. It might be unethical to own an unfair share of the earth’s resources; or to own intelligent animals, such as great apes, dolphins, or elephants.
Even if every philosopher agrees that some property rights are part of the ideal system of justice, they won’t all agree in the specifics to having property rights. For example, Karl Marx argued that the means of production should not be owned as private property because it would give the owners an unfair amount of power. Those who own the means of production could end up being the rulers who oppress everyone else.
The invisible hand.
Adam Smith, one of the founders of capitalism, argued that a free market could be guided by an “invisible hand” in the sense that property rights, a profit motive, a free market, and competition can lead to a productive and abundant society; even if the government doesn’t intervene or regulate business—as long as people are rational and informed (133). This is one way that selfishness in the form of the profit motive can end up being beneficial to everyone in a society.
The “invisible hand” is caused by the “law of supply and demand.” If there is a demand for a product or service, people will compete to provide it, and we will buy from the person giving the best deal (133-134). The law of supply and demand can prevent price gouging (inflated prices), shoddy work, and perhaps even inadequate worker compensation (134). Businesses can hire the best workers, fire inefficient workers, and compete to hire the best workers through high compensation.
If the invisible hand argument succeeds, then we will have a good reason to endorse capitalism on utilitarian grounds. However, it’s not obvious that the invisible hand functions as well as we would like, even though it’s plausible that it does function to some extent. Competition and free markets might not always provide a fair, just, productive, or prosperous system. Even Adam Smith seemed to agree that at least some government regulation is a good idea. He didn’t seem to think the invisible hand to be infallible. Of course, capitalism doesn’t require a completely free market.
Challenges to capitalism
Challenges to capitalism don’t prove that capitalism is immoral; they are merely considerations for improvement and can be part of a greater discussion about the overall moral justification of capitalism. I will discuss four challenges to capitalism:
Capitalism leads to severe economic inequality.
There is a great deal of income inequality in our capitalistic system. “The disparity in personal incomes is enormous; a tiny minority of the population owns the vast majority of the country’s productive assets; and in the final years of the twentieth century, our society continues to be marred by poverty and homelessness” (134). Inequality has not only lead to poverty, but also oppression, inadequate education, and unequal opportunities. A child born in a wealthy family will probably have better opportunities, a better education, and better medical insurance than a child born into poverty.
Some defend capitalism from this objection in the following ways:
- The free market doesn’t cause poverty; it’s caused by government interference. However, “neither theoretical economics nor the study of history supports this reply” (135). Most economists and social theorists agree that redistribution of wealth through taxation and tax-funded public services have reduced poverty and perhaps even economic inequality (ibid.).
- Poverty and extreme income inequality can be reduced (or eliminated) in capitalistic systems through political action. For example, we can reduce poverty through taxation and public services (i.e. redistribution of wealth).
- Even if capitalism leads to poverty, the benefits of capitalism could outweigh the harms (ibid.).
Capitalism is based on a false conception of human nature.
First, capitalism depends on a conception of people as well-informed rational profit seekers who know how to make decisions to benefit themselves. However, we can’t always be well informed. Many of the products and services we pay for require a high level of expertise and specialization that we are unable to judge appropriately (135). We don’t have the time or resources to be as “well informed” and rational as the capitalistic system demands. Additionally, to make maximally rational and well-informed economic decisions requires us to eliminate our confirmation bias and fallacious forms of reasoning through scientific experimentation and peer review. We don’t always have the resources to have scientific experiments to determine which decisions are best, so we have little choice but to rely on reviews and testimonials (anecdotal evidence) and we will inevitably have a great deal of confirmation bias.
Second, capitalism can effect our personality and values by encouraging us to be “well-informed rational profit seekers,” but that’s a bad thing. In particular, capitalism encourages people to have the wrong priorities insofar as it makes us “materialistic” and greedy (obsess over attaining money and possessions), and insofar as it makes us selfish (and marginalize the importance of other people) (136).
Three problems with competition.
First, capitalism requires there to be competition, but it’s possible and desirable for self-interested profit seekers to eliminate the competition and seize as much power over society as possible. Capitalism has an insufficient defense against monopolies and the elimination of competition, and actually encourages these things. Additionally, capitalism greatly favors the wealthy over everyone else because the most productive businesses require expensive equipment for large-scale production (ibid.). It’s not possible for everyone to compete on a level playing field when the wealthy have so much more power and resources than everyone else.
The challenge to capitalism concerning a lack of competition has been widely accepted and “antitrust actions have sometimes fostered competition and broken up monopolies, as in the cases of such corporate behemoths as Standard Oils and AT&T” (137). However, “such actions have proved ineffectual in halting the concentration of economic power in large oligopolistic firms… Today more than a quarter of the world’s economic activity comes from the 200 largest corporations” (ibid.).
Two, our capitalistic political system favors corporations and the wealthy. Wealthy corporations lobby the government and donate to politicians in the hope to get favors in the form of legislation, tax loopholes, and other subsidies (government funding). Many call this “corporate welfare” (ibid.). For example, “[a]nnual taxpayer subsidies to agriculture alone run between $10 billion and $20 billion (and a total of $35 billion, if the higher prices consumers pay are included)” (138).
Some have estimated that there are around $85 billion worth of direct subsidy programs funded by the US government every year, the Federal Reserve recently gave out $9 trillion in “emergency loans” to powerful corporations, and banks have the right to spend money they don’t have due to our fractional reserve banking system.
Three, competition might not always be a good thing. There are “empirical studies establishing that in business environments there is frequently a negative correlation between performance and individual competitiveness” (ibid.). Sometimes cooperation is much more productive than competition. Additionally, rather than being motivated to attain external rewards (profits) or other external goals (defeating the competition), we are often more productive when we do what we enjoy or value for its own sake.
Moreover, cooperation is often more productive than competition.
When people work together, coordination of effort and an efficient division of labor are possible. By contrast, competition can inhibit economic coordination, cause needless duplication of services, retard the exchange of information, foster copious litigation, and lead to socially detrimental or counterproductive results such as business failures, mediocre products, unsafe working conditions, and environmental neglect. (138-139).
Capitalism leads to exploitation and alienation.
The wealthy sometimes “hold all the cards” and can refuse to hire workers unless the workers agree to work in disrespectful, unsafe, and/or underpaid conditions. Workers have occasionally worked in conditions comparable to slavery, such as many of the sharecroppers.
The wealthy can not only choose to treat workers as poorly as is legally possible in order to maximize profit, but the wealthy often feel morally justified in doing so. The power difference between the wealthy and workers often causes a rift in social status, where the wealthy think they deserve their wealth, and disrespect the workers because they are of a lower social class.
Moreover, workers often compete for jobs, promotions, and raises. This can cause dehumanization between workers who no longer see each other as people who deserve dignity and respect, but rather as the enemy. Workers who are more productive or hard working can be a threat to the livelihood of the other workers. A worker willing to work overtime without pay to get a promotion can end up forcing all other competitive workers to do the same to compete for that promotion; but such hard work can encourage workers to be exploited rather than respected.
Alienation is the psychological separation between two things. Two people are alienated even if they are in the same room when they see each other as external and separate. Rather than an enjoyable and fulfilling life, a life with alienation can be more depressing and oppressive. Employers alienated from their workers see their workers as a means to an end—a way to make profit, rather than as friends and fellow human beings. Workers alienated from workers can see other workers as a means to an end (a way to get products) or as the enemy rather than as friends or fellow human beings. Workers alienated from their own labor see their labor as a separate thing sacrificed for the necessities of life rather than as part of a fulfilling life or a reflection of oneself.
New problems capitalism is facing
I will discuss three problems the United States capitalistic system is facing.
The United States faces slow growth in productivity.
The United States is experiencing less economic growth than it did for a hundred years prior to 1973, and many experts believe it “reflects a declining rate of growth in productivity” (141-142). This can be, in part, because we haven’t been investing as much in factories and equipment. It’s not entirely clear why the United States has this problem and it’s not a universal problem found around the world. The lack of productivity is lowering our standard of living and could lead to lower share of international business.
Some people have suggested that the reduction in productivity could be caused by a preoccupation “with short-term performance at the expense of long-term strategies” (142-143). For example, we should be more willing to lose short term profits for long term benefits, and invest in long-term research and development (143).
The United States has a declining interest in production.
There are a declining number of companies focused on producing goods, and some companies have stopped producing goods (ibid.). Many of these companies are focused on marketing rather than production, and others are now middlemen who do little more than package and distribute goods made by someone else.
The United States faces changing attitudes towards work.
First, some have argued that the work ethic—seeing hard work as part of living a fulfilling life and enabling us to attain the American dream—is being lost (145). Only one out of three people accept the American dream, “down from 60 percent in a 1960 survey” (ibid.). Many no longer think productive work will necessarily “pay off,” and there is evidence that “Americans place work eighth in importance behind values such as their children’s education and a satisfactory love life” and have consequently allowed their professional lives to suffer in order to spend more time with their families (ibid.)
In addition, there are other changes in our values and interests that have an impact on business. One, people are no longer interested in factory work and want more fulfilling and less monotonous work (ibid.). Two, loyalty to employers is declining and loyalty to other employees is increasing (ibid.). Three, people’s jobs are often taking a back seat to their “personal needs” (ibid.). Four, employee sabotage and violence are on the rise. Five, theft, absenteeism, and low productivity is increasing as drug use at the office is increasing (ibid.).
We often take it for granted that capitalism is morally justified, but there are philosophers who prefer some kind of socialism after considering the arguments for and against capitalism. I have discussed many of those arguments here in addition to some specific problems the United States capitalistic system is facing today.
Update (9/28/2011): I added more information about the invisible hand argument concerning the assumptions the argument makes.