Thinking About Free-Market Capitalism

These days if I read the news or any analysis about what’s happening in the world, I’m struck by what a miracle it is we humans haven’t burned it all to the ground already. This whole thing could have been charred dust by now, easily. It’s hard to run a mass society apparently and there are some real jerks and dumbasses out there; many of them in charge and the rest complicit or colluding unconsciously. There must be something pretty resilient about people to explain why society hasn’t already collapsed in my view. My friend @noelc painted the picture this way: society seems to be under the effects of an accelerant with technology’s progression and it wouldn’t be hard to imagine the car careening into the ditch at these speeds. Maybe the system actually works pretty well since it hasn’t collapsed entirely yet? I find this notion immediately contrary to my typical point-of-view, but I’m compelled to look into it.

It’s easy to point fingers at problems of course, and frankly quite enjoyable. I love doing that. It’s even better when you really know what you’re talking about though, and I want to make sure I know my own opinions on the economic principles that theoretically operate much of this system. This is an essay about me going beyond finding fault and trying to figure out how I feel about the economic system that runs the Western world, as I understand it. Others know a lot more about this than me, but I can’t rely on the experts to tell me how I feel.

My starting place is not very “market-friendly”. I want all kinds of leftist big-government spending programs and I’m pretty disgusted by the lack of care society shows for the underprivileged. I’m also writing from a US perspective, so I hope its better other places and I know its worse in still more locations. Social services like universal single-payer health care seem like no-brainers to me, free or way-cheaper college education, make-work programs; especially if for public transit or public housing infrastructure or space travel; universal basic income sounds like it could be worth trying—stuff like this gets me excited about what we could do collectively rather than what I see actually happening. So what is a bleeding heart liberal like me supposed to do with the ideas of capitalism that I see value in, that I think are working at making some good changes and notable contributions to modernity? Typically these notions are painted as opposing one another. On the one side: fans of the free-market and on the other side, socialists.

I’ve probably already lost some people by admitting I see some value in capitalism. For me it’s true though. I look around and see tons of evidence that free-market capitalism really works; technology these days is amazing, cities are growing like weeds and building amazing skyscrapers left and right, and it costs almost nothing to saturate your house with wireless internet, install a tv in the back of your headrest, or order an item delivered that was manufactured a couple days ago on the other side of Earth. I’ve done video chats with people literally on the other side of the earth for years as well. Things are pretty amazing and companies are working really hard to out-do each other in many innovative ways. Allegedly the profit motive inspires this work.

From my perspective, our economic system has done all these things; but it clearly hasn’t done everything I value either, like protect the damn environment or reduce inequality. What’s up with this system that can be so effective in some areas and so ineffective in others?

This essay is inspired by a voice memo I left myself back in 2010. Let me see if I can work through three main points. Before I start, let me clarify what I mean by free-market capitalism. Essentially I think about it as the system that encourages individuals and companies to seek profits and says that the forces of competition and demand will serve to optimize this system’s outputs for the best mutual benefit. Somewhere in there ideas like total knowledge allowing all participants to act rationally, low barriers to entry, and other concepts I’ll get into are included. I guess I need to brush up on my basic knowledge of economics, but that’s what’s coming to mind.

Anyhow, so that’s the system, but why does it work to make cool things I can buy and huge profitable companies but not to protect the environment and care for society’s overall health? Here are three problems I can think of:

1. It’s Based on Questionable Assumptions

It’s certainly fine for models and theories to generalize significantly to try to make a cleaner sense out of a messy reality. Those underlying generalizations need to be inspected up close though to see if they are accurate or create problems with the overarching theory. Here are a couple of those assumptions as I understand them:

Low Barriers to Entry for Competitors

Competition is a key factor for why Free Market Capitalism should theoretically create equitable outcomes in my understanding. The presence of competition prevents sellers from overcharging buyers in the marketplace because in theory a competitor would be willing to step in and undercut the exploitative pricer and all the buyers would go over to this new competitor. Then the original seller could lower their prices or just lose all business.

Fine, but what if it is not possible for a competitor to enter the marketplace? Things are pretty complex these days. Anyone could probably get their hands on bulk wheat to sell, but I think it’s a little more complicated to acquire integrated circuit boards or create a global supply chain to manufacture self-driving taxicabs. I understand that each level of these complex structures should also be subject to market forces and that a huge global marketplace should create sufficient competition at all levels in theory, but I suspect there are enough edge cases to make it as likely that the theory doesn’t occur as does. When Toshiba invented a new 1.8” hard drive around the turn of the century, Apple bought literally all of the production to create the iPod. It took years for anyone to figure out this product was generating significant profits, but with all the production locked up they couldn’t do anything about it anyhow. There are now a few private companies trying to enter the space rocket business; conveniently they’re all funded by billionaires. That’ll never quite be an easy market for competitors to enter which means in many cases even the basic principle of competition cannot be presumed in the market.

Full Knowledge and Transparency

After the existence of competition, transparency and access to information is another basic concept in market economics. Consumers will be able to find out what competition is available. The example that was taught to me in microeconomics back in the late 90s was the seeming paradox of advertising expenses assisting a low margin supplier and helping reduce overall prices through increased competition. The industry in question was the prescription glasses market, where new entrants were advertising to let people know that they didn’t have to buy expensive glasses right from their optometrist’s office, they could just take their prescription to LensCrafters and choose from a wider selection of cheaper glasses. The surprise in this example gets at the fault of the theory–we presume advertising is designed to obfuscate the truth and manipulate the behavior of consumers because it often is. This challenges the notion that consumers can enter the marketplace with clear eyes and make rational decisions based on access to competitive information. Instead we wander around with our emotions manipulated in a unlikely attempt to separate ad-copy from truth and discover occluded information only through dutiful and time-consuming research. Mattress makers famously brand products exclusively for different distributors so no direct comparison is possible. So even if competitive products could be made despite high barriers to entry, the mass of consumers might not be able to tell what the hell was available to them anyhow. That’s a pretty big ding in the alleged justice possible from the free market.

2. The Drive to Externalize

Here’s a bigger problem. I actually suspect that a market might be able to serve all the needs of humans pretty well if only it was possible to do calculus on all the myriad factors and variables and make sure they were accounted for. Big factories wouldn’t pollute for instance if they had to pay the clean up cost; they’d have an incentive to find other ways. Sounds good. Over here in reality though, if you can conveniently leave a cost out of the equation by externalizing it, you win. It’s easier and better for you. Everyone would take that chance unless they had some strong moral compulsion to do something differently. Sometimes shame can be that motivator, but too often these shortcuts can be done in secret so no one finds out.

Healthcare is another huge one as I see it. We don’t have to create a world where living a sane life is possible, none of us have that responsibility. Mental health, family conflict, and more are the same. Individuals can bear the cost to that and the economic system counts the costs of servicing these problems as a net gain. The actual undesirability of these issues is not assigned a value. It seems to me like either the government solves these issues, the government mandates organizations solve these issues, or they just don’t get solved. Too much of the latter is happening. Voluntary benefits seem to only work for people whom companies have to compete to employ.

3. The Profit Motive

In this whole deal, the profit motive is the part that is just too sacrosanct for the good of the theory of free-market capitalism as far as I’m concerned. It just encourages efforts to undermine absolutely every other important aspect that makes the theory theoretically a functional system. The opportunity to make a profit is what drives one to fulfill a demand and deliver value, but it also inspires deceptive advertising, paying off corrupt regulators, eliminating competitors, dumping toxic chemicals into the water supply, and any other manner of ways to undercut what would be good for other actors, the larger system, and the world at large.

I think that’s the main concerns I’ve been carrying for 8 or 9 years. Is that all obvious? What counteracts these things?

If I had more time I would’ve liked to write this with 60% fewer words at the beginning and more examples at the end. I don’t though.