Special Edition Fall 2023: Opinion: Demystifying capitalism
By Ella Tracy
Capitalism has become an easy scapegoat on which to blame economic inequalities in the United States. Frustrations are understandable when one considers issues like vast wealth gaps, high costs of living and systemic workaholism. Capitalist theories certainly perpetuate some of these issues. But capitalism as an economic structure is far more complex, with a fascinating history that intertwines with the Industrial Revolution, the U.S. slave trade and British Imperialism.
Philosopher Adam Smith published a book in 1776 titled “An Inquiry into the Nature and Causes of the Wealth of Nations.” The book addressed concepts like the specialization of labor and free markets. These are both pillars of a capitalist economy, so Smith is often considered “the father of capitalism.” But Smith was a philosopher; “Wealth of Nations” is a book of observations. By 1776, capitalist markets already existed.
Political economy historian Michael Sonenscher’s book, “Capitalism: The Story Behind the Word,” discusses how the emergence of commercial societies jump-started capitalism. Commercial societies are devoted to advancing commercial interests; in other words, innovating and making money doing it.
Commercial societies themselves were created when governments began prioritizing economic growth and higher living standards. It could be argued that commercial societies necessitated the Industrial Revolution, which sparked intense specialization of labor and consumerism. In turn, this produced free markets to allocate the newly available goods and services to consumers.
Adam Smith’s 1776 publication of “The Wealth of Nations.”
In the United States, it’s important to disentangle the political and economic definitions of capitalism. Capitalism took on political connotations after events like the Cold War, where communism — a centrally planned economic system with no private ownership and capitalism’s theoretical opposite — was frequently cited as America’s adversary. This led capitalism to take on an American, democratic association. Depending on one’s point of view, capitalism’s political meanings become negative if used as a hot-button word on which to blame social inequalities or massive firms that set high prices for necessary products.
Capitalism’s economic definition is devoid of political meaning. “When you study capitalism as an economics major, you are studying how society allocates scarce goods and resources,” said Dr. Kristine West, endowed professor in the sciences and associate professor of economics. “How do we as a society decide what to make and who is going to get what we make? Capitalism is one way that a society could settle on to make production and allocation decisions.”
West described capitalism as a free market economy where, “production and distribution decisions are made by individual firms and households interacting in markets.” Dr. Caroline Krafft, associate professor of economics, added that a capitalist economy involves, “private ownership of resources, such as physical capital or land.”
The history and definitions of capitalism are crucial for understanding why the United States economy operates the way it does. Smith’s “Wealth of Nations” publishing date of 1776 should ring bells for Americans. “The founding documents [of the U.S. and capitalist theory] were written at the same time, so they were very much in conversation with each other,” West said .
Krafft attributed U.S. capitalism to the country’s beginnings as a colony. “Colonies were designed to be an extractive capitalist model,” she said. The colonies started by robbing the Indigenous peoples of their land and siphoning the land’s resources to send crops back to Europe for profit. From there, the colonies developed with private ownership.
“You absolutely cannot disentangle [capitalism] from slavery,” West emphasized. “Slavery is such a violation of the assumption [that trade is always voluntary], and yet it is an integral part of the founding of our economic system.”
Interestingly enough, capitalism in a perfectly competitive market would work spectacularly if it weren’t for market failures, the economic term for inefficient allocation of resources. For example, the overproduction of goods leading to pollution is a market failure. Exorbitant health care costs, the underproduction of vaccines and scarce affordable housing are also outcomes of market failure.
Markets can also struggle with equity. “The market can do a good job at allocating, but we don’t love the allocation we end up with because we don’t think it’s fair,” West said. “For example, we might argue that the private market does a good job of allocating educational services, but we have reasons to prefer an outcome where everyone has access to education equitably.”
West warned against, “throwing the baby out with the bathwater” when grappling with market failures. Scrapping capitalism entirely is not the solution to societal and economic concerns. Doing so might cause more harm than good, such as decreasing business incentives that lead to innovation. West listed health care as an example.
“The profit motive that drug makers have that leads them to charge high prices for very important medications also inspires them to do research and development. [The question is] how can we keep the good that we get from markets and introduce some of the equity we get from central planning?”
Central planning occurs when an entity like a government steps in to make allocation more fair. Introducing central planning to capitalism can help balance the benefits and drawbacks of free markets. Governments can subsidize housing to combat rent prices. Policies like cap and trade or carbon taxes can preserve markets while limiting pollution. Funding for public infrastructure like roads is raised by government taxes. Antitrust laws prevent monopolies, where single firms control market prices. When central planning and free markets are combined, a mixed economy is created. The U.S. economy is not a pure capitalist one; our economy combines allocative markets with government intervention to correct for market failures.
However, it’s possible for two truths to exist at the same time. Even though the government works to distribute resources more fairly, we still see inequities. One notable causation is differences in initial endowments, or what people’s financial starting spots are. To change someone’s initial endowment, West suggested policies like taxes on inheritances or “investments in education to make sure all kids have access to the same human capital investments no matter where they were born.” Massive injustices in the history of the U.S. such as slavery or the genocide of Indigenous peoples are often cited as events that cataclysmically changed peoples’ initial endowments. Equity policies can also look at reparations to address these historic traumas.
Economic issues, then, aren’t necessarily caused by capitalism, but rather by market failures and inequities systematically woven into the history of U.S. institutions. Policy work and advocacy can help correct those failures.
Then, how can St. Kate’s students incite change? Step one is to complete your degree. West suggested that everyone should be an economics major “so [students] can think about what the rigorous tools of economics are as they apply to whatever issue you are passionate about.”
After graduation, one could secure a job to make large sums of money and donate to charitable organizations. A position in the corporate realm could give one influence over hiring practices or sustainability. A legislative position allows one to directly influence social and policy issues. One could also work for or create a B corporation, which allows one to have both for-profit and nonprofit missions. For example, one can “make people sustainable and durable clothes in an ethical way, but you’re still a company that’s trying to make a profit,” Krafft suggested.
Equity and sustainability are all possible within a mixed capitalist economy. Intentional policymaking through central planning can complement the unique distribution efficiency of a market-based economy. Advocacy is necessary, but through it, we can fill in the gaps of capitalism.
