Capitalism is a Broken System

Here is an odd confession from a libertarian (mostly) thinker.  Capitalism is a broken and flawed system.  It produces results of large disparities, and it creates inefficiencies in the economy.  And, that is exactly why I love it so much.  That is the very thing that makes it a superior form of economic system, and is the best option available.

Among the criticisms of capitalism is there is a sort of inherent unfairness, that wealth can become concentrated amongst some while others are less fortunate.  Of course, this ignores the fact that there are also classes of the wealthy in socialist and communist societies.  It’s just that in those societies, the wealthy are the ruling class rather than private individuals, and there tends to be a wider disparity between poor and rich with sometimes no existence of a middle class.  So, instead of calling disparities “unfairness,” it’s more accurate to consider them as the consequence of inefficient markets.

Capitalism is broken in the sense that it is not efficient.  Yes, these inefficient markets do tend toward fixing themselves without government intervention, but the inefficiencies do exist.  And, that is what makes it so great!  There is absolute beauty in inefficient markets.  Those flaws are what enable opportunities.   A disparity in wealth and the existence of classes create incentives for people who earn less to want to make more, and because people in capitalist/free enterprise societies are less restricted in their choices, they pursue more affluent lifestyles without having to leap over so many obstacles, as exist in more regimented societies.  A perfectly efficient market immediately closes gaps that makes better than average opportunities no longer available.  In other words, with perfectly efficient markets, everyone essentially holds the same amount of wealth, eliminating the incentives that produce growth in an economy.  Purely communist societies seek to eliminate inefficiencies through centralized planning, but those in power of such systems find it irresistible to not use their positions of power to grow personal wealth, thereby creating two classes, largely disparate, with little opportunity for most people to change their station in life.

As a practical example of how inefficiency in capitalism works to the benefit of nearly everyone who participates, we can look to the stock market.  The stock market moves on information – earnings announcements, forecasts, government actions, rumors, etc.  Because that movement of information is imperfect, there are opportunities to find stocks whose prices are below their intrinsic value.  A stock’s intrinsic value is derived from the present value of its future cash flows.  However, all variables that may affect those cash flows are not known to everyone, and no one has all the pertinent information, because the entirety of the economy has some sort of effect on each stock.  So, because the market is valuing such stocks in an inefficient manner, people can profit from them.  If perfect information were available, there would be no movement in stock price, because the intrinsic value of the stock would have been assigned with all information taken into account.  Because no one person has all the information available, it doesn’t matter who you are.  You have the opportunity to make money from investing in stocks.  Even small individual investors can get an edge on people who are insiders that have either not heard or not taken into account information you may hold.

Similarly, in a capitalist system, all goods and services are priced inefficiently, as is labor and capital.  This is why economists have differing predictions.  Again, there is an imperfect flow of information and no one person has all the information available.  So, opportunities are created for inequities in the pricing of all goods and services that allow people to accumulate different levels of wealth.  Some goods trade on prices out of parity with their value that allows for greater profits.  Some services sell at prices greater than their value.  Individuals who capitalize on these inequities grow their personal wealth.  As they grow such wealth, there is still more wealth to be made, and so they continue to contribute to the economy’s growth, creating even more opportunities along the way.

By this point of the article, I can hear the building frustration from those people who believe one person grows wealth at the expense of another.  However, this is not the case.  A capitalist economy is not a zero-sum game where one person has to lose in order for another person to win.  People enter into markets and pricing at different times and at different levels.  For example, let’s say you invest in XYZ stock at $50, and you sell it one year later for $100.  Good for you!  The person you sold your stock to had purchased it at a much higher price.  However, the stock may continue to grow, and he can also sell it at a profit.  You did not profit from him losing money.  The same applies to other goods and services.  You might profit from a disparity in the value of your labor, while another person enters the same pool of employment at a different time and either misses the disparity or also profits from it at a different level.  No two people begin their entry into labor markets in the same manner or at the same time, and so have different opportunities that are also influenced by their beginning station in life.  But because inequities exist, anyone can capitalize on them with the right timing and knowledge, regardless of who you are or where you begin.  Only in cases of force, fraud, and/or theft do people profit from the markets at the expense of others.

By contrast, economies which are socialist or communist tend to retain their inefficiencies.  Undervalued goods and services can, compared to capitalist societies, retain their devalued price.  Overvalued pricing can also remain in place.  This is because the flow of information is more greatly restricted through central planning.  Restricted freedoms that result from centralized planning also prevent people from capitalizing on opportunities.  The pursuit of creating a perfectly efficient economy is the very thing that causes many of the inefficiencies to remain in place, resulting in little opportunity to capitalize on those inefficiencies.  Imperfect people maintain imperfect information, and when there is a ruling class with a concentration of power, there is a vast imbalance of the flow of information.  Where a capitalist society allows all individuals to hold information others might not have, socialist and communist societies pool and concentrate much of that information to the ruling class, who are much more likely to profit from it than those who reside in the lower class.  By contrast to capitalist societies, your beginning station in life much more greatly determines your ability to profit from disparities.  Furthermore, these alternate forms of economy also grant the power of force, fraud, and theft to their regimes, thereby circumventing the natural workings of the marketplace.

So, to sum up the premise of this article, the greatness of capitalism is in its flaws.  The fact that it is a broken system is what makes it so great.  It is perfect in its imperfections.  As a natural consequence of those imperfections, wealth does naturally concentrate around people who are able to better concentrate information, and there is much unfairness.  However, it is that same unfairness that creates opportunities, even for those who are informationally disadvantaged.  In a true capitalist society, anyone can have a piece of information that gives him or her an advantage over those who may have a concentration of information.  Capitalism is inequitable, it is cold and harsh, and it is very inefficient.  And, this is what allows it to grow wealth for all of its participants more easily than any other system.  Even the poorest can climb the ladder as wealth grows overall.  The primary concern is to ensure that government does not interfere to create informational efficiencies through cronyism, concentrate and withhold information for itself, or acts through force, fraud, or theft, to restrict freedoms and information.  A truly capitalist system means government must not be involved, and that is the most crucial aspect.  The criticisms of capitalism usually arise in systems that actually aren’t fully capitalist.

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Danny Chabino

Danny Chabino has a background in operating small businesses. He has been involved in managing and/or owning the operations of multiple retail establishments, a sub-prime lending company, a small insurance company, a small telemarketing venture, and insurance consulting. In addition to these activities, he also has spent many years managing investments in stocks and stock options as a successful trader. He is the married parent of two adult children, living as a proud lifelong Oklahoman and a part-time redneck. Danny writes for the enjoyment and pleasure of sharing ideas and for the love of writing itself. His opinions skew libertarian, but he enjoys hearing open debate and listening to or reading of opposing ideas. As an odd confession, he personally detests politics, but enjoys writing about political ideals and philosophies.

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