Capitalism is still the best system
Updated: Nov 14, 2020
We may sometimes hear that capitalism is incompatible with the environmental and social challenges of the 21st century. But is replacing capitalism really a good idea?
What is capitalism?
To simplify, we’ll call capitalist economies those in which most services are provided by private companies. In industrialized countries, this includes most of what we buy: food, electrical appliances, furniture, cars, software, online services…
What is capitalism good at?
We have become accustomed to the benefits of capitalism and take them for granted. For instance, the fact that we can find many goods in stores without any shortage is in fact the result of an optimization miracle. The production of almost anything we buy is in fact the work of hundreds of freely interacting people. Even a simple pencil requires a tremendous amount of economic interactions as this video explains.
The king of optimization
Competition and profit-seeking push each company to find the most economical way to satisfy their customers’ needs. All these decentralized decisions lead to producing the right amount of intermediate goods along all production chains, up to the final goods sold to customers.
When the Berlin wall was still separating the city, we could find well-filled supermarkets in the West, whereas in the East there was a small choice of products and frequent shortages of entire product types.
Capitalism provides a framework in which thousands of individuals can try new ideas of products and services. Look at everything you have around you! We are the heirs of thousands of innovators who have pushed the boundary of science and technology, allowing us to live in our modern comfort.
On the opposite, a centralized committee would be very bad at exploring millions of different ideas. Most new ideas are originally looked upon with skepticism by the public (eg. people were originally afraid of steam-powered trains). Most ideas fail in fact, but a few succeed and shape the future. Capitalism allows each one to try to sell their new idea, and then the “natural selection” by customers selects the best ideas.
But, you might say, even in capitalist countries, some services are provided by state corporations and actually work well sometimes, don’t they? Yes they do, but all these companies have become state-owned monopolies long after the initial innovation was made and only after they became requested by the people to guarantee access to everyone. Electricity production or railways are such examples. They have been nationalized in some countries, but only when they were already widely accepted and the public was convinced of their usefulness. But when these inventions were new, it was the framework of the free market that allowed them to succeed.
To each according to their preferences
“From each according to his ability, to each according to his needs” is a communist motto describing an ideal society. A planning by public committees is supposed to plan the production of what people need. But needs are subject to preferences. Even obvious needs like food offer many different choices because everyone has different tastes or allergies. A centralized committee may certainly decide that rice and bread are necessary, but maybe not coconuts or bananas. If you like them, that’s too bad for you!
A capitalist economy does not ask you to justify why you want to buy something. Your reasons might be irrational, related to a passion you have, which it might even be embarrassing to discuss in public.
Drawbacks of capitalism
You might say: OK, there are good things with capitalism, but there are serious issues too. What about global warming and the massive extinction of animal species? And rising inequality? The rich get richer and the poor get poorer. Isn’t that capitalism’s fault?
Today, the main critics on capitalism are:
Destruction of the environment: In economics, this is a general issue called negative externalities, which is when the production of a good or service can impact negatively people which are neither the producer nor the consumer. This is the typical issue with pollution. For instance, an electricity company using coal as its power source provides a good service to its customers with reliable power at a cheap price. However, coal generates a lot of pollution. If customers don’t care about it, there is no incentive for the company to switch to a cleaner fuel.
Too much inequality: Capitalist opponents argue that it produces too much inequality and leaves a part of the population in misery, without any access to essential services like housing or medical care.
In discussing the issues of capitalism, we could also mention the emergence of monopolies, the recurrence of economic recessions or the too low production of some public goods, but I have chosen here to focus on the main attacks against capitalism by its radical opponents.
Let’s imagine a communist system in a democratic country (which doesn’t exist in practice). In theory, it could solve the two main issues with capitalism:
If most of the population cares about the environment, politicians will have an incentive to ask state corporations to produce in an environment-friendly way. Of course it’s not magic, and if the population doesn’t care, we will have the same problems as with capitalism. For example, if electricity is produced by a state company from coal, politicians will have an incentive to switch to a cleaner power source only if the population is ready to accept more expensive electricity bills.
Inequalities can be limited because the government can define salary grids for state companies. Even in capitalist countries, wage inequalities tend to be lower in state companies.
Problems with capitalism can be fixed
Until there, it seems that the two systems have both advantages and drawbacks, and that the choice between the two is a tradeoff. But in fact, the issues with capitalism can be fixed (and are often fixed in democraties), while its advantages are exclusive and cannot be imitated by communism.
As long as damage to the environment is concerned, many solutions exist like regulation, taxes on polluting activities or “cap and trade” systems, to cite only a few. These methods have been successfully applied in the past: We got rid of CFC gases which caused ozone depletion, removed lead from gasoline and paint and phosphates from laundry detergent.
The issue with economic inequality is an never-ending debate, but most democracies have some form of welfare state in place, with medical insurance, unemployment insurance, minimum income, etc. that prevent the worst misery. As long as rich people are concerned, these democracies also have some progressive taxes for partially re-distribute wealth.
Advantages of capitalism are “exclusive”
Unlike the issues with capitalism which can be fixed with public intervention, it is impossible to fix the issues with communism.
Innovation and a constant search for new ways to satisfy customers require the possibility to explore new ideas and try to sell them. Many will fail, but it is this freedom that makes progress possible when it succeeds. For this to be possible, individuals need the freedom to create and manage companies, which is the definition of capitalism.
The test of reality
We should not forget that advocates for communism really tried, in good faith, to improve the population's well-being. Many communist governments like the one of the former East Germany (GDR) were convinced that they were fighting to improve people’s lives and tried really hard to make their economy work.
The example of former West and East Germany is particularly interesting because it is almost a real-world scientific experiment: Both countries started with similar conditions like an educated population with a similar culture and similar infrastructure (actually it was both partially destroyed in both countries after WWII).
Although West Germany was not perfect, it reached a living standard similar to the USA and incomparably better than East Germany. Even a poor citizen in West Germany enjoyed a better life than an average citizen in the East. For instance, it is taken for granted in the West that supermarkets are full of varied goods of each sort, while there were frequent shortages in the East with for instance no fresh product at all some days.
The best proof of East Germany's failure is probably that they built a strong militarized border (and the well-known Berlin Wall) to prevent East Germans from escaping to the West. Before it was built, more than 600,000 East Germans had fled to the West. Sadly, the militarized border was mostly successful at preventing people from escaping, as they used radical measures like automatic booby traps and anti-personnel mines to kill anyone who tried to cross. This is probably the best proof that there was something wrong with communism.