Chapter 4 – How the Rules of Capitalism Destroy the Lives of Billions

Why does capitalism create so much suffering? It is helpful to review the rules of capitalism, and understand how these rules work together to create so many profound problems that we see around the globe today:

  • The hundreds of millions of people living in slums
  • The billions of people living on less than $3 a day
  • The tens of millions of people living in refugee situations
  • The tens of millions of people on food stamps in the United States
  • The gigantic concentration of wealth occurring today
  • And so on….

All of these problems flow from the rules of capitalism.

The basic precepts of capitalism are seductively simple, and can be summed up in just a handful of rules, like this:

  1. Anyone at any time can create any product or service and introduce it into the marketplace. Usually people do this by creating a company. For example, a person could create a new company to sell pizza.
  2. A company can set any price for its product or service. For example, our new pizza company might charge $15 for a cheese pizza. However…
  3. The marketplace sometimes helps to determine pricing. We often hear the idea that companies will “charge what the market will bear” in relation to prices. If a company sets a price too high, customers should be less inclined to buy the product for two reasons: a) in the case of pizza, the customer can always make pizza at home, or can choose to eat something else instead of pizza, and b) there are many other places to buy pizza in the marketplace. These other pizza companies and other food options are known as competitors. If the price of the pizza does not “make sense” in relation to this competition, then customers will choose the competition instead, all other things being equal.
  4. Competition is therefore an important principle in capitalism. Competition is supposed to be the thing that keeps prices reasonable. If a company is charging too high a price in the marketplace, then customers should abandon that company, or new companies should form to sell the same product at a lower price.
  5. The other thing that can influence the price of a product in capitalism is a principle called supply and demand. This can be especially true for products known as commodities. The principle of supply and demand is seemingly simple: If demand for a product is low and the supply is high, producers should lower the price to increase demand. Alternatively, if demand is high and supply is low, then producers can raise the price to cut demand.
  6. The medium of exchange in any capitalistic system is money. A person or company earns money by selling a product or service in the marketplace. Then the person or company buys products and services in the marketplace with the earned money.
  7. One way individual people earn money is by doing work, or labor, for a company. A company that needs a task to be done by a human being will offer a job in the marketplace. The company will offer to pay money in return for performance of the task, and therefore becomes an employer. For example, if a company needs a human being to drive a truck, the company will offer a job where the task is truck driving. A worker will take the job and perform the task to receive money, and in the process becomes an employee. The employee is in essence selling a truck driving service to the employer at a price, also known as a wage, agreed to by both parties.
  8. The goal of any company in a capitalistic system is to generate extra money above and beyond the cost of production, which is called profit. So there is a total cost for producing the product and putting it into the marketplace, and then the price charged for the product, and the price is higher than the cost. Because the price is higher than the cost of production, the company makes a profit from each sale.
  9. A new product or service often comes into the marketplace in a disruptive way. That is to say, a new company often looks at the existing competition in the marketplace and introduces a new product designed to lure customers away from the existing companies in the marketplace. Example A: if the price for a product or service gets too high, a new company can try to deliver a better product or service at a lower price, usually by using some new technology or technique to lower the cost of production or consumption. Internet web sites are replacing printed newspapers. Internet streaming is replacing cable TV. Internet travel sites replaced travel agents. Example B: if an existing product’s delivery is annoying or cumbersome to customers, a competitor may be able to charge the same price (or even more) if its delivery process is streamlined compared to competitors. Blue Rhino did this with propane tanks. Netflix did this with DVDs. Uber did this with taxi rides. Google did this with search results. Ebay did this with auctions. And so on.
  10. Companies can change product offerings or prices at any time. This is often done to respond to competition, or to respond to changes in supply or demand. Example A: prices for crude oil change every day, and it is said that crude oil is a commodity product [ref] where the price is completely controlled by supply and demand. If a company finds a new supply of crude oil that is inexpensive to produce and brings this oil to the marketplace, there is now more supply and crude oil prices fall (assuming no change in demand). Alternatively, if everyone switches over to electric cars and the demand for crude oil therefore falls, then the price for crude oil will fall (assuming no change in supply). Example B: If a publishing company prints 100,000 copies of a book expecting easy sales, but then no one buys the book at its list price, a publisher will often lower the book’s price in an attempt to encourage more sales. This is also the idea when a store has a sale.
  11. The interaction between pricing, competition and new products in the marketplace – in an environment where anyone can try essentially anything – is said to create an invisible hand that guides the marketplace to reach good outcomes. Adam Smith introduced this concept, believing “an economy will comparatively work and function well if the government will leave people alone to buy and sell freely among themselves. He suggested that if people were allowed to trade freely, self interested traders present in the market would compete with each other, leading markets towards the positive output with the help of an invisible hand. In a free market scenario where there are no regulations or restrictions imposed by the government, if someone charges less, the customer will buy from him. Therefore, you have to lower your price or offer something better than your competitor. Whenever enough people demand something, it will be supplied by the market and everyone will be happy.” [ref]

Notice first: It all sounds so simple. Anyone can do nearly anything, which should lead to extremely high levels of innovation. The invisible hand will guide the economy toward good results for everyone. It is not uncommon to hear someone say, “competitive markets feel like magic.”

Also notice: you have heard all of these terms, and they are all part of daily life. We hear these terms all the time on the news, we learned about them many times in school, and we talk about them even in casual conversations with friends. We have all heard about money, profit, competition, supply and demand, “charge what the market will bear”, employees, jobs, etc. We all know about money, and we all have an intimate relationship with money right now. Money is as important as oxygen to us – without enough money we become homeless, and we all know it. We are all literally immersed in the rules and principles of capitalism. What we do each day, how we do it, what we buy, how we spend our time, and many of our thoughts are completely controlled by the rules of capitalism.

Also notice: you do not have any viable alternative to capitalism in your head. It is not like there is any economic system that competes with capitalism in any real way, where you have all of the rules memorized in your head and you understand the principles like the back of your hand. For example, it is quite likely that you have never even imagined a world where there is no money. It would be very easy to design an economy today that does not need to use money. Have you ever thought about it? Probably not. You have probably never even thought to think about it. We are so immersed in a system that uses money so ubiquitously – we may be unable to imagine any other way.

Also notice: Capitalism seems to have had some important wins in terms of innovation. For example, many of us in the developed world now have smart phones, along with ubiquitous electricity to support them. But please put these wins in context. While a small slice of humanity living on planet Earth can buy an iPhone, yes, the fact is that half of humanity lives on $3 a day or less [ref]. Seventy percent of humanity lives on $10 a day or less. Not only will seventy percent of humanity never touch an iPhone, they may not know where something fundamental like their next meal will come from. Such a gigantic disparity in human well being is not a win. It is demonic. What we need is a new economic system that favors innovation AND spreads that innovation out to every human on the planet.

The Absurdities of Capitalism

If you think about these rules of capitalism as a thoughtful, rational person… if you try to move yourself up, above our capitalistic system, and then look down on capitalism like an unbiased observer would… then you realize that many of the principles driving capitalism are utterly and completely absurd, and often lead to horrible outcomes. A slum is a horrible outcome – there is no question about this. Today approximately a billion people live in slums. Many of the rules of capitalism are bad right on the surface, and many are bad because of the side-effects, interactions and trends that they create.

The simplest example of this absurdity is profit, in rule #8 above. Why would any consumer want to pay more for a product than its cost of production? Why should a consumer have to pay more? Paying more than the cost of production automatically allows the concentration of wealth to occur. The idea of profit wires the concentration of wealth straight into capitalism from the very beginning. Why would we want that? And this is just one tiny piece of absurdity floating in the ocean of absurdity that we call capitalism. We will discuss the problems with profits further in Chapter 13.

Simply step back and think about the full list of insanity that directly results from capitalism. The list includes:

  1. Unemployment – Every adult or family in the economy needs a good job in order to buy food, pay rent, purchase electricity, and so on. Why should any adult who wants to work ever be faced with a “job market” that has no good jobs to offer? Why would we accept an economic system that creates this situation? People must have jobs to buy food and housing, but often the capitalistic system offers no jobs.  [see Chapter 14 for details]
  2. Ridiculously low wages – Ditto for the billions of people forced into the terrible jobs that capitalism usually creates – jobs paying only 50 cents or $1 or $2 per hour. A wage like this results in intense poverty for the recipient. Why would we accept an economic system that leaves billions of fellow humans in intense poverty? [see Chapter 14 for details]
  3. Poverty – The intense poverty that we see all around the world is a direct result of capitalism, caused by the terrible jobs (or no jobs) that capitalism prefers to create. Half of Earth’s population makes less than $3 per day as a result [ref]. Why would we accept this from the world’s predominant economic system? Why not design a new economic system that completely eliminates poverty? [see Chapter 5 for details]
  4. Slums – Ditto.
  5. The gigantic concentration of wealth – The purpose of capitalism is to create a gigantic concentration of wealth in the “wealthy elite.” But why do we want the “wealthy elite” to exist at all? Why accept an economic system that strives to create billionaires by stealing money from everyone else? [see Chapter 7for details]
  6. Billionaires – The existence of billionaires is a complete absurdity – a totally ridiculous outcome that directly results from the rules of capitalism.
  7. Asset capture – Asset capture is a powerful tool that billionaires use to concentrate wealth. It is absurd that the capitalistic system allows asset capture, yet this is how capitalism is wired.  [See Chapter 9 for details]
  8. Arbitrary pricing – Prices in capitalism are completely arbitrary. A company is free to charge “what the market will bear”, regardless of the cost of production – an absurdity that fuels the concentration of wealth. Why design the world’s predominant economic system to allow arbitrary pricing? Why not instead design a new economic system in which all prices are rational? [see Chapter 13 for details]
  9. Profit – Profit is an overcharge – typically 10% or 20% over the cost of production – that capitalism tacks on to every sale that takes place in the economy. No consumer wants to pay for profit, yet consumers have no choice under the rules of capitalism.  [see Chapter 13 for details]
  10. Dividends – Dividends allow companies to distribute the profits that they take from consumers, sending all of the profit to shareholders. Shareholders do no work to receive this money, and are usually the wealthy elite [ref]. It is yet another absurdity of capitalism fueling the concentration of wealth.  [see Chapter 7 for details]
  11. Recessions, Depressions – Recessions and depressions are a direct result of capitalism, and cause massive suffering by creating waves of unemployment throughout an economy. Why would we use an economic system that periodically causes massive suffering? [see Chapter 14 for details]
  12. Inflation – Like recessions and depressions, inflation if an artifact of capitalism that causes suffering by reducing the value of money. It is absurd to use an economic system that has inflation baked in, yet here we all are.

These 12 absurdities are the direct result of the rules of capitalism. Why should humanity tolerate, much less embrace, an economic system harboring this much insanity? It is time to replace capitalism with a new economic system that completely eliminates all of these problems.

Capitalism Is a Rube Goldberg Machine that Does Not Work

The “rules of capitalism” are supposed to create a rational economic system. The problem is that they instead create a Rube Goldberg machine which has a very strong tendency to deliver terrible outcomes for most people on the planet. How terrible? Simply look at the world that we actually live in, the world that capitalism has wrought:

71% of the world’s population lives on less than $10 a day…  Globally, the majority of people live on about $3 a day. [ref]

This is what happens when we let a Rube Goldberg machine drive the bus. You can understand the nature of the Rube Goldberg machine by looking at an article like this one…

Why American Workers Aren’t Getting A Raise: An Economic Detective Story

…where its befuddled author is trying to determine why capitalism has failed yet again. The article contains this quote:

Something has indeed gone very wrong with capitalism.  In a competitive market, if a company is making a lot of money, other companies will get excited by the prospects of high profits and will enter the industry and compete. Eventually margins decline as more competitors fight each other. That is how dynamic, capitalist economies should be. Something is profoundly broken with capitalism if corporate profit margins do not revert to the historical mean.

In his thinking, here is how one part of the Rube Goldberg machine is supposed to work:

  1. If a company is making a lot of money…
  2. Other companies will enter the industry to compete…
  3. The competitors fight each other (those are his exact words!)…
  4. And eventually margins decline

This is an explanation of how the “invisible hand” is supposed to work. His problem is simple: He expects this Rube Goldberg machine to work properly. He is ignoring the fact that it is a terrible Rube Goldberg machine, because he has been convinced by propaganda that the machine should work.  In his best case scenario, if this Rube Goldberg machine operates according to plan, then a bunch of companies “fight each other”, and  eventually  consumers  may  get the result that we want. Unfortunately, there are a number of important caveats before consumers get what they desire:

  • The people who run the companies desire an outcome (higher prices, more profit, more power) that is exactly opposite the outcome that is best for consumers.
  • Many companies often cheat and break laws to get what they want.
  • The fighting involves an enormous amount of waste and inefficiency.
  • Existing companies have huge, baked-in advantages over startups, meaning that it is not a fair fight in many cases.
  • Existing companies have absolutely no desire to see competition arise, and will do everything they can to squash competition.
  • It is in the best interest of companies to create as few jobs as possible, and to make those jobs as bad as possible. Therefore it is in the best interest of companies to reduce benefits, lower wages, eliminate unions, etc.
  • As we wait for eventually to happen, everyone in the economy is suffering. For example, in the U.S. health care sector, the rules of capitalism are killing people.
  • As companies gain more wealth and power, they are able to take control of governments to reduce regulations and shut out competition (a well-known process called regulatory capture).
  • And so on…

Think about how idiotic and absurd this all sounds. It sounds idiotic and absurd because it is idiotic and absurd.

In the next ten chapters we will look at many of the different absurdities wired into capitalism. With these absurdities understood, it will be much easier to imagine and understand a new economy that replaces capitalism. The goal of the replacement is to eliminate capitalism’s absurdity so that every human on the planet has a chance to prosper, rather than to suffer on $10/day or less.

To better understand the absurdities of capitalism, Jump to Chapter 5 > > > 

To begin learning about the new economic system, Jump to Chapter 16 > > >