Capitalism's Pros and Cons

Amateur economics for the Anthropocene

Followers of Pose Ponder know I’m focused on how we humans might hope to navigate this new era named after our species and try to be better. Most concern with the Anthropocene goes to reporting on or trying to tackle issues of climate, energy, biodiversity loss, resources and waste, agriculture and land management, and planetary impacts (weather, fires, melting poles, rising sea levels). Getting up to speed on the science, trying to sort out the journalism and technology, figuring out how to reduce your personal carbon footprint, worrying about the ethics of your investments and what big corporations are doing.

Everybody who cares pretty much agrees we shouldn’t continue with BAU: business as usual. There needs to be both personal and society-wide response of some kind. But how to break out of the Usual?

The root cause of the Anthropocene is human population growth and technological-economic growth, with all the concomitants that go along with them: geographic spread and intensification of resource acquisition, massive land use, industrialization, pollution, disposal of waste. It’s economic activity that supports developing human lifestyles planet-wide, which is driving change at scale. Take your pick of time frames as to when it all started in earnest: with hunter gatherers spreading to every continent? the rise of agriculture? globalization in the Age of Exploration? the industrial revolution? the emergence of nuclear power in WW2? true globalization only late in the 20th century?

In planetary terms, time periods like these are all blips. From the human historical standpoint, sustained change may have started only as late as the concluding decades of the 19th century. So says

Brad DeLong

in his 2022 book Slouching Toward Utopia, which I’m currently reading.

That means: anyone trying to get a grip on the Anthropocene needs basic Economics 101. DeLong tells the story of the long 20th century as economic history, from 1870 through 2010. He employs a clever juxtaposition of Hayek and Polanyi as the theoretical geniuses telling two versions of the development story, a back and forth between sheer growth (Hayek) and an inevitable pushback against it when human rights, justice, and fairness are encroached upon a bit too much (Polanyi). As DeLong puts it, Hayek’s motto is, “The market giveth, the market taketh away; blessed be the name of the market.” Polanyi, by contrast, proclaims, “The market is made for man, not man for the market.” (See Souching ch. 3.) I’m not finished with the book, so I won’t draw any final conclusions. But while I certainly appreciate the Hayek-Polanyi juxtaposition as analytical framework, I do wonder if DeLong conflates Polanyi with Progressivism. That is a topic for a future post.

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In any case, with that set-up, how can a layperson think about markets, capitalism, democracy — our BAU framework? It’s got us to where we are, in economic terms, for both good and ill.

The Pros

There are four giant positives I see that should never be lost track of when thinking about markets and capitalism.

First, markets are efficient. The price mechanism, without any central planning, when left alone, allocates resources such that suppliers produce supply to meet demand. This is Hayek’s (and Milton Friedman’s) rigorous assertion, the foundation of classical and modern microeconomic orthodoxy.

Second, exchange is voluntary and in theory pareto optimal. It’s non-coercive. Markets are just there. They’re free. No one has to participate, on either the supply or demand side. No one forces anyone to buy or sell, or to set a fixed price. If two rational actors decide to make a deal, they come to a mutually satisfactory agreement. Theorists have shown it will be the optimal solution under the circumstances.

Third, Markets aggregate automatically in such a way that small scale actors doing their thing, making exchanges according to self-interest, will scale up to overall social benefit. This is Adam Smith’s famed “invisible hand.”

Fourth, economic history — and the emergence of the Anthropocene era — shows that “billions have been lifted out of poverty” over the last century through economic growth, capitalism, free trade, and global American leadership. That’s how the story goes, and it must be at least in part true, because billions have been lifted out of poverty. Global indicators of human well-being have improved over the last American century.

All the historic record-breaking achievements should not be underestimated. In all past ages, unless you were part of a tiny aristocracy, the 1%, and even then, your life would have been, as Hobbes put it, nasty, poor, brutish, and short. No need to limit to a hypothetical state of nature. Virtually everyone lived like that for all of human history, and we do not want to go back.

Whatever adjustments to BAU are necessary, let me repeat, we do not want to go back. Smith, Hayek, Friedman, and company need to continue to have their say. And good Anthropocene humans need to listen. Not swallow whole uncritically, not lapse into ideology, but listen nonetheless. Good Anthropocene humans are obliged to balance theory with history, hard data, practical wisdom and massive doses of prudence.

The Cons

Hayek always argued that whatever flaws or failings a free market may have — and he was certainly challenged on the point — trying to fix it would make it worse.

It’s certainly possible to acknowledge the imperfections of markets and capitalism and still advocate for leaving them be. The thought process has to proceed in two stages: first diagnosis, then treatment. The first stage, diagnosis, is not terribly hard. Whether treatments should be applied, and of what kind, based on likelihood of success, expected side-effects, costs, fallout — is a second, separate step.

Keeping that in mind, here’s a diagnostic list of market failures, the cons. I’m compiling it for reference and as an attempt toward mental clarity when trying to think through the economic side of Anthropocene issues.

First, markets are as efficient at doing bad things as they are at doing good things. They are utterly value neutral. It basically comes down to what people demand. If they demand sex, drugs, war, they can get it. There are cases for which we would as soon have no market, or as inefficient a market as possible.¹

Second, our existing economy is linear, not circular. Capitalists take resources from the earth, process and manufacture them to produce goods people want to buy, and then consumers throw those goods away when they’re finished. The process goes in one direction. There is little demand, and little design on the front end, to close the loop, to stop taking resources continually anew, to stop wasting and start refurbishing, recycling, reusing, remaking — or, to keep goods in use for much longer in the first place (for example with a right to repair).

Or capitalists organize workers (labor) and machines (technology) to offer services and data/information, that people also want to buy. Linearity is less of a problem in service industries, in terms of material waste, but we throw away incredible piles of technology waste utilized in information processing and knowledge work. Energy use by data centers is astronomical in proportion. Value creation is human intensive in these industries, but who benefits? Who creates data, and who reaps from its monetization? Then there are the consumers. Are they free in their demand, or are they addicts as well?

A circular economic paradigm will design well in the first place, source responsibly, create genuine value for consumers (maybe regardless of unfree demand), and will minimize waste, including the waste of human time, mental health, and creative capacity, all easily lost to exploitation of attention and focus.

Third, the true costs of resources, and costly fallouts from environmental and social impacts are inadequately accounted for in market price mechanisms. Classically known as externalities, market failures of this type mean consumers aren’t paying the true price, so demand is skewed. Suppliers, too, aren’t incorporating true costs, and they are happy to use political power to continue not having to pay whenever possible. Or, globalization allows for the possibility of shipping problems elsewhere, sourcing materials and labor from abroad on the cheap, exporting risks and shifting cost burdens. Developing populations and environments are easily exploited when basic protections for people and land are not in place and true costs environmental and social costs are not counted. And yet in domestic market terms, exploitation can sound like innocuous “competitive advantage.”

Which brings us, fourth, to Karl Polanyi’s critique. Land and labor become commodities in a market system. Markets are disembedded from life. Think of it this way. A commodity is a pure stock of something, with numbers attached, say quantity and price. (Supply and demand curves meet, and deals are done, when quantity and price match up.) But real people can’t live when wages (the price of their labor) goes below a certain level, the living wage. Land may be more “valuable” clearcut than kept in an intact ecosystem, even though the loss of the latter is near permanent. It’s not a stock easily replenished. Markets are value-neutral, and they only have sufficient information for the very short run, which is valued highly due to uncertainty and lack of information about the long run. This is commodity thinking, which markets rely on to work. In reality, there is no such thing as generic “labor” or “land.” They aren’t infinitely quantifiable stocks or stores. They aren’t abstractions disembedded from real life. It’s always this person working, with unique skills and talents and knowledge. It’s always this land that is “property” belonging to this owner — which wat some historic moment was taken out of the commons, landed places where local people (ideally) made prudential, cooperative use of it. Not every aspect of human life — much less plant or animal life — can be managed by markets. Not everything is commodifiable, certainly not without massive injustices ensuing.

Fifth, even Milton Friedman understood that markets can operate only on top of set rules of the game.² Friedman mentions no deception or fraud, but “the rules” also include things like secure property rights, freedom to trade at will, enforcement of contracts, stable money supply, and access to capital for investment (i.e. banks). One might add relative peace and social stability, safe transportation, the ability of workers to move and migrate, including across borders. There are all kinds of assumptions built into the idea that markets can operate. The devil is in the details for all of them.

Sixth, markets do not operate according to the principle “one man, one vote.” They aren’t democracies. Capitalism requires capital, to create supply. This means there has to be excess money somewhere in the system. “It takes money to make money.” Capitalists thus necessarily come from the (relatively) wealthy class. Similarly, on the demand side, if you don’t have money, or at least the ability to offer your labor for wages, to make money, you can’t buy anything. Your demand doesn’t matter, even if it’s for simple bread to stay alive. (This is part of Polanyi’s point, that labor is not a mere commodity whose quantity can simply rise or fall according to market needs.) There may even be an innate built-in trend of capital, such that wealth inequality increases over time (Piketty’s R>G), which will lead eventually to social-political instability. Finally, wealth does not come merely with economic power to supply and demand, but also with political power, i.e. the power to influence the rules of the game. The wealthy can use the political system to rig the market in their favor, and there is every incentive for beneficiaries of the status quo to influence the rules in such a way that it continues to favor them. The wealthy desire to maintain the system that has made them wealthy and successful. The poor, on the other hand, do not have resources, by definition, and cannot prevent being made continually worse off by the system.

Finally, even as true costs that come over the long run (always “discounted”) are seldom adequately factored in, markets in any case can never adjust immediately with no time lag, even given a rapid and improving pace of modern communication, transportation, and so on. Time is not an infinitely malleable commodity calibrated for market convenience, either. Crops grow seasonally and no faster. Mines decade decades to come online. Human life spans are in the decades, affecting populations that supply labor, human capital (training and education), and demand. Ecosystems replenish over centuries or millennia. Species that go extinct will never come back, and new biodiversity takes millions of years to evolve. In short, reality is constrained by time, and markets are oblivious.

Markets are indeed crazy efficient mechanisms that do one thing, and do it very, very well. In the last century they’ve produced marvels of human advancement — and a lot “creative destruction.” They’re also in large part theoretical constructs. Their beneficial operation relies on so many assumptions that don’t actually inhere in reality. Capitalism and markets have enabled humans truly to escape the economic, population, technological, and energy constraints of history, but they don’t have divine power to overcome every possible geological, physiological, and biological limit.

That’s still a lot of cons.

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This has been my inexpert, amateur assessment. Please, if you’d like to add other pros or cons, or constructively correct any aspect of my summaries, I appreciate the input.

The floor of the New York Stock Exchange

1. Collectively speaking, would interference or regulation of markets for vice or moral evil be a majority imposing on a minority? Or a minority imposing on a majority!? Would it be paternalistic, moralistic, against “moral progress” in some domains? If market liberalism (libertarianism) were curtailed — might a curtailment of libertinism ultimately promote true freedom in the end? Indulging passions, vice, and addiction isn’t indicative of genuine freedom. Then again, Bernard Mandeville, a rather notorious figure in early economic thought, wrote that without private vices there would be no public benefit. Make everyone virtuous, and economies will collapse! In any case, markets can’t decide these things. They’re mere mechanisms, value neutral.

2. Quoting from his 1962 book Capitalism and Freedom: "there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” (Friedman doctrine at Wikipedia.)