The Limits of Capitalism

                                                                                                                              July 2011

It has long been conservative gospel that the “free market” cures all ills and that, as Reagan famously (or infamously) said, government isn’t the solution; government is the problem.  As an environmental economist, it’s obvious to me that this is the sort of thing ideologues say when they cannot be bothered to actually think things through or consider the evidence.

The “free market” does not cure all ills, it’s almost never entirely “free,” and, if left to their own resources – that is, if left completely unregulated – corporations can do enormous damage to the freedom of the market, to the environment, and to the public good in general.  There is nothing in the incentive structure that corporations face in a free market that would cause them to consider the public good when it is at odds with their own self interest.

It’s not that capitalism is immoral; it’s amoral. There’s no place in the incentive structure of capitalism for moral considerations.   It’s not about optimizing social welfare; it’s about maximizing profit.  There’s nothing wrong with trying to maximize profit, and there’s a lot right with it. But if profit maximization is the objective, and it conflicts with some public good or it inflicts great harm on some group, then the “free market” will not, on its own, try to correct the problem.  There are plenty of examples of this, and of cases in which it was up to the government to step in and try to protect the public good – regulating against child labor; regulating to make sure products are safe, the air we breathe is clean, and our drinking water is safe to drink, to name a few. There really are times – and plenty of them – when the “free market” is the problem and government is the solution, despite the mindless incantations to the contrary. Unfettered capitalism can create big problems that it is ill-equipped to solve.

For example, profit-maximizing producers treat all inputs to production in the most cost-minimizing way possible, disregarding any negative externalities (read: unpleasant “side effects”) whose costs they do not incur – like pollution. When industries are not charged for polluting, they have no incentive to try to reduce polluting emissions, and they don’t.  Instead, they choose the lowest cost approach, which is to spew their pollution into the air we breathe and the water we drink. In fact, there is a disincentive not to do this. If one company decided to reduce emissions out of the goodness of its corporate heart, but its competitors did not, this would put the “good” company at a competitive disadvantage. So unless everyone is (forced to be) good, it’s not in any individual company’s self interest to do so.

Treating all inputs to production in the most cost-minimizing way possible has, in recent decades, come to mean ignoring that some “inputs to production” are actually sentient beings.  The extreme suffering inflicted on animals raised for meat or dairy as part of our über-efficient modern “factory farming” system is surely a negative externality.  “Factory farmed” animals are raised in truly revolting circumstances their entire lives until they are slaughtered in an even more revolting manner. Their suffering – and they surely do suffer – saves the factory farmers the cost of treating them in a more humane manner, and that cost savings is passed on to the American consumer.  But the animals live so confined and crowded together in their own filth that they must be continuously fed antibiotics to keep them from being sick. Aside from the dubious ethics of treating animals so inhumanely, this is becoming a public health crisis in the making.  On its own, capitalism cannot effectively deal with this problem.  If a factory farmer decided he could not in good conscience treat his animals this way anymore, his costs would rise and so, of necessity, would his prices.  He would quickly be relegated to the tiny (but committed!) market for meat and dairy from humanely treated animals.[1]

But negative externalities are not the only problem that the “free market” cannot solve on its own. Without some mechanism that is external to the “free market” (i.e., government regulation), capitalism tends towards the concentration of wealth in the hands of fewer and fewer companies and individuals. Much has been written on this and on the negative effects of market concentration and income inequality when it becomes too severe, as is currently happening in the United States.[2]

But perhaps the greatest danger of unfettered capitalism is that the concentration of extreme wealth in the hands of a few individuals and/or the “hands” of a few big corporations (“who” perhaps do have “hands” since they’re treated legally as “persons”) gives those very rich entities the economic power to “buy” the political power with which to protect and enhance all that wealth. And buy power they do.  Armies of lobbyists are in the service of the rich – big corporations and industries, in particular – to see to it that Congress does not enact any laws that could cramp their style or put constraints on their ability to conduct their businesses in such a way as to maximize their profits, regardless of any bothersome negative externalities (such as, in the case of the financial sector, bringing the entire global economy to its knees).

Starting with a focus on the looming public health crisis brought about by Big Agriculture’s practice of extensive reliance on antibiotics to counteract the horrendous conditions under which animals are now raised, Johann Hari describes the confluence of all of these “ills” to create one “Big Sickness” that threatens to turn once-vibrant democracies (“rule by the people”) into plutocracies (“rule by the rich”):

“It might seem strange that governments all over the world are taking such a gamble with public health, in the face of the best scientific advice. But Big Agriculture has armies of lobbyists and open checkbooks, while the people trying to protect the public have only the facts and reason and truth on their side. The squandering of life-saving antibiotics is one example of a bigger trend hijacking global politics. Small groups of rich people, determined to maximize profits, are buying or bamboozling politicians into serving their interests and into ignoring the interests of the vast majority of the population. This is the trend that is making it so hard to (say) re-regulate the banks to prevent another global crash, or prevent the unraveling of the climate.”[3]

Johan Hari is, of course, not the only one to have noticed this trend and its effect on governments’ ability to deal with serious problems. And the problems are serious indeed.  For example, although there is still substantial uncertainty, scientists are beginning to suspect that climate change is happening faster than previously predicted and that the consequences may be more dire than previously thought.  The consensus among the scientists that climate change is real and is largely human-caused is almost universal.

But it doesn’t seem to matter, because the politicians, at least in the U.S., aren’t listening – and seem steadfast in their refusal to listen. The reactions of politicians in the United States range from accepting what the scientists are saying but doing nothing about it to ignoring or denying climate change.  Nowhere in the political realm do I detect anywhere near the sense of urgency that is being shouted from the scientific realm.  Almost the entire Republican Party has either denied climate change or flat out refused to do anything about it.  Why, one wonders, might that be?  Could it be that they are all bought and owned by the industries that are among the biggest contributors to climate change? Those industries that rely on a continuation of current production and consumption patterns that contribute enormously to climate change – Big Oil and Big Agriculture, for example – have amassed great wealth which they’re now using to “buy” politicians to “represent” them in Congress.

Perhaps that sounds too cynical, but given the parameters within which both corporations and politicians currently work, it could be viewed as the “rational” approach for both – at least if you take a short-run view. It takes a whole lot of money – more money every election cycle – to run political campaigns these days; it’s ever so much easier to fund campaigns if corporations with deep pockets are willing to donate in the millions (rather than trying to get donations in the tens or hundreds of dollars from millions of “average Joe citizens”). Industry can also devote its millions to buying attack ads against any politician who appears as a threat to “their” politicians or to themselves.  And attack ads are often effective – political campaigns wouldn’t keep spending buckets full of money on them if they didn’t feel they were getting their money’s worth.  And where do those buckets full of money come from?  Why, from the very industries and corporations that want a Congress that is sympathetic to their point of view.

It’s a cozy arrangement; each side gets what it wants.  The corporations get “representatives” in Congress who will fight for their interests – fight to get rid of the regulations that constrain them, to water down or completely gut proposed legislation that would adversely affect their bottom line, to safeguard their tax loopholes, to protect their government subsidies. And the corporations find that their massive expenditures on armies of lobbyists and attack ads are a very good investment indeed. Viewing corporations as amoral profit-maximizers, it’s simply the rational thing to do (to maximize short-term interests)

The politicians in turn get the financial support they increasingly need, as money becomes more and more infused into the political process. Everyone wins – except you and me and the rest of the ordinary Americans.  The public is left out of this deal.  Congress used to be conceived of as the people’s representatives; instead, it has largely become the corporations’ representatives.

But corporations can’t vote, you say; only people can vote.  The people could vote those politicians out of office, couldn’t they? Yes, they could; but they haven’t.  Here’s where political theory and political reality part ways.  Once again, much has been written on this question: Why do people re-elect their representatives in Congress when these representatives are not looking out for their interests but rather for the interests of big business? As Thomas Frank famously put it, “What’s the Matter with Kansas?”[4]

I’m not a political scientist, but from what I’ve read, there is probably a combination of factors at work:

(1)   People are not well informed and are therefore fairly easily manipulated, and a lot of effort and money has been expended towards that end.

(2)   People form party affiliations that are almost tribal in their intensity, and much effort has gone into promoting issues that divide people along cultural lines that reinforce these tribal affiliations – issues like abortion and gay marriage that serve to divide people rather than unite them around a common cause such as the shrinking middle class or the real threat of climate change. There’s a whole network devoted to providing an “alternative reality” to Republicans, for example, and many Republicans want to believe in it. In this alternative reality, the climate change scientists are conspiring to get federal research grants (at the public’s expense), and Obama and the Democrats are socialists who want to grow the federal government rather than the economy, with whatever “job-killing” policies they propose.

(3)    And to some extent, the politicians are telling people what they want to hear.  There seem to be limits to what many people can deal with, and perhaps climate change strains those limits. If politicians don’t address climate change, it is in part because their constituents aren’t focused on it, because the dire consequences aren’t occurring now (although when they come, it will be far too late to do anything about it), whereas most people are facing serious problems right now.

So corporations are amoral and have no incentive to address the public good when it conflicts with their bottom line, and lots of incentive to try to “buy” as much political power as they can to support their economic power.  Politicians have incentive to stay on the “good side” of all that corporate wealth, if they want to get re-elected next election cycle, as money has become increasingly important in the political process. And ordinary citizens?  We are millions of little Davids against a few powerful Goliaths, and unlike in the story, we are not winning the fight.  We are barely even engaged. Many of those who have been most affected by the not-so-subtle transformation from democracy to plutocracy don’t seem to have a clue about what’s going on. They have been handily duped. And meanwhile, the glaciers are melting, the oceans are become acidic and dying, the scientists are issuing more and more dire warnings, and no one with any power is listening. (And did I mention that the percentage of total income in the U.S. that goes to the richest 1 percent – or the richest 0.1 percent – has reached obscene levels in recent years?)

The incentives that motivate this behavior speak to the short-run. It’s the next election that politicians worry about; it’s the near-term political environment and how it affects their current markets that industry worries about.  But what about the long run?

In the long run, none of this amoral behavior is optimal. In the long run, an unraveling global climate is bad, perhaps dire, for everyone – including the politicians and the corporate CEOs and their children and their grandchildren, just like the children and grandchildren of ordinary Americans – and Chinese and Australians and Bangladeshis, etc. In the long run, a dysfunctional political system that has been captured by Big Money is bad even for Big Money, because a country in which the vast majority of the population feels like the country is no longer run in their interest becomes a tinderbox for discontent.[5]

Capitalism has proven to be a far more powerful economic engine than any other economic system that has been tried, capable of greatly “increasing the size of the pie,” although the sizes of the slices that have been divvied up have become increasingly unequal. But as noted, there is nothing in capitalism itself that guards against immoral excesses.  It is amoral, which is perhaps as it should be. But that means that a concern for the public good, when it comes into conflict with the “corporate good,” must come from somewhere else.  And that is the people, through their elected representatives.

But right now many of those elected representatives are part of the problem, as they serve the interests of their corporate paymasters at the expense of their constituents. How do they do it? Mostly through the usual tried and true methods, some of which are mentioned above –

(1)   fear mongering (“Obamacare means death panels”),

(2)   raising culturally divisive issues such as abortion and gay rights to distract attention from the things people rightfully should be concerned about (including the growing income inequality, and with it, the growing political inequality between the rich and everyone else, as well as longer-term threats such as climate change); and

(3)   that old standard, outright lying (“Obama is a Muslim; Obama is a socialist”).

Corporations may be amoral, but politicians are supposed to be moral.  Right now, the price of morality often seems to be a one-term stint in Congress.  All those attack ads, remember, are surprisingly effective – used in the primaries particularly by Republicans against fellow Republicans who do not toe the party line (to support the rich and corporations) and paid for by, of course, the rich and corporations.[6]  America has been faced with growing plutocracy before, during the Gilded Age, and we managed ultimately to avoid it – that time. There’s no guarantee that this time we will be as fortunate.

Like so many things –each of the three branches of our government, for example – capitalism is a fine system as long as there are institutions in place outside it to keep it within bounds.   We should recognize that, like everything, it has its limits; it cannot regulate itself, nor should we ask it to. Ultimately, even the capitalists will want to be regulated, as they come to acknowledge, as some already have, that problems like climate change require federal regulation. And without it, they too will suffer.

It’s sad and pathetic that this country is still stuck in ideological paralysis, with one of the two major political parties unwilling to examine its mindless ideology that the “free market” can do no wrong and government can do nothing right. It’s obvious – and extremely important to understand and acknowledge – that each has its limits. Until this basic fact is recognized, it will be hard to make progress in dealing with those limits so that we can even attempt to solve our current problems, some of which threaten to inundate us, literally.

The longer we wait to address the problem of growing plutocracy, the harder it will be to arrest it, as large corporate interests increase their control over the political process, making it ever harder to pass the sort of legislation that would put bounds on their behavior.  It’s hard not to notice the analogy to climate change, as we wait longer and longer to address a problem whose chance of being catastrophic increases as we persist in doing nothing about it.


[1] One could argue that if people cared about the inhumane treatment of animals on these factory farms, they could buy only from those farms that treat their animals well – and there is a (very) small coterie of people who do just that.  But there is a large price differential, and, perhaps as significantly, most people don’t know about the conditions on factory farms, and the industrial farmers have gone to some lengths not to let that information become public – think what a hit their profits would take if word got out.

[2]  For a recent look at just how unequal income and wealth in the U.S. have become, see “It’s the Inequality, Stupid,” Mother Jones, March/April 2011. Available online at:  http://motherjones.com/politics/2011/02/income-inequality-in-america-chart-graph

[3] Johann Hari , writing in the Independent/UK, on Friday, June 17, 2011, “Cheap Meat, MRSA and Deadly Greed” http://www.independent.co.uk/opinion/commentators/johann-hari/johann-hari-cheap-meat-mrsa-and-deadly-greed-2298567.html

[4]  Thomas Frank. 2004. “What’s the Matter with Kansas?: How Conservatives Won the Heart of America”. Henry Holt and Co.

[5]  For an excellent discussion of income inequality in America and its negative effects, see Stiglitz, J. “Of the 1%, by the 1%, for the 1%,” in Vanity Fair, May 2001, available online at: http://www.vanityfair.com/society/features/2011/05/top-one-percent-201105

[6]  There is evidence that all members of Congress, not just Republicans, are to some extent “owned” by the rich. See Bartels, L. Economic Inequality and Political Representation, 2005.  Available online at http://www.scribd.com/doc/36931202/Larry-Bartels-Economic-Inequality-and-Political-Representation

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4 comments on “The Limits of Capitalism

  1. […] have written in other essays (The Limits of Capitalism and Trying to Explain My Crazy Country) about how our political system is being strangled by “the […]

  2. […] decisions of corporations have moral implications, for the same reason. In an earlier essay (see here) I wrote, “It’s not that capitalism is immoral; it’s amoral. There’s no place in the […]

  3. […] other problem that requires a government solution, as I’ve discussed in other essays (see here, here, and here). It is a meta-problem – a problem that must be solved in order to solve the other […]

  4. […] have written in other essays (see The Limits of Capitalism and Trying to Explain My Crazy Country) about how our political system is being strangled by “the […]

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