Is Capitalism Actually Broken

Understanding the Economic Machine

Each machine in this analogy represents the economic system of a country. Every machine has three inputs: labor, capital, and natural resources. Labor represents people’s work, while capital includes all the resources a business might use, including intangibles like ideas. The machine converts these inputs into goods and services, creating value. Economies, therefore, turn inputs into value.

Defining the Economic System

What determines whether the machine is capitalist, communist, socialist, or something else? There are three dials. The first dial controls who owns the capital. On one end, the government owns every bit of capital, with North Korea being the closest economy to 0%. On the other end, at 100%, private citizens own all the capital, with the US at roughly two-thirds of private ownership. The second dial dictates how much control the government has over what gets produced. In economies with high coordination, like the old USSR, the government dictated what the economy could and would produce. In economies with low coordination, the government might mandate a few things but leaves most decision-making up to the private sector. The third dial controls how extensively markets are used to set prices. At 0%, we have economies with no markets, where the government sets all prices, and consumers have no say. At 100%, markets are used to set the price of everything, even things like basic life-saving health care.

Capitalism: A Spectrum of Economies

Capitalism isn’t just one type of economy—it’s a wide range of possible economies, which makes answering the question of whether capitalism is broken, complicated. At the height of the Industrial Revolution, the dials were set pretty close to what we now call the free market, or “laissez-faire” capitalism. There were very few regulations, and economists of the time believed that capitalism’s “invisible hand”—basically, individuals acting freely and in their own self-interest—would produce optimal outcomes, both for the economy and for society.

The Dark Side of Capitalism

However, this belief led to some serious issues. In the late 1800s in the United States, food manufacturers put all kinds of cheap and sometimes dangerous adulterants in food to maximize profits. What they were doing was legal, but of course, wrong. There was a public outcry, and in 1906, Congress passed the Pure Food and Drugs Act, setting the stage for the Food and Drug Administration, which watches over the US’s food supply to this day.

Contemporary Capitalism and its Challenges

These days, no economy really practices pure “invisible hand” capitalism, but some people are increasingly worried that today’s threats, like climate change and rising inequality, can’t be solved by any capitalist system. Capitalist economies incentivize growth, which has created massive demand for the cheapest energy possible, which, for a long time, was fossil fuels. Burning all those fossil fuels unquestionably drove—and continues to drive— climate change. Not only that, but the desire to maximize profit usually gives corporations a powerful incentive to ignore inconvenient truths.

Inequality and Capitalism

Inequality is another major concern. In many countries, inequality is rising. In the US, the UK, Canada, Ireland, and Australia, the top 1% of income earners have been eating up a larger and larger share of total income over the past 50 years. However, the picture is not the same everywhere. In England, the share of income going to the top 5% of income earners peaked at around 40% in 1801, and then, as capitalism took hold, it fell steadily to a low of about 17% in 1977. These days, it’s back up— hovering around 26%. In many European countries and Japan, the top 1%’s share of income came down from 20 to 25% in the early 1900s to 7 to 12% today.

Is Capitalism Broken?

So, is capitalism increasing inequality or not? It depends. There’s a wide range of settings that all fall under capitalism, meaning that one country’s version can look very different from another’s. It’s totally possible that inequality could be increasing in China’s version of capitalism, while it decreases in France’s. Capitalism, it seems, is a double-edged sword. On the one hand, it generates a huge amount of value, which translates to almost everyone having more money than they otherwise would. On the other hand, it also funnels the biggest chunk of that money into the wallets of relatively few people.

The Future of Capitalism

Is pure, “invisible hand” capitalism, with all the dials set to the extremes, broken? Yes. But it’s also kind of irrelevant since no country uses pure capitalism. Is contemporary capitalism—as it’s practiced in much of the world today— broken? Well, it’s the major driver of climate change and in many places is contributing to rising inequality. It may even be creating a de facto aristocracy in certain countries, so, not looking good. The critical question is: can we fix contemporary capitalism by fiddling with the dials or restricting who can turn them, or do we need to tear the machine down and build a new one from scratch?