Other Problems with Capitalism

“Externalities (or spillover effects) occur when firms or people impose costs or benefits on others outside the marketplace.” ¹  This phrase comes from one of the world's most widely used economics textbooks. Despite the logic of the parallel construction of “costs or benefits,” externalities are primarily “costs.” In practice, this means that capitalist enterprises often seek to shift as much of the costs of their business activities as possible onto others. Pollution of air, water, and land are externalities; injuries and deaths that occur in the workplace are externalities; the exhaustion of natural resources, the disappearance of many forms of life, global warming, the destruction of social structures, among others, are all considered externalities.

In contrast to the bland language of economics and the brief mentions of externalities in economics textbooks, externalities are a crucial aspect of all capitalist enterprises. Without government protections that limit this feature, capitalist enterprises release their waste into the air, water, land, and oceans without restraint. They also injure and harm workers directly during the production processes. This is not an optional strategy or an incidental aspect of capitalism. It is a structural characteristic that compels every capitalist enterprise to externalize as many production costs as possible to stay competitive.

We are all very aware that the fossil fuel industry externalizes millions of tons of CO² every year. Global warming is the cost we all bear for their profits. Here are a couple of other examples of large-scale externalities in action.

An Example: Chemicals and Plastics

The US Environmental Protection Agency’s Toxic Substances Control Act Chemical Substances Inventory includes 86,000 chemicals and chemical compounds manufactured, processed, or imported in the US. In 2016, ten were selected for risk evaluation, and 20 more were added in 2020. Only a few hundred have been investigated. This highlights the vast scale of safety and environmental hazards that pose external costs for the chemicals industry.

Turning to a ubiquitous set of chemicals – plastics- we can actually see the global impact of their external costs of production and use. The production of plastics worldwide amounts to 800 billion tons per year. For the most part, plastics are forever chemicals. They don’t gracefully return to nature as properly composted food waste does. Many disintegrate into microplastics, while others degrade into chemicals that are carcinogenic. Up and down the food chain, plastics are ingested and passed along to the next hungry beastie. “In 2021, researchers from Italy announced that they had found microplastics in human placentas. A few months later, researchers from Germany and Austria revealed that they had found microplastics in meconium—the technical term for an infant’s first poop.”²

The plastics industry was aware from the very beginning that recycling efforts would be ineffective. “For decades, petrochemical companies and the plastics industry have known of the technical and economic limitations that make plastics unrecyclable and have failed to overcome them. Despite this knowledge, the plastics industry has continued to increase plastic production while carrying out a well-coordinated campaign to deceive consumers, policymakers, and regulators about plastic recycling.”³

Another example: Health and Industrial Food

Our diet of industrial foods drives many chronic diseases.⁴ Our evolutionary history has not prepared our digestive system to handle these foods. The medical community refers to this as metabolic disease syndrome. This includes heart disease, stroke, type 2 diabetes, and obesity. These diseases are common in the developed world and increasingly prevalent in the developing world. The number of people with diabetes rose from 108 million in 1980 to 422 million in 2014. Prevalence has increased more rapidly in low- and middle-income countries than in high-income countries.

These are processed foods that feature highly refined wheat flour, sugars in many forms, fats, and salt. "Ultra-processed foods are industrial formulations made entirely or mostly from substances extracted from foods (oils, fats, sugar, starch, and proteins), derived from food constituents (hydrogenated fats and modified starch), or synthesized in laboratories from food substrates or other organic sources (flavor enhancers, colors, and several food additives used to make the product hyper-palatable). Manufacturing techniques include extrusion, molding and preprocessing by frying. Beverages may be ultra-processed."⁵

Capitalist food producers love these industrial foods because the ingredients are inexpensive, and the products have an exceptionally long shelf life. I often joke that cockroaches will feast on Twinkies and Hostess cupcakes long after humanity disappears. Additionally, industrial foods are addictive. Evolution has made us highly attuned to carbohydrates, sweets, fats, and salt. We indulge in these foods when available to prepare for the inevitable lean times that defined our long hunter-gatherer phase. Evolution did not equip our bodies for a diet where the majority of calories come from these sources.

The full weight of the marketing industry has been brought to bear on our diet. "Food, beverage, and restaurant companies spend nearly $14 billion annually on advertising in the United States. Over 80% of this advertising promotes fast food, sugary drinks, candy, and unhealthy snacks, overshadowing the $1 billion budget for all chronic disease prevention and health promotion at the U.S. Centers for Disease Control and Prevention. Furthermore, food companies target children, teens, and communities of color with marketing for their least healthy products."⁶

You can think of the diseases associated with our industrial diet as an external cost borne by consumers. These diseases do not impact the corporation's production costs. Instead, it is individual consumers and society at large who bear these costs. Industrial food producers are aware of the potential harm their products can inflict on consumers. For example, the sugar industry has conducted a multi-decade campaign to obscure and deny any connection between sugar consumption and health issues.

The capitalist system is unstable

A central dogma of capitalism, particularly in orthodox economics, is that markets self-regulate. Markets set prices and, in doing so, regulate the supply of goods. The reality is much different and evident to everyone. Booms, busts, recessions, depressions, and chronic speculative excesses- these characteristics of capitalism hardly need more than to be pointed out. Anyone over 25 or so as of this writing remembers the global meltdown of the financial system in 2008-9 and the ensuing years—the Great Recession.

 To illustrate, here are some key economic events in the US since the Civil War that refute the notion of an automatically self-regulating market system:⁷

Some may complain that many of these events are in part or wholly caused by what they consider to be non-economic causes, for instance, wars, and most recently, a global pandemic. This type of complaint only makes sense in the idealized world of academics. The performance of the economy is embedded in the day-to-day world we live in. The economy needs to perform in a range of environments.

Capitalism requires endless growth on a planet with finite resources.

Capitalism consists of individual firms that compete for sales and profits against one another in the market. Therefore, the only sustainable strategy for these firms is to continue growing larger. There is no steady-state version of capitalism; it must either expand or fail. Given that we live on a finite planet, the exploitation of its resources and the limited capacity to absorb pollution (external costs) inherent in the capitalist system is unsustainable and can lead to catastrophic consequences for our species, and likely for most other species on our only planet.

Richard Corin, writing on the website Economic Reform Australia, describes capitalism’s endless growth demand:

 “The rich can no longer assume that the Earth’s resources belong to whoever can exploit, consume and convert them into waste faster than anybody else. This is a frenzy of destruction fueled by competitive greed to grab as much as possible before someone else gets it and before it’s all gone. It is a madness which has to end and be replaced by an ethic that recognizes an equal right to access the free gifts of nature, so that resources can be respected, conserved and recycled justly and sustainably. If our institutions fail to evolve to meet this requirement, civilization and its large populations have no future.”⁸

We have already noted the significant income and wealth inequalities in today's America. Let's look a bit further.

As shown in the chart above, the incomes of the top 1% and the top 0.1% increased by 206% and 465%, respectively, between 1979 and 2021. Meanwhile, the income of the bottom 90% of the population increased by only 28% over the same period. Not displayed on the chart, the wage growth for the 25th percentile of the population rose only 12% over those 42 years. For the median percentile, wage growth was 18%.

Keep in mind that the US economy grew smartly over this period. In 1979, the U.S. GDP per capita was $32,389.  By 2021, this figure had risen to $65,958 in the same 2012 inflation-adjusted dollars. This is a 103% increase.⁹

US wealth distribution is even more unequal. The top 5% possess significantly more wealth than the bottom 90%. In fact, 735 billionaires in the US hold greater wealth than the bottom 50% of the US population. As illustrated in the graph below, the wealth share of the bottom 90% has been declining over the past 40 years. Many individuals in the bottom 20% have negative wealth, being in debt beyond their means.

The combined wealth of the nation's 806 billionaires has nearly doubled in the last seven years.

$5.8 trillion equals 9% of total US wealth. The bottom 50% (806 billionaires versus 170 million people) hold just 2.4% of total US wealth.

Global Wealth Inequality

If one takes democratic control and decision-making even remotely seriously, it is evident that capitalism is an inimical force in a democratic society. The impoverishment of public institutions that do not align with the capitalist system’s need for financial return on investment is clearly reflected in the inadequate funding for families, education, housing, healthcare, and other services. Since the mid-1970s, conservative policies have consistently extracted money from the public sphere to benefit private interests. This has been achieved through declining tax rates and increased subsidies to corporations and the wealthy. Second, the rich & corporations dominate the government. Third, 97% of all business assets (plants, equipment, etc.) in the US are owned by just 1% of corporations.¹⁰

We have centralized planning controlled by monopoly corporations. Competitive forces do not influence investments.

“Free markets” is a staple of our political rhetoric, arousing passions about the fearless entrepreneur making their fortunes in the free market and advocating for keeping the government out of free markets. Libertarians, discussing capitalism, state, “It greatly increases the capacity or agency of individuals, that is, their ability to realize goals. Along with other factors, such as increased mobility and the wider diffusion of knowledge, it also expands the range of options or life choices available to people who, 300 years ago, would generally have had their lives determined for them at birth.”¹¹  Academic economists refer to the self-regulating, automatic nature of markets, ensuring optimal pricing and production levels.

This is an exemplary aspirational description, but there is no such thing as a’ free market.” Markets have rules and regulations. They can exist only when buyers and sellers understand and follow these laws and regulations, and when enforcement mechanisms are in place to punish violators.

For instance, our local farmers’ market in Hudson, NY, has a five-page document outlining the rules and regulations.¹²  Included are the market's location, hours of operation, terms of membership (who can be a vendor), fees and reservations, and many other details, such as:

• All vendors are required to weigh down their tents.
• Prices must be posted for all products displayed for sale. Each Vendor must set their own prices. Price fixing is illegal.
• All products must be clearly labeled in compliance with Federal, State, and local regulationsand requirements.
• Vendors who weigh items must use a scale certified by the New York Division of the Bureau of Weights and Measures and display the certification in a clearly visible space. This does not apply to those selling by the each, the bunch, or the bag.”
• ..... and many more.

Who establishes the rules and regulations for our “free” markets? How do these rules and regulations significantly influence the distribution of income and wealth in our society? They play a substantial role in determining the winners and losers. Additionally, we can ask who enforces these rules.

This leads to another observation about markets: they are not a level playing field. Significant differences in power and knowledge often exist between buyers and sellers in market interactions, especially evident in the labor market. Getting hired is not a simple alignment of goals and objectives; the employer holds the cards. They determine the wages, working conditions, benefits, if any, and more. Only with a union does an individual employee gain real bargaining power. In the context of the highly concentrated markets that dominate the US economy, the ability of the individual worker to negotiate wages is even more compromised.

Markets are also viewed as the most efficient capital allocators, the seeds of future economic growth. They excel at selecting the winners, while losers tend to go belly up. There is undoubtedly some truth to this notion. However, this truth mainly applies to profit-making activities. Almost the entire realm of family life is excluded from the market system. Women predominantly engage in the unpaid labor of raising children, cooking, cleaning, and maintaining family together.¹³

As previously discussed, when markets become concentrated with only a few suppliers, this represents market concentration and monopolization. Not only are prices determined by the monopolistic supplier, but competition is also diminished or entirely removed. The dominance of a select few replaces the discipline of market competition.

“Market competition is at the heart of the capitalist system. It serves as the driving force for creative innovation, the mechanism by which market supplies and demands are brought into coordinated balance for multitudes of goods, and an institutional setting for individuals to freely find their own place to best earn a living in society.”¹⁴  This is the rhetoric from a leading Libertarian website, The Foundation for Economic Education.

The reality is that capitalists abhor competition. The only outcomes of competition are reduced sales and profit margins. From my experience, avoiding competition was a key strategy. In the high-tech industry where I worked, it was a guiding principle to assess whether a proposed new project would enable us to be first to market. If we were only able to enter as a third or fourth player, there was a strong chance that the high profits of the initial phase of an innovation cycle would already have been depleted by the competition between the first and second entrants. We might eventually offer the new product to maintain the complete range of offerings that our customers anticipated, but we would not fully commit to engineering and ramping up production.

Another aspect of companies' behavior in highly concentrated markets is the suppression of competition. For instance, Apple has spent $218 billion acquiring more than 112 companies from 2016 to the present. Alphabet (Google) has acquired 258 companies, spending over $42 billion. Boeing has purchased a major competitor, McDonnell Douglas, along with Rocketdyne, DeHavilland, and 13 others. This is merely a sample of acquisitions by dominant companies.

The decline in new company formation in the US over the past couple of decades suggests that successfully entering many markets has become significantly more difficult.

Capitalism is interested in sustaining our species only at the margins. For instance, governments in developed countries offer housing for large segments of the population because capitalist developers are unwilling to invest in housing that does not yield a profit. Government-supported mortgages and the construction of highways for automobiles largely fueled the suburban expansion in post-World War II America. Conversely, capitalism produces an abundance of housing for the upper-middle class and the rich, while providing very little for workers and the poor. The current neoliberal version of capitalism pays many workers with less than a living wage, and many more only marginally better. Neoliberalism has also reduced public commitments to healthcare, education, and family support. It is common in the US for families with children to take on extra jobs to afford childcare provided by individuals earning barely a living wage. In contrast, much of Europe ensures that housing, healthcare, education, and family support services are provided as a right.

Capitalism does not recognize the reproduction of our species as part of the economy. Much of this work is performed by women.  Child rearing, family life, cooking, cleaning, entertaining, educating, and socializing are not considered legitimate economic activities. Consequently, we have an enormous amount of unpaid labor involved in raising children and sustaining the day-to-day activities of households and families. These fundamental human activities, crucial for the continuity of our species’ existence, are not acknowledged by economists or the government as part of our economy.¹⁵

Just a list here of other problems that capitalism poses for the vast majority.

• Mass debt
• Marketing that distorts, changes, and creates human demand and consumption
• Very poor maintenance of public infrastructure.
• A system that is not a system
• Perversions of the rule of law – equality before the law
• Short investment time horizon
• Anonymous capitalism - hiding income, wealth, and political power, for example
• Misapplication of markets – the prime example is the US healthcare system.

Global Warming

To date, not only has there been no progress in reducing carbon emissions into the atmosphere, but the situation is rapidly growing worse.

Meanwhile, we have a Federal government that is encouraging the expansion of fossil fuel production in the US and providing ongoing subsidies to the industry.

Exhaustion of the Earth

This is a topic completely beyond this summary. Nevertheless, here are a few headline snippets from the Executive Summary of 2021 UN Environment Programme report Making Peace With Nature. 

• The current mode of development degrades the Earth’s finite capacity to sustain human well-being.

• Society is failing to meet most of its commitments to limit environmental damage.

• There is an urgent need for a clear break with current trends of environmental decline and the coming decade is crucial.

• Earth’s environmental emergencies should be addressed together to achieve sustainability.

How Does Capitalism Fit into a Solution?

Not at all. Capitalism is not built around concepts of equity and sustainability. It demands and drives the continuous expansion of production and consumption. It is structurally dependent on externalities, such as air and water pollution. As a system of private profit-driven investment decisions, it is incompatible with the global solutions required. It currently dominates the political control of many of the world's largest economies and employs that control to further the goals of the super-rich and corporations.