Can Capitalism Be Fair?

Two big challenges to capitalism are income inequality and climate change.

Posted Jan 23, 2020

The key problem with capitalism is that it involves a conflict between workers and owners. We see this issue today in the increasing luxury of owners and the bitter economic struggles of employees. The last time inequality was so extreme, we got the political turmoil preceding World War II.

From early in its history, capitalism manifested a capacity to undermine the power of governments and citizens alike.

The Joint Stock Company

In England, the turn of the 18th century saw the inauguration of the British East India Company by royal charter. The purpose of the company was to exploit resources from Asia and it was quickly followed by the Dutch East India Company.

The British East India Company was more powerful than most governments of its day. It set up trading posts around Indonesia and China and hired a large army to defend them.

This company functioned as a vehicle for colonial domination of distant populations (including India), offering a frightening illustration of what happens when capitalism operates outside of government authority. This is clearly relevant to our own time where large global companies no longer need armies to exert their will around the globe.

The British East India Company returned a fat dividend that enriched investors for generations. Then it stopped being profitable due to the spiraling costs of empire and went out of business to be replaced by direct control from the London government.

This early company suffered from most of the problems of modern capitalism, including the raping of global resources and the obscene accumulation of wealth in the hands of the few.

Capitalism and Inequality

The wealthiest one percent of the U.S. population owns about half of the financial wealth, so the financial markets are the primary source of wealth inequity. Such extreme inequality poses threats to democracy for several different reasons.

One is that wealthy citizens can have an outsize influence in elections by making large contributions to election campaigns that often purchase access to elected officials.

Another is that instead of being a merit-based society where anyone can succeed by virtue of their own efforts, the U.S. is becoming a society of hereditary wealth where children of the affluent have no need to work and may contribute little to their country or community. (Of course, the same is true of some nominally socialist countries like China that have adopted a capitalist business system).

The current level of inequality is equivalent to that of 1929 and capitalist societies that are this unequal generally prove unstable.

There are two key sources of instability. The first is political and one gets revolutions on the right and the left such as those occurring in the decade of the 1930s. There are currently many signs of political instability in countries around the globe that are fueled by economic unrest, giving rise to populist revolts.

Inequality is itself a cause of economic failure because the relative poverty of large segments of the society crimps demand for goods and services

The most under-emphasized source of instability in capitalist societies may be damage to the environment and ecosystems. This has recently been emphasized by climate change activists.

Capitalism and Ecological Collapse

Capitalist societies thrive by increasing economic production, raising wages, and increasing the standard of living. This trend has continued since the Industrial Revolution so that workers have ever-increasing disposable income and generally improving health as measured by an approximate doubling of life expectancy (1).

Most of the increases in disposable income show up as rising consumption of goods and services. Increased consumption boosts the use of energy and other resources.

For example, the furniture placed in larger modern houses is produced from hardwoods taken out of old-growth forests around the globe that compromise the planet's capacity to store carbon substantially increasing greenhouse gases and climate change.

While the burden of climate change is placed on everyone to some extent, the biggest losers often receive few of the gains of the planetary pillage. For example, many poor low-lying countries in the Pacific stand to lose substantial territory to rising sea levels.

Another problem is that the advantages of capitalism are front-loaded. They are enjoyed today whereas the biggest costs are borne by future generations whether as a direct result of climate change or through the loss of biodiversity and collapse of economically important ecosystems, such as the world's fish stocks.

Generational Competition

This issue recently came to the fore in the youth environmentalism movement with high school students demanding that governments take responsibility for correcting climate change instead of pushing the problem off to future generations who must cope with a substantially hotter world.

The character of this competition can be simply stated. Current generations are over-consuming planetary resources causing inevitable future damage to climate and ecosystems.

To the extent that this damage is permanent and irreversible, the excessive consumption of current generations on impractically large homes, heavy vehicles, luxury goods, luxury travel, inessential goods, consumer products, and reckless consumption of energy, is a price exacted on innocent future generations.

Small wonder that they would interpret the narrative of endless economic growth as a fairy tale.

References

Floud, R., Fogel, R. W., Harris, B., & Hong, S. C. (2011). The changing body: Health, nutrition, and human development in the Western world since 1700. Cambridge, England: NBER/Cambridge University Press.