On Philosophy

November 16, 2006

Capitalism

Filed under: General Philosophy — Peter @ 1:37 am

How can we defend capitalism when it results in an unequal distribution of wealth (and happiness), so unequal that some people are forced to live on the streets even though it would be easy to feed and house them? (If you feed and house criminals why not the poor too?) Some would defend capitalism by arguing that it increases the total happiness of society (a utilitarian argument). Of course most aren’t convinced by such arguments, but it could be that capitalism results in the best possible society, and certainly choosing the best possible society is a defensible choice. After all, under the ideal socialist system, even though no one may be left out in the cold, society as a whole suffers, and falls behind its capitalist counterparts.

Capitalism in its purest form is supposed to result in the best possible society because of competition. Specifically everyone is trying to make as much money as they possibly can, so they make the best products they possibly can, and sell it for the lowest possible price, in order to out-compete other people, and hence make the most sales. And this is good for everyone because we get better products for less money. But believing that this would actually work as advertised is as naïve as believing that socialism works as advertised. Neither system works in real life because they don’t properly take into account human nature

Socialism fails because it assumes that everyone will try their hardest even if they don’t receive a reward for their work. And pure capitalism fails because it assumes companies will try to increase profits by competing with each other, and that to complete they will attempt to make a better product and have lower prices. This simply isn’t the case. Even when multiple companies are competing they may attempt to attract customers in other ways, for example by advertising. It is well known that people’s shopping behavior is easily influenced by advertisements, and so by investing money in them companies can get an edge. But advertising is really a waste of money, it doesn’t result in a better product for less money, and society is in no way bettered by it. And if two companies are competing under pure capitalism there is little incentive to invest resources in developing a better product because your competitors can simply steal your results (which is one of the reasons there are no pure capitalist systems).

But the most likely situation is that companies won’t compete. Instead they will collude to sell their products at higher prices. Now in an ideal world one company would realize that they could get an edge by breaking the deal, and would be motivated to by the lure of increased profits, and so eventually the collusion would fall apart. At least this is what we would like to happen. In reality companies are not so short sighted. They know that their competitors can lower their prices in response, and the CEOs are probably golf buddies anyways. If someone new tries to break into the market and out compete the colluding companies they can simply use their brand identity to keep customers, and if necessary their saved profits to sell their product at a loss, until the new company aggress to collude or goes out of business. This outcome isn’t good for society, but it does happen.

Fortunately we don’t live in an ideal capitalist society. Our corporations and economy are managed by the government to a significant extent. But even so we aren’t living in the best possible society. For example consider brand name soda. Brand name soda is relatively expensive, even though cheaper store name sodas exist. And it is even more expensive when bought through a vending machine. When it is on sale you can buy 2 liters of a store name soda for 90 cents, and obviously they are still making a profit on this. In theory we could fill the smaller soda bottles up with this and sell them for 25 cents each, a whole dollar cheaper than from a vending machine. Of course the price would have to be increased somewhat to pay for the cost of the machine and refilling it, but even so it seems reasonable to suppose that under pure capitalism someone would so this, out competing the higher priced soda machines, making a nice profit for themselves, and giving us all cheaper sodas. Clearly this is ideal. But of course it doesn’t actually happen. The big name soda companies have set up significant barriers to entry to someone who would want to start their own line of vending machines. Not to mention that vending machines are individually expensive, and thus that only a well-established company, or someone who was already wealthy, could afford to even start on such a venture, and it probably isn’t profitable enough for such people.

An obvious first step towards improvement would be to severely punish collusion. For example the fact Pepsi and Coke vending machines both charge the same amount, an amount that is vastly over the amount they need to stay in business, would be a red flag. So what could we do to bring our economy closer to the ideal? One possibility would be to ban advertising, but this is a dangerous infringement on the freedom of speech, not to mention the fact that many services, such as TV, magazines, and newspapers, are supported by ad revenue. Another possibility is simply to limit the size of corporations. Small corporations don’t get as much benefit from advertising, have a harder time colluding with each other, and are more likely to compete in the “right” way. Unfortunately many products are only made possible by economies of scale (the fact that production costs are reduced when making something in vast numbers), and so if we had only small corporations we wouldn’t have vending machines at all, and clearly that isn’t the best possible society. We also might consider limiting profits by law, governed by the cost of production of individual products times the amount sold, but to do so would be to discourage research into new products (since doing so would cut into their net profits). On the other hand if you limit net profits, after costs of research are taken out, then you are encouraging companies to either waste money or simply produce fewer products at a higher price.

I don’t actually know what the best solution is. If I did I probably could spin it into a Nobel Prize for economics (designing a system better than capitalism is no easy task). My best guess is that government intervention in cases of collusion, or simply a lack of competition, (i.e. make not competing a crime) plus aggressively breaking up corporations that are monopolies would have some positive effects. Of course the government isn’t infallible, but it should be clear by now that the markets can’t fix these problems, as large corporations have too many ways of avoiding actually making better products and selling them for less.

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5 Comments

  1. But advertising is really a waste of money, it doesn’t result in a better product for less money, and society is in no way bettered by it.

    I agree with the sentiment, but you’re overstating. It would be hard to buy a house or hold a garage sale without a classifieds section/craigslist.

    Comment by Carl — November 16, 2006 @ 2:11 am

  2. Collusion is of course already a crime. To be honest, I find it unlikely that Coke and Pepsi are colluding. Also, even theoretically, capitalism seeks the most profit rather than the lowest price. Hence, Coke and Pepsi have both found the same peak in the price/demand curve for soda. If they charged less, they’d sell slightly more but earn less total, and if they charged more they’d sell less and earn less. No collusion necessary.

    On a related note, Paul Graham defended income inequality the other day (paulgraham.com/gap.html). It’s all basic libertianism stuff, but it seems decent in the round. I think capitalism would be more defensible if we guaranteed a minimum standard of living by giving everyone some amount of cash or food stamps or whatever, but on the whole, it’s not bad.

    PS. Your spam filter is too tough!

    Comment by Carl — November 16, 2006 @ 2:21 am

  3. Carl, you need to re-read some economics. See the article on pure competition: http://en.wikipedia.org/wiki/Pure_competition.
    In pure competition efficiency is maximized, it is the best possible situation. And thus if it creates inequalties those inequalties can be defended. Coke is not in a situation of pure competition, at best they are in monopolistic competition (http://en.wikipedia.org/wiki/Monopolistic_competition). We know this because a) you can buy other brands for less and b) it is an example in my economics textbook. So yes they are maximizing their profits, but the place where they are maximizing them is not best for society. If they reduced their prices and produced more coke then the benifit to society would be greater than the loss to the coke company. And in pure competition products are sold at that price, because in situations of pure competition it does maximize profits.

    Comment by Peter — November 16, 2006 @ 3:16 am

  4. “How can we defend capitalism when it results in an unequal distribution of wealth (and happiness)…”

    In this context, there is a conjoining of wealth with happiness, simply because of the article “and”. I won’t infer into the exact motive for this, and have simply observed it; but I also find it interesting that there is also the implication that happiness is, or can be, distributed. Perhaps there are several who won’t agree with my view that happiness comes from within the individual.

    Now, that being said, there are certainly individualy respective external requirements that are necessary for the result of happiness. (Also, as a side note, I believe happiness, as a simple rule of human nature and life in general, is incapable of being sustained, no matter how successful one is in reaching their goals.) For example, I know that if I did not have a) good health, b) meaningful relationships and a suppportive social network, c) financial security, and d) the ability to pursue my interests, I would not be a very happy person at all. So, one could say that my happiness is dependent upon the possession and culmination (because in simply lacking one or two happiness can still ensue) of these things. Well, I suppose I’m getting fully off onto another topic- the philosophy of happiness- but I guess my point is that I find it quite interesting when people associate the distribution of wealth, in any society, with the happiness of the individual.

    This does bring up an interesting point, however, and one that is familiar to everyone, which is ‘What constitutes happiness?’ Actually, I’m sure most people would concur that happiness is constituted of both external factors and internal factors, and the disparity that lies in varying views on this idea is regarding the extent that each of these factors plays a role in happiness.

    Another point brought up previously is that happiness cannot be sustained, except perhaps through the constant effort and will on the part of the individual.

    Basically my proposition is this: if it is true that happiness cannot be sustained (with the exception mentioned above), even through the success of reaching one’s goals (and I have no reason thus far to doubt that statement), then two conclusions can be drawn:

    1. SUSTAINED happiness is not dependent upon the achievement of a goal, and
    2. Happiness is therefor not an entity to be attained through an acquirement of longed-for materials and goals, but a state-of-mind to be carried along the journey towards such attainments.

    If this is the case, then it can also be deduced that, since it is not fulfillment that necessitates happiness, it is rather the HOPE of better things to come, and a belief that a a consistent striving towards a more harmonious, enriching, fulfilling (whatever you choose to call it) lifestyle will not be in vain, that necessitates happiness.

    No doubt one can achieve happiness through reaching his goals, of course- this is why we strive for them- but I’m speaking of the ideal happiness, one that is impenetrable and independent of outside occurances.

    Ok, so I guess another one of my points is that, in order for a government to be outrageous in its influence over people’s lives, it must deprive them of the freedom of pursuing, with the very realistic goal of attaining and keeping, all of the things mentioned above that I said were pertinent to happiness (in most cases… I don’t want to unfarily generalize). So, a government will never be without its faults (it never has been at least, and human nature I’m fairly certain is unable to contradict that fact); but even so, if it perpetuates the freedom of will in the individual, it then rests upon that individual as to why he or she is or isn’t unhappy (or, more precisely, if he is or isn’t without the hope and will of pursuing the full potential within himself, his daimon, and how this can benefit society overall on top of that).

    So, in conclusion, I guess my question, mostly rhetorically speaking, is: how much DOES a government affect the happiness of its people? Of course, this depends upon the government; it’s a question though upon which I find myself at odds with most people. At any rate, it’s definitely quite an interesting concept to mull over. Sorry if I got too off-topic- that statement obviously indulged my curiosity!

    Comment by Rebecca — November 16, 2006 @ 1:12 pm

  5. Whoa there Peter. You’re setting up a false dichotomy by claiming that since the cola industry is not an example of perfect (pure) competition, it must be an example of collusion. Pure competition, for those of you playing the home game, is a situation in which various producers are selling the same good, where the only way to differentiate between producers is the price they charge for their good. Insisting any industry actually practice such a standard is absurd. Things like brand recognition, purchasing allegiance and actual differences in the products (seasoned cola drinkers know the difference between Coke, Pepsi and Other by taste alone), mean that perfect competition is not only unrealizable, but anti-human nature.

    I also don’t see why it must be an example of a monopoly. Coke and Pepsi have nearly equal market shares in the cola game, and other beverage companies have made serious inroads. At worst, it’s a weak oligopoly.

    So I’m going to have to side with Carl here and say that the price of pepsi and coke, relative to lesser brands, is a function of market share and other factors of imperfect competition than of some sort of willfull collusion or price setting.

    Comment by Greg — November 17, 2006 @ 11:24 am


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