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.