Is capitalism actually broken?
Each one of these machines represents
the economic system of a country.
Every machine has three inputs:
labor, people’s work.
Capital, all the stuff
that a business might use,
including intangibles, like ideas.
And natural resources.
The machine converts these inputs
into goods and services,
and because we’re willing to pay
for the things the machine produces,
what the machine is really creating here
is value.
Economies turn inputs into value.
What determines whether the machine
is capitalist, communist, socialist,
or something else?
Three dials.
The first dial controls
who owns the capital.
Over here, the government owns
every bit of capital,
down to the last office paperclip.
North Korea is probably
the closest economy to 0%.
On the other end of the spectrum, at 100%,
private citizens own all the capital.
The US is about here,
at roughly two-thirds 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.
Over here at 0%, we have economies
with no markets,
where the government sets all prices,
and consumers have no say.
Over here at 100%,
markets are used to set
the price of everything,
even things like basic
life-saving health care.
You can also think of this dial
as controlling the number and extent
of government regulations—
from tariffs on foreign goods
to antitrust laws
to regulations on net neutrality.
So, 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.
But we’re going to try.
At the height
of the Industrial Revolution,
the dials were set pretty close
to what we now call 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.
And that’s how we ended
up with embalming fluid in milk.
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.
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.
Let’s look at climate change first.
Capitalist economies incentivize growth.
That’s 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.
Just like tobacco companies denied
the link between cigarettes and cancer,
oil and gas companies denied
or downplayed climate science for decades.
Next, inequality.
Inequality is complicated enough that
we made a whole video about it,
but the simple story is:
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.
In the UK, the top 1% share doubled
from 7% in 1980 to 14% in 2014.
But that's not the whole picture.
In England, the country for which we have
the best data before capitalism,
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%.
And here’s another data point:
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.
So, is capitalism increasing inequality
or not?
It depends.
Remember, 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.
Capitalism’s staunchest defenders say
that with enough grit and determination,
anyone can join the ranks of the wealthy.
Is that really true?
In a free, capitalist market,
the wealth generated by successful
companies mostly flows to the owners.
And along with that come
other benefits:
education, health, social standing,
and power.
If owners tinker with the machine so that
it benefits them more than others,
they create a feedback loop where power
and everything that flows with it
calcifies within their families.
And then you’ve got, basically,
an aristocracy.
So let’s break down the question
we started with:
is pure, “invisible hand” capitalism,
with all the dials set to the extremes,
broken?
Yeah.
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.
And 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?
