Thread: An explanation for the failure of capitalism

Central among the assumptions that underlies free market theory is the belief that every trade results in a benefit to both sides of the trade, beyond the mere market value of what is traded. When you consider it, this assumption makes good sense, and seems true. After all, why would you trade something you have for something you didn't have if what you wanted wasn't worth more to you than what you'd give up for it? And why would the person you'd trade with trade with you if the same thing wasn't true for him? So in every trade, it seems reasonable to suppose that both sides of the trade benefit.

Let's illustrate this assumption by playing a game. Instead of trading goods or money, we'll trade pebbles. We each start with 100 pebbles. Besides the pebbles we have, there's also a very large pot of pebbles (an essentially infinite number). Pebbles will represent the benefit we get from a trade. At the end of the game, we can exchange pebbles for pieces of candy, but there are only ten pieces of candy. How many pebbles a piece of candy is worth will depend on the total number of pebbles in the game. We figure it out by taking the total number of pebbles we all own (not counting the the large pot of pebbles), and dividing that number by ten.

To represent the benefit we get from engaging in a trade, every time we trade pebble for pebble, we draw extra pebbles from the community pot. So you and I trade one pebble to each other, and we each draw an extra pebble from the pot. That extra pebble represents the additional benefit we get from engaging in the trade. Now, you might think this is an exceptionally pointless game, for, as long as we each benefit from a trade equally, then pieces of candy we get at the end will still be divided as evenly as if we never made any trades at all.

But what happens if one person consistently gets a greater benefit from trading than another? For example, when we make a trade, you get one extra pebble from the pot, while I get two. If we play the game long enough, eventually, I'll get all the pieces of candy at the end.

Now, presuming that we cannot change the number of pebbles we get, and you desperately want some of that candy, you only have a few choices. Either refuse to participate in any trades, and force the end of the game before I accrue enough pebbles to shut you out, increase the number of pieces of candy, or get the power to add a new rule that says every 100 trades, we take 3 pebbles from everybody for every 10 pebbles they have, and redistribute those pebbles equally between all the players. It's important to keep in mind that none of these fixes will ever bring us back to equality, where you get the same number of pieces of candy as I get, but at least they will insure that you get some pieces of candy, that you won't get shut out.

How might a free trade situation resemble our game above? Well, it turns out that producers of goods and services for trade will always benefit more in a given trade than consumers of those goods and services. The reason to see why is easy. Let's say you produce shoes for trade. Part of that production involves you making (or paying others to make) a whole bunch of shoes, so many that you could never use them all yourself. So any given pair of shoes you possess isn't going to be worth that much to you, in fact, only as much as it cost you to produce them. But if you're a consumer of shoes, then the shoes I have are worth quite a bit more to you, as you don't have any and need some. If you make your money through wages, then the money you exchange for those shoes represents a certain amount of time you'll be trading for those shoes. But the time you'll be giving up to pay for those shoes is going to be worth quite a bit to you as well, as you could have spent that time doing something you'd rather be doing, like playing with your kids or fishing or dabbling in the garden, or whatever makes you happy. Furthermore, the money you trade can be spent on other things that will be worth quite a bit to you as well. Now, the value of the time you'll be giving up to pay for the shoes will of course be worth less to you than the shoes you'll be getting, and the value of the other things you could buy will be worth less to you than the shoes, otherwise you'd be buying that other thing, but in the end, it's not that much less. So producers will generally get a greater benefit from engaging in trade than consumers.

Now money is the representation of value, or the benefit that's gained through trade. It is the job of the Federal Reserve to print money to keep up with all this new value that's created through trading. So the Fed is like the big pot of pebbles in our game that we each dip into when we make a trade. The pieces of candy at the end are like the goods and services that are consumed. The three fixes to the game I mentioned that you could resort to represent violent revolution in the first case, the increase of productivity in the second case, and taxation and redistribution in the third case.

Of course, our game is only a crude approximation to what happens in our economy. After all, we don't trade money for money, or pebbles for pebbles. We might amend this game to make it more faithful to reality by adding an equally large pot of candy, allow people to trade candy for pebbles, and allow people to eat the candy they have at any time. We must also stipulate that every player must eat at least one piece of candy every 10 turns. If they run out of candy, don't have enough pebbles to buy any more, and must eat a piece of candy, they're out, they lose. The producer can get a piece of candy out of the pot and add it to his pile every 3 turns, but to do so, he must give any consumer of his choice one pebble. At any turn, a player can trade pebbles for candy ( or candy for pebbles, or candy for candy, or pebbles for pebbles), and get their allotted benefit from the pebble jar. How much candy costs is still determined in the standard way, by taking the total number of pebbles owned by everybody in the game, and dividing that by the total number of pieces of candy owned by everybody. You don't get to determine how much you can sell your own candy for, because in this game, the candy, pebbles, players and trades stand in for billions of discrete goods and services, trillions of dollars, hundreds of millions of people, and tens of trillions of trades respectively. At this level, the costs of the aggregate amount of these goods and services is determined by the money supply, the free will of the individual can be factored out statistically, and the continuity of individual trading can be quantized into the turns of our game. Furthermore, no player can refuse to trade anything for anything else but they always have the choice of trading pebbles for candy first. Trading pebbles for pebbles or candy for candy will always be an equal 1-to-1 trade (and don't forget to take your allotted pebbles out of the pot for trading).

Even under this amended game, eventually, it will end, as eventually the consumers will have so few pebbles relative to the producers that they won't be able to buy any more candy. And this is a problem, because if this game is a fair representation of the free market situation on the large scale, this means that capitalism is unsustainable in the long run, unless the producers can find a way to add more candy to the game, or we redistribute the pebbles (or candy) from time to time. This is why high inflation and large levels of wealth and income inequality mark the end-stages of capitalism. The only way out of this is productivity innovation, (and competitive private industry is very good at this, but eventually meets up with physical and environmental limits and can't be relied upon to always overcome this problem) or wealth redistribution. The economy is not a game we want to end. Inflation in itself is not bad, so long as wealth remains fairly equally distributed. Inequality by itself is not bad, so long as the money supply is very very tight, and everybody has at least some money. But inflation combined with inequality result in Great Depressions.

It's really late and I'm pretty tired, so please excuse me when I get rambly with this...

That's a solid example of one of the ways capitalism has failed, rather, not that it's failed but has fallen short of the promises that the system has made. The issue has less to do with pure economics and more to do with the dog eat dog nature of the system it's self. The trouble with capitalism is that it offers the greatest rewards to those willing and able to exploit others.

You spoke of free trade, which as a Canadian is an issue that bothers me to no end. The North American Free Trade Agreement was sold to the Canadian people on promises of a stronger economy and cheaper goods. It has, however, done quite the opposite. As a nation, Canada is rich in resources and poor in people, so we entered the free trade agreement in the belief that we could sell our resources to the U.S. for a fair price and expand our markets. I'm sure I don't need to get in to too many examples, such as the softwood lumber travesty in which an illegal terrif was placed on Canadian lumber sold to the U.S. in order to protect the U.S. lumber industry, stealing millions of dollars which the U.S. was ordered to repay in a internation hearing and has yet to do.

I'm rambling, but the issue is, resources the U.S. has they don't want and will ensure we are unable to undercut them and gain the maximum market for our considerable resources. However, resources the Americans need such as Albertan oil, we are forced to meet certain quotas every year. Unable to jack up the price to a prohibitive level or scale back our sales, we sell the U.S. the majority of the oil we produce. We are then forced to buy nearly half the oil we use from foriegn markets at a price higher that the production cost of our own oil despite the fact we produce more than enough to be self sufficient.

My point here is that the U.S. is the big dog in this yard. It has greater economic, military and political power than Canada. They can openly thumb their noses at us, exploit us for our resources, fail to live up to their end of the agreement and ignore the international community. So Canada suffers, the Americans benefit. This is another example of the capitalist failure to live up to it's promises of opprotunity and riches to all those willing to work for it.

Capitalism, I'm afraid, is something that is unbeneficial to the vast majority of people. It rewards shady buisiness practices, paying the least amount for resources, parts and labour while charging the maximum amount for the finished goods or service is par for the course and is accepted as proper buisiness. Capitalism will never be an answer to problems such as poverty or unemployment, because it is in the interest of capitalism that these things remain. A level of unemployment ensures that the workers will have to be cautious of any demands for increased wages or better working conditions, because there is a ready and willing workforce waiting in the wings. People hungry (literally) to take the job that you now posess.

Even the very idea of contentment runs contrary to the interests of capitalism. If the vast majority of people were happy and content in their lives, there would be much less drive to try to fill the voids in your life with new products and services. With trying to show people your life is better than theirs by way of your possesion of goods. We always have to want more, better, flashier and more impressive things to continue to drive our economy.

In essence capitalism is nothing more than the new feudalism. Instead of working some Lord's land and giving up a certain amount of our goods for the privaledge to continue to survive we're merely working in some wealthy man's factory or buisiness for the most part, buying their goods with the wages they pay us. Nearly everything we buy is just handing our money back over to the old boys club that gave it to us in the first place. There are of course exceptions (buisiness owners here, please, I meant no offense. You all seem like great people and small operations, whom I fully support the buying of goods and services from) but by and large all of the money we earn, given to us by the wealthy class quickly returns to whence it came, back to the wealthy class.

There are always a few examples of people who have risen from little to great places in the world, but they are few and far between. Also, despite the idea of the 'American Dream' something that done on a large scale would be intensely damaging to the economy. In terms of the way our nations are currently run, everyone owning and operating their own buisiness would be a unimaginable disaster. Thus, the vast, vast majority of those not born in to wealth and ownership are thrust in to a life time of labour for those who are.

Basically, any benefit granted to us by capitalism is basically given to us only because it is the bare minimum we will accept. It's necessary to be given to us to continue life as normal under a capitalist system. Much of the time, even this is done grudingly. Is anyone familiar with the early days of the labour movement?

All of the things that I can think of that would point to capitalism being a safe and monitored system are actually infringements on the very idea of capitalism. Things such as anti-monopoly laws, legislated quality controls and so on...

Anyhow, I'm exhausted. I hope this made sense to someone other than me. Also, as a side note... Am I proposing another system? No, I just like to complain.

There's a lot there, and a lot of it is fairly tangential to the game I outline. By free trade, I mean any exchange of a good or service for some other good or service that is not coerced. The point of this essay is to show that even a system of putatively uncoerced exchange can be unsustainable, and can still serve the interests of only the wealthy few.

In general, I am not opposed to more or less unrestricted international trade. I'm far from a protectionist in that sense, but I do think that international trade agreements can suffer from the same failing that is outlined in my game analogy, and thus not beneficial for all parties to engage in. And when trade is coerced through the influence of powerful wealth, I think we can all agree that the results will definitely be bad.

Sorry if I sort of hijacked your thread. It was just that your original post got me thinking, and I thought I'd throw in my two cents on the failings of capitalism. I didn't really get in to what you said in your original post too much because you had already covered the topic and analagy better than I would have.

It's quite alright! Part of the intent of this posting is to spur thought in others. The only reason I didn't add more was that I didn't think there was much I could add to it, or really anything I disagreed with or needed clarified. Thanks for joining the discussion!

Interesting posts.
I would argue that capitalism hasn't exactly failed, but simply has not been tried in its purest sense.
Governments prop up industries that in a true capitalist system, should be allowed to fail, that sort of thing. Hence certain industries are fine when they make huge profits, but then are propped by tariffs and government tax money rather than being allowed to fail as perhaps should be done.
Canada's complaint about lumber being one such example.
Btw....NAFTA was wool pulled over ALL of our heads, but that is another topic, I believe
Night folks.
John P.

Because -as a group- people are greedy bastards who try to maximise profit for themselves.

Power gives someone the opportunity to skew the trade balance in their own favor, so more power -> more money -> more power.

Exactly.
Power and corruption ruin every perfect economic model, which, I think, everyone here is saying, anyway....
John P.

Kantian I cant help noticing you seem to be starting threads and writing in threads which seem designed to enflame opinion and cajole and antagonize for very little reason. I refer both to this thread and another thread you started which explains why global warming is a lie....

Are you just trying to get a rise out of folk?

Normaly I'd agree with you sidney, but Kantian has done a good job of monitering the threads he starts to keep them from becoming flame wars and posts. He aslo posts insightful observation rather than inflammatory "this is how it is posts."

Actually thinking on it wasn't the global warming thread started by JMS?