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The Failure of Capitalism

Warning: This post is meant for a rational audience who likes to wrestle with controversial points of view. If you are not amongst the rational category, please stop reading immediately. The author is not responsible for any results/consequences of reading this blog.


The free market economy is touted as perhaps the best thing that happened to mankind since the invention of the wheel. The market is the place where we trade, where we can exchange goods and services for those which we cannot produce or are outside our skill sets. Money is just a way to facilitate trade, and is not an actual commodity. Or is it? Apparently, we can put a price on money.

But it's not just about money. The free market is said to offer us ultimate choice; a scenario where the consumer is king; the ultimate in stable equilibria; and an invisible hand that always promotes the good of mankind.

However, capitalism, like other systems is an idealistic model, and the systems which we have in place are a poor approximation of the ideal situation.

To begin with, the free market, which serves as the basis for capitalism assumes an infinite number of buyers and sellers, as well as an infinite number of goods/services. This way, the buyers have choices, not just between goods, but also between the sellers selling the goods. This situation can occur only on paper. In fact, we have a limited number of sellers, a large number of buyers, and a number of goods/services. How close is the situation as compared to the ideal?

Not very, apparently. Economies of scale dictate that it is better to mass-produce. This means that we no longer can have the infinitely many small sellers, but they collude and form bigger organisations. These big organisations eventually get extremely powerful and start controlling the market. Intellectual property and patent protection laws often help them dictate terms and control competition. Look at the pharmaceutical industry. With millions of dollars spent in R&D, the pharma companies often charge premium on drugs, many of which are life-saving and essential. The high prices place many of these drugs out of the reach of people who cannot afford them, condemning people to a slow and painful death, while patents prevent other (relatively more) philanthropic players from entering the market to save countless lives. Can't see any benefit to mankind here.

On the other hand, look around whenever you want to buy any equipment, say a computer or a mobile phone. Do you really have a choice? I don't think so. The only choice you have is one of N products, where N may be sufficiently large. None of us has ultimate choice in the marketplace, and yet we think that we are spoilt for choice. In fact, the market structure for most electronic goods is not even an oligopolistic structure, but a monopolistic competition.

Sometimes, I'm amazed by people. They claim that they want choice, and then choose the option where they have minimum choices possible. Anyone buy Apple products? One phone, one music player and one laptop. That's the choice Apple offers, and yet people flock to its stores. The only customisations they get are the stickers that they put on the phone.

Two conditions critical for the free market, which is the basis of capitalism don't exist in the real world. What we have in the real world is a market controlled by few producers, who are powerful enough, and consumers whose awareness is lesser than the poverty line in India. It raises serious doubts about the success of capitalism as a paradigm for the market.

In fact, capitalism has its own share of problems. Profit maximisation has lead to "pollution havens" which are countries with poor environmental standards. These countries are generally poor, and would welcome industry even if it posed risks. These pollution havens are often abused, and products made in these countries are sold in countries with relatively higher environmental standards. In the ideal scenario, goods would be produced locally, and people would resent any harm caused to the local environment due to the production of these goods, which would reflect in poor sales of the product, causing the producer to change his/her method of production. When production (and subsequent pollution) is being done on the other end of the globe, people generally would not care about the harm caused by using something.

Further, big corporations generally prefer big govenments. They lobby for more government control, and in the process create barriers to entry, which prevents smaller fry from getting in. Right now, the cost of a medallion required to run a taxicab in New York is a million dollars, which ensures that only big companies can afford to run taxicab services, and that passengers receive "good" treatment.

So, is capitalism another system that looks good only "on paper"? If so, why has the system survived the test of time. Is it just because we could not find a better, alternate system? Or will time tell? Do the "Occupy" protests signify something? Interesting questions to which I have no answers.

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