Kerux: a portfolio of Calvin Theological Seminary - Volume 45.1 - 15 December 2010

A Critique of Pure Capitalism

by Micah Schuurman

Capitalism is notoriously difficult to define. However, for the sake of this essay, I will define it as an ideology that sets forth a economic system that emphasizes the principles of private ownership, the free market and personal responsibility. These phrases are buzz-words today. Politicians regularly use them in speeches. These ideals conjure up warm feelings in the heart of many and for good reason. But, when implemented, they often yield unintended results.

Private ownership makes sense for anyone who takes a candid look at human nature. People tend to take better care of things that they themselves own. Anyone who has ever had a roommate knows that people often fail to treat their roommate's belongings with care. From the viewpoint of stewardship, it seems as though an individual is more capable than a group of individuals when it comes to caring for certain things, particularly personal belongings. But, it seems that personal stewardship is not ideal when considering stewardship of other aspects of life. An obvious example is stewardship of the environment.

Suppose you and I own two adjacent farms. You take good care of your land, but I don't take good care of mine. I dump chemicals and pollute the groundwater. You water your animals from your well and they get sick and die because of my irresponsible behavior.

The technical economic term for this is an externality, an unintended economic consequence of a particular action. Positive externalities include the way in which a beekeeper's bees will pollinate surrounding crops or the way in which a new business provides jobs to a community. An example of a negative externality is the way in which neighboring houses lose property value when I paint my house a hideous color or the way in which factory farming has endangered public health by creating antibiotic-resistant bacteria.

Negative externalities are a problem because it is an easy way for a company to cut costs. It makes economic sense for a factory to force others to pay the real cost of pollution through poorer health, damage due to acid rain and the negative consequences of global climate change. The more effectively a company can externalize costs, the better its profits will be.

The fundamental problem is that no one actually owns the air or the water table. Unless capitalism can effectively privatize absolutely everything including the rain-water itself (attempted briefly in Cochabamba, Bolivia in 2000), negative externalities will continue to be a problem. The only other viable solution is for the government to take responsibility for protecting those things that cannot be privatized and used for profit.

Capitalists often insist that the free market can iron out the negative externalities. People will stop buying from a company that pollutes or uses other unethical business practices. Unfortunately, this assumes that a significant percentage of people are very well informed consumers and able to weigh the full consequences of each purchase. The quantity of data involved in making even one thoroughly informed decision is astronomical. People seek cheap, quality products. The negative externalities that factor into the true cost of a product rarely factor into the decision at all.

It is impractical to expect the free market to solve negative externalities. But, there are more drawbacks to the free market than simply being unable to handle negative externalities. For example, the free market has no meaningful way of speaking of economic injustice. In capitalism greed is not a sin. Indeed, a business is expected to maximize profit. This involves cutting costs. The ideal businessman is one who can get the most productivity out of workers for the least amount of money. Working within the ideology of capitalism, it is literally impossible for employers to pay workers an just wage provided the employers are working for their own self-interests by maximizing profits. In this system, the needs of the employee do not play any role in determining a fair wage. The employer has no ethical obligation to look out for the welfare of the employees.

The problem here is that the framework of this debate hinges on a false dichotomy. Those supportive of a pure free market insist that we as a society must choose between low wages and no wages, between low-paying jobs and no jobs at all. They forget that there is a third option, jobs that pay a living wage (Consider what Nehemiah 5 tells us about economic injustice). One possible way to engineer a living wage would be to increase the minimum wage, increase taxes and use the increased revenue to give substantially larger tax breaks to people with dependents and to small businesses struggling to pay the higher wages. This would provide more money to those who need it and less to those who don't, namely high-schoolers working summer jobs.

But, the problems with the free market extend beyond being unable to handle negative externalities and the matter of just wages. A pure free market destroys itself from within by means of economies of scale. Economies of scale refer to the fact that it is more efficient to produce products in high quantity. Suppose I own a widget factory. If you need to buy one widget, it will cost me one dollar to make that widget for you. But, if you need one thousand widgets, it may cost as little as 50 cents per widget. Most costs go down as scale increases. A few costs go up as quantities increase. For example, McDonald's devotes a larger share of its profits to legal fees than a mom and pop hamburger joint normally does. But, generally, efficiency increases as quantities increase. That is why Walmart has such low prices.

Efficiency is a necessary part of any healthy economic model. But, efficiency becomes a problem when it enables larger, more efficient companies to wipe out competitors. As this happens, larger companies become more and more like monopolies. Thus, a pure free market inevitably leads to a market with little freedom at all. Government involvement via anti-trust laws seems to be the only thing capable of protecting the free market from itself.

Personal responsibility is the third and final emphasis of Capitalism that I will discuss. Personal responsibility makes sense, particularly in our individualistic culture. In 2 Thesselonians 3:10, Paul reminds the people that “anyone who is unwilling to work shall not eat." But for every passage that seems to put moral responsibility on individuals, many more seem to put responsibility squarely on society as a whole. But, operating within a capitalistic worldview, it is nearly impossible to talk about corporate responsibility in a way that does not reductionistically define it solely in terms of personal responsibility. The two are distinct and yet the two must coexist peaceably in a society that seeks to reflect the will of God for society as found in the Bible.

As you may have noticed, no country has an economic system that reflects the pure Capitalism articulated above. Capitalistic economic systems in the real world tend to supplement the principles of private property, free market and personal responsibility with some corporate ownership, government intervention and communal responsibility. Nevertheless, America's political climate today is such that a person cannot suggest a deviation from pure capitalism without being labeled a socialist or a communist. A day doesn't go by without someone on Fox News denouncing President Obama as one of the two. Obama isn't a socialist. He and the Democrats are capitalists who deviate from the "script" a bit more than Republicans. The debate ought not be about who is better at living up to pure capitalistic ideals. The debate ought to focus on who can combine socialistic principles with capitalistic ones to produce the best "cocktail" for the particular challenges facing our country.