Well, yesterday I looked at three flaws with socialist solutions to a nation's problems.
(1) Decisions are made by people other than those who are the best informed.
(2) Decision makers are motivated by a number of concerns other than the public good.
(3) Political systems respond slowly (way too slowly) to changes circumstances.
So, let's look at three significant problems with capitalist solutions to social problems.
(1) The wealth effect. In a capitalist system, those with money have the power to bid resources away from the more valuable uses to which the poor people would put them.
Capitalists often boast that its system allows for the most efficient allocation of resources because, if you want something more than somebody else, you simply pay more. Resources always go to the person who will pay more, so resources always are given to the person who values them more.
This is false.
Differences in wealth mean that those people who have wealth can outbid those who have significantly less wealth, even if the wealthy person has a trivial interest in those resources.
I have illustrated this in previous posts with the case of a woman with $20 in a drought-infested land wanting to buy water for her sick child, while another woman with $20 million wanting that water to shampoo her poodle. If the two people had equal wealth, the woman with the sick child would certainly outbid the woman with the poodle for that water. Unfortunately, because of differences in wealth, the water is allocated to its socially least valuable use.
The world is filled with wealthy people bidding resources away from poorer people who, nonetheless, would put those resources to more highly valued use.
It takes about nine pounds of grain to produce a pound of meat. If poor people had the means, they would buy that grain to feed themselves and their families. Instead, wealthier people literally bid the grain off of their table and demand that it be used for what merely amounts to an increase in flavor.
The same thing is now happening with ethanol production. Wealthier people are bidding the food away from poorer people to produce energy that they can then continue to use for purposes, many of which are substantially trivial.
(2) Capitalism is a regulatory system.
Capitalists often market the distinction between them and their competitor as a conflict between "regulation" and "no regulagion".
The fact of the matter is that this is a conflict between two different types of regulatory systems.
What is the difference between an action that imposes a legitimate cost on other people, and one that violates their rights? I lower prices in my store, taking your customers, lowering the value of your business. Did I violate your rights? What is the difference between that and letting my property deteriorate, when you live next to me, lowering the value of your property?
What if I build a dam on my property that breaks, causing a rush of water that destroys your house and kills your wife and daughter? Is this a violation of your rights?
How do we define what risks you voluntarily adopt, and what risks I wrongfully impose upon you?
Even in a purely capitalist system, it would take a mountain of legislators, judges, and lawyers to sift through the minutia of what capitalists call “voluntary exchange”. It is no different then the effort that we must also go through with respect to any other type of regulatory system that we choose to set up.
Capitalism is not regulation free. It is, itself, a system for regulating the ownership and transfer of property.
(3) Capitalism is expensive.
I originally entitled this section, "Externalities and the Free Rider Problem." However, externalities are not a problem with capitalism. Externalities occur where capitalism does not exist. Externalities are costs or benefits that are imposed on other people that are not imposed on the people who cause them.
In order for resources to be perfectly allocated, a person who produces benefits for others needs to be compensated for every single benefit provided – and a person who imposes costs on others has to be made to pay those costs.
If he produces benefits where he does not capture any rents, then others are “taking from him” that which is rightfully his. In the economic realm, it means that people are not going to put as much effort into those activities as they would if those benefits could be properly captured.
If he produces costs that others are forced to pay, this is the equivalent of buying things on somebody else’s credit card without their consent. Activities where people can force others to pay the bill are activities that people are likely to perform even when the social benefit of their actions is negative.
Imagine what it would cost to have a system where every single benefit that one produces for others is captured in terms of rents or payments, and one is forced to pay for every single cost that one imposes on others.
At some point, we have to say that the marginal cost of additional capitalism simply is not worth the marginal benefits. At that point, we say, "We're just going to stop capitalism right here and allow the "thefts" in capitalist terms beyond this point to stand without worrying about them."
Ultimately, we are forced into a choice - to not use capitalism when it does not pay to do so, or to institute some very expensive systems of property rights that cover absolutely every externality produced both positive and negative.
So, capitalism has its problems. It allows for the gross misallocation of resources, it is a regulatory framework that is subject to all of the abuses of any regulatory abuses, and it can be fully extended and applied only at very great expense.
Socialism has its problems.
The question of whether to adopt capitalist or socialist solutions to our problems is not an either or question. It is a question that requires taking seriously the benefits and the problems that exist in each system and then trying to choose which tool is best for a given job.
Sometimes, that is not going to be an easy question to answer. Sometimes, morally reprehensible people are going to get in and muddy the waters as much as they can because they see an opportunity to gain personal benefit by generating confusion and manipulating us into choosing poorly.
These are facts that we simply have to include in our decision making.