Misconceptions About Capitalism, Part I

Due to the relatively positive reception to my articles regarding "Misconceptions about Communism," I thought it might be helpful to look into some of the misconceptions that still exist about capitalism. Now, that's not to say that these are misconceptions held by economists or experts in economics - but rather, some of the more generalized and common misconceptions held by the public. I've encountered many of these even amongst graduate students whom I have discussed the topic with, and I thought it would be interesting (and hopefully informational) to try and dispel some of these myths. As always I appreciate any feedback left in the comments-section underneath and would be more than happy to address any issues brought up there.

Misconception Number 1: "The free market brings better goods at lower prices."

This misconception is both complex and often times based on circumstantial evidence. It is true that in the latter half of the 19^th and early half of the 20^th centuries, where capitalism was considered highly unregulated compared to today, many new consumer products were launched onto the market - sometimes even faster and of higher quality than those produced in socialist states. However, how much of this can be attributed to the free-market itself is where the misconception occurs. Even more, this misconception leads to another one - that any and all regulation of the market is thus inherently bad.

Now this works in two ways. First, regulated capitalist economies have a history of offering a similar path as less-regulated models. Much of the success in varying capitalist societies cannot be attributed solely to the economic arrangement itself. For instance, increases in the standards of living and the availability of more products can also be attributed to the work of labor unions and workers' associations for pushing for increased wages, a standardized minimum wage, and other important factors. Likewise, the history of capitalism itself has shown it can produce both positive and abysmal consequences for the economy and people. The unregulated market-reforms in post-Soviet Russia has seen massive unemployment, significant decreases in standards of living (including population life expectancy), and significant drops in public services once depended upon by the general population.

The trajectory of capitalism in this country has certainly not left its fate solely to be determined by the market. When economic indicators rise too fast, large business and corporate interests become concerned about inflation. Often they lobby and push to have the government intervene to slow things down, resulting in increases in unemployment and widespread lowering of wages.

Misconception Number 2: "Everyone has equal opportunity to succeed in capitalism."

This misconception is especially popular amongst Americans, where the economic situation has historically been quite distinct from many countries in Europe. There's no denying that American capitalism has its fair share of "rags to riches" stories, and even many families can look back to see how their ancestors (coming from modest to desolate means) were able to scrap enough together to put their children through college and so forth. However, the fact is, it's not that simple. Material success in America is not simply an opportunity open to absolutely everyone. In fact, much more is at stake. Some of the distinctions that can determine the overall outcome of one's potential for economic success in America start before birth. What type of familial support system (both material and immaterial) will play a significant role in how successful you will be. Secondly, not everyone possesses the same skills that will determine whether or not they will be an economic success. Moreover, access to borrowed capital, one's reputation with influential people in government and finances, being in the right place at the right time, and the limited amount of factors in one's life one has control over will all be subsequently important factors in determining economic success (or lack thereof). It's a very commonly-held belief that working hard alone will make you successful in the American economy. This could never be the case, as capitalism does not operate like a merit-based lottery. The system itself is designed to make a tiny majority extremely wealthy and in control of the vast majority of the national wealth. Standards of living increase but these need to be contextualized as well. These indicators also need to be looked at in relation to other important indicators. For instance, making $50,000 per year now in 2008 is obviously not going to be as comfortable as it would have been at the turn of the 20^th century.

Misconception Number 3: "Keeping services private keeps them more responsive and efficient."

This is another keystone misconception commonly found in the American psyche. This is especially noted in American aversion to even a nationalized system of healthcare or health insurance. There exists a widespread fear that publicly owned services and industries will become stagnant, bureaucratic, and inefficient as opposed to privately owned ones. The fact is though, that private services have the possibility and potential to be just as inept and ineffective as any publicly owned one. Neither can necessarily be predicted. Moreover, private services do not respond to need. They respond to market trends. True, public needs/wants may play a very influential role in determining the market, but because they operate on a profit incentive all private firms providing a service will pay attention first and foremost to the market pressures for which they respond to, not the general needs of the public. In other words, a private firm will not provide a specified service is there is no market based need to do so. Or, if there is no profit motive to provide said service then there remains little motivation or incentive to provide it on any other basis.

These are only three of what I thought the most glaring misconceptions about capitalism (strictly as an economic system). In a future article I will deal more with the political/social assumptions that are often times associated with capitalism as well (including the misconceptions and fallacious beliefs regarding capitalism/democracy).