A Critique of Capitalism

The fundamental idea of Capitalism is simple, direct, and sounds eminently sensible: Those people who have demonstrated an ability to create wealth should have a privileged economic position to create more wealth.

It's also completely wrong. It's not just that it doesn't always work out well, often leading to a small privileged elite and large numbers of people who live at the edge of starvation. It's fundamentally flawed.

As I'm trying to show in my series on economics, an individual does not receive a disproportionate reward in a free market from creating the most value. An individual receives a disproportionate reward from exploiting a bottleneck.

By itself, rewarding the exploitation of a bottleneck is a Good Idea. One good sense of efficiency is a system without bottlenecks. In first-order economics, rewarding the exploitation of a bottleneck widens it, either by throwing more labor at it or by discovering technological alternatives. It's a good negative feedback loop. It even makes sense to base a certain degree of privilege on bottlenecks: We want people who are good at finding and widening bottlenecks to have a privileged position to find and widen more bottlenecks.

However, human beings are capable of thinking about economics in more than just first-order terms. A clever human being, knowing that a free market rewards exploiting a bottleneck, will seek to find (or create) a bottleneck that can be exploited without widening it, a self-perpetuating bottleneck.

And that's precisely what Capitalism is. There's an inherent bottleneck in almost all human activity, the start-up costs: equipment, training and the like. Otherwise known as capital. If an individual can make capital a bottleneck, then because he faces less competition, control of the capital allows him raise the price of a commodity to the inherent value (thus capturing the excess value). He is no longer forced to decrease the price to the true (or opportunity-adjusted) cost (thus distributing the excess value to the consumer). Which gives that individual more capital, thus concentrating the ownership of capital and narrowing the bottleneck, establishing a (bad) positive feedback loop.

The above is just a restatement of Marx' brilliant critique of Capitalism₁. Marx himself, writing in the 19th century, can be forgiven for stopping there. But that's not the end of the story. Capitalism has not gone completely off the rails... at least not yet. There's still a (good) negative feedback loop in Capitalism₂.

The capitalist₂, to be effective, has to be use his capital to produce commodities. In order to charge a higher price for a commodity, people have to be able to pay that price. So some of the excess value has to be distributed to some of the general population so they can pay that higher price. Capital cannot simply accumulate excess value; it has to permit some of that excess value to move back to the population so that the capital itself has value. Thus we have a partial, second-order negative feedback loop in Capitalism₂.

But there's still a big problem with Capitalism₂... at least from the Capitalist's perspective. If we have to distribute some excess wealth to some of the general population to give value to capital, some of those people will perversely and immorally accumulate the excess value and create their own capital, instead of using it to pay for more commodities. The individual capitalist thus faces more competition, which forces him to distribute more of the excess value to more of the population, until he's barely being paid for anything more than the time he has to actually work, i.e. his own labor.

The really clever Capitalist will employ third-order reasoning. He's found and exploited a first-order bottleneck (he's made a better widget), and he's used the partial second-order positive feedback loop to accumulate more capital. Now he's faced with the immoral and ridiculous demand that he be altruistic, that he distribute some of the excess value he's honestly accumulated by the sweat of his brow to people who by definition haven't earned it, because they themselves did not find and exploit a bottleneck. This demand really is intolerable.

The really clever Capitalist will use third-order reasoning to shut the door behind him, to make absolutely sure that he does not face competition from the general population. Instead of using his capital to create more value, he has both the incentive and power to use his capital to create less value. Indeed, the successful Capitalist has every reason to undermine Capitalism₂, and no inherent reason not to do so.

Marx glimpsed this analysis — it's the fundamental contradiction of Capitalism — but he failed to nail it. There's nothing particularly magical about capital as a bottleneck: any self-perpetuating bottleneck will have the same effect, and any self-perpetuating bottleneck which purports to widen bottlenecks will suffer from the same contradiction.

As an exercise for the reader, look for self-perpetuating bottlenecks in history and modern societies. They're all over the place. For example, the self-perpetuating bottleneck of feudalism is ownership of land.