Is capitalism actually broken?

Imagine three machines representing the economic system of a country. Every machine has three inputs: labor, people’s work. Capital, all the stuff that a business might use, including intangibles, like ideas. And natural resources. The machine converts these inputs into goods and services, and because we’re willing to pay for the things the machine produces, what the machine is really creating here is value. Economies turn inputs into value.

What determines whether the machine is capitalist, communist, socialist, or something else? Three dials.

The first dial controls who owns the capital. Over here, the government owns every bit of capital, down to the last office paperclip. North Korea is probably the closest economy to 0%. On the other end of the spectrum, at 100%, private citizens own all the capital. The US is about here, at roughly two-thirds private ownership. The second dial dictates how much control the government has over what gets produced. In economies with high coordination, like the old USSR, the government dictated what the economy could— and would— produce. In economies with low coordination, the government might mandate a few things, but leaves most decision-making up to the private sector.

The third dial controls how extensively markets are used to set prices. Over here at 0%, we have economies with no markets, where the government sets all prices, and consumers have no say. Over here at 100%, markets are used to set the price of everything, even things like basic life-saving health care. You can also think of this dial as controlling the number and extent of government regulations— from tariffs on foreign goods to antitrust laws to regulations on net neutrality.

So, capitalism isn’t just one type of economy— it’s a wide range of possible economies, which makes answering the question of whether capitalism is broken, complicated. But we’re going to try. At the height of the Industrial Revolution, the dials were set pretty close to what we now call free market, or “laissez-faire” capitalism. There were very few regulations, and economists of the time believed that capitalism’s “invisible hand”— basically, individuals acting freely and in their own self-interest— would produce optimal outcomes, both for the economy and for society. And that’s how we ended up with embalming fluid in milk. In the late 1800s in the United States, food manufacturers put all kinds of cheap (and sometimes dangerous) adulterants in food to maximize profits.

What they were doing was legal, but of course, wrong. There was a public outcry, and in 1906, Congress passed the Pure Food and Drugs Act, setting the stage for the Food and Drug Administration, which watches over the US’s food supply to this day. These days, no economy really practices pure “invisible hand” capitalism, but some people are increasingly worried that today’s threats, like climate change and rising inequality, can’t be solved by any capitalist system. Let’s look at climate change first. Capitalist economies incentivize growth. That’s created massive demand for the cheapest energy possible, which, for a long time, was fossil fuels. Burning all those fossil fuels unquestionably drove— and continues to drive— climate change. Not only that, but the desire to maximize profit usually gives corporations a powerful incentive to ignore inconvenient truths. Just like tobacco companies denied the link between cigarettes and cancer, oil and gas companies denied or downplayed climate science for decades.

Next, inequality. Inequality is complicated but the simple story is: in many countries, inequality is rising. In the US, the UK, Canada, Ireland, and Australia, the top 1% of income earners have been eating up a larger and larger share of total income over the past 50 years. In the UK, the top 1% share doubled from 7% in 1980 to 14% in 2014. But that's not the whole picture. In England, the country for which we have the best data before capitalism, the share of income going to the top 5% of income earners peaked at around 40% in 1801, and then, as capitalism took hold, it fell steadily to a low of about 17% in 1977. These days, it’s back up— hovering around 26%. And here’s another data point: in many European countries and Japan, the top 1%’s share of income came down from 20 to 25% in the early 1900s to 7 to 12% today.

So, is capitalism increasing inequality or not? It depends. Remember, there's a wide range of settings that all fall under capitalism, meaning that one country's version can look very different from another's. It’s totally possible that inequality could be increasing in China’s version of capitalism, while it decreases in France’s. Capitalism, it seems, is a double-edged sword. On the one hand, it generates a huge amount of value, which translates to almost everyone having more money than they otherwise would. On the other hand, it also funnels the biggest chunk of that money into the wallets of relatively few people. Capitalism’s staunchest defenders say that with enough grit and determination, anyone can join the ranks of the wealthy. Is that really true? In a free, capitalist market, the wealth generated by successful companies mostly flows to the owners. And along with that come other benefits: education, health, social standing, and power.

If owners tinker with the machine so that it benefits them more than others, they create a feedback loop where power and everything that flows with it calcifies within their families. And then you’ve got, basically, an aristocracy. So, let’s break down the question we started with: is pure, “invisible hand” capitalism, with all the dials set to the extremes, broken? Yeah. But it’s also kind of irrelevant, since no country uses pure capitalism. Is contemporary capitalism— as it’s practiced in much of the world today— broken? Well, it’s the major driver of climate change and in many places is contributing to rising inequality. And it may even be creating a de facto aristocracy in certain countries, so, not looking good. The critical question is: can we fix contemporary capitalism by fiddling with the dials or restricting who can turn them, or do we need to tear the machine down and build a new one from scratch?