Does Capitalism Really Work?

There is no doubt that capitalism is the most successful economic system to date among all those that have existed. Thanks to capitalism, we owe all the scientific and technological advancements that have allowed humanity to live at a much higher standard of living today than a few hundred years ago.

The system owes its success to a simple rule (as mentioned by Harari in "Sapiens"): be selfish. A fundamental principle of modern capitalist economics is that every participant is "rational". Their sole aim is to maximize profits and minimize costs. Sellers and buyers meet in the free market, guaranteeing that the system will function optimally. For instance, if a product costs $10, but could actually be produced for $5, a market gap is created, which someone will sooner or later fill to generate profit for themselves, thus the price of the product will eventually drop to $5. Capitalism, therefore, does not need to be regulated. It is best left alone, as it will regulate itself. This is what we call the invisible hand of capitalism. A simple and elegant theory, right? Too bad it doesn’t work…

It's important to recognize that capitalism is a self-organizing optimization system that, although not perfect, functions quite well. However, it's crucial to establish the system's boundaries for this to be the case. A simple example is slave labor. Since capitalism lacks morality, its sole aim is to maximize profit and optimize the system. Therefore, if a country allows slave labor and it results in the highest profit, then according to capitalist logic, slaves should be employed. There's nothing inherently wrong with this; capitalism itself doesn't become evil by doing so. It merely selects the most optimal solution within the given constraints. Thus, we should not expect the amoral invisible hand of capitalism to abolish slavery. This task falls to us, the people. We must set the boundaries within which capitalism can operate. For instance, employing slaves must be prohibited, as it is morally unacceptable.

Fortunately, slavery is now prohibited in most places, but other challenges have taken its place. Currently, one of the biggest challenges is climate change and sustainability. As long as it is much cheaper to produce goods in an unsustainable manner, capitalist logic will utilize these methods. There is nothing strange about this. Capitalism isn't evil; this is simply its logic. If we don't want to overheat, drown in waste, or face wars due to some areas becoming uninhabitable, then we must set boundaries just as we did with slavery. We must prohibit unsustainable production methods and the use of unsustainable energy sources. Perhaps in 100 years, unsustainable production will seem as barbaric to people as slavery does to us. They will ask: How could humanity have allowed all this?

But accurately delineating boundaries is just one of the problems; the free market doesn't operate entirely as prescribed in theory. In the market, we might observe the system working well between two egg vendors, but the situation is far from ideal when looking at large corporations. For instance, in the tech market, instead of many competitors, we see only a few dominant ones. In the realm of social networks, Facebook prevails; in search, it's Google, and so on. Although the market is theoretically open, in reality, it's nearly impossible for any new players to emerge. The reason for this phenomenon is quite simple: the "gravity" of large companies. Once a company grows sufficiently large, it can easily absorb the competition and smaller ones. Just consider the numerous acquisitions byGoogle or Facebook. Additionally, the services themselves have their gravity. People use Facebook because their friends are there. This is the network effect, which becomes very hard to counteract beyond a certain size. Even if a much better social network were introduced, it would be very difficult to lure people away from Facebook. And if it ever did become a significant player, Facebook could easily acquire the company.

But we can see the same trend on a smaller scale, at the individual level as well. Along with the companies, the wealth of investors also grows. The rich become richer, the poor become poorer, and the gap between the two social strata widens. If our goal as humanity is to increase happiness on a global scale (for every individual), then in its current form,

capitalism has failed to achieve this goal.

Of course, let's not throw the baby out with the bathwater. Capitalism isn't a bad system, but it needs bug fixes, or rather, a significant upgrade.

First and foremost, we need to reevaluate the boundaries of capitalism, which can only be done on a moral basis. Just as we abolished slavery on moral grounds, we must also prohibit the use of our descendants' resources in advance on moral grounds. We have reached a point where the living conditions of future generations are at risk. Consider the cruelty of forcing our children and grandchildren to live in an uninhabitable world, which is at least as cruel as slavery, if not worse. Yet, we don't feel the weight of this issue.

The second issue, the problem of inequality, can only be addressed by a massive redistribution system. Although one of the foundational ideas of capitalism is that it should not be interfered with, and the free market along with the "invisible hand" will solve everything, it appears this doesn't work in practice. Due to the "gravitational" force of capital, the rich get richer and the poor get poorer, and the situation will only get worse if artificial intelligence takes away many people's jobs. What can help with this is a massive redistribution system. But what would such a system look like?

A suitable tax system can be used to collect money, but who decides who gets the money collected in this way? There is a very simple answer to this, which is essentially the typical capitalist response as well: let the market decide. Simply distribute the money equally among the people, and they will then support the actors who are important to them with their spending. Meanwhile, no participant can grow too large because of the redistribution system. The basic logic of such a system is as simple as the capitalist "be selfish" logic. It doesn't require a complex apparatus, the whole process could be automated.

This is the logic behind Philp Rosedale's (creator of SecondLife) system calledFairShare. On the project's website, there's a simulation that demonstrates how social inequalities grow over time in a free market, and how the process can be regulated by a simple redistribution system. This system, where people receive an income on a universal basis, is called a universal basic income. The system is so simple that it could even be automated. In a digital currency system (for example, based on blockchain), it would be possible for taxes to be automatically paid from every transaction. There would be no need for separate accounting and bookkeeping systems, as the tax system would be "built into" the money itself. The distribution of the basic income would also be part of the system, occurring automatically without human intervention. Just imagine how much human resources such an automated system would free up.

Rosedale's system is ingenious. The only point where I disagree with him is in his attempt to implement this money system as a form of community currency. I believe such a system cannot function as a community currency because only those who would gain more from the basic income than they lose through taxes would find it worthwhile to connect to such a system. Without net contributors, it would not be possible to cover the basic income, leading to the system's demise. As a community currency, I could better envision "karma money," which is reputation-based credit money.

This brings us to the final important conclusion:

capitalism cannot be fixed with local bug fixes. The problem is systemic and thus requires a systemic solution.

Convincing people to cycle to work or to separate their waste selectively won't significantly make the economy more sustainable. There needs to be substantial regulation of industries and companies, something only states are capable of. Similarly, it's impossible to locally implement a basic income system like the one Rosedale envisioned. This can be forced only by the state, and yes, it will hurt many wealthy individuals, but at the same time, it will reduce social inequalities, make the market function better, and last but not least, increase global well-being. But if this is the case, why don't states act?

To fix the bugs in capitalism, we first need to fix the bugs in democracy.

In current representative democracies, the state typically represents the interests of corporations. I'm not suggesting that elections are merely an illusion, as we genuinely can choose between value systems. However, it's typical for all sides to primarily serve corporate interests, with value choices coming secondary. This could only change if there were a much greater level of political awareness among people.

It's important to separate your waste selectively, but it's even more important whom you vote for in the election.

Of course, we would also need representatives who primarily represent the voters (as they should by default), and it would be also important to include people to participate more directly in decision-making. For instance, there are already technologies available that could organize completely secure, anonymous voting on important issues, allowing everyone to comfortably vote from home via the Internet. Such voting could be initiated by anyone, and the representatives would then need to act according to the voting results. If people are dissatisfied with a representative's work, they could be recalled at any time. If we could fix the bugs in our democracy, we could fix the entire economic system through it.

As I mentioned at the beginning of the article, capitalism is still the best among all economic systems. However, the flaws that are encoded into the system are becoming increasingly visible. If we want to avoid collapse, it is essential that we upgrade the system, and hopefully, with Capitalism 2.0, we can make it through a few more centuries.