Inequality.org

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Institute for Policy Studies

Is Capitalism To Blame For Inequality?

Is American capitalism the cause of our country’s growing and very worrisome inequality? That all depends on how you define ‘capitalism.’

By Sheila Suess Kennedy

Credit: independentaustralia.net

Credit: independentaustralia.net

As Adam Smith explained many years ago, the “invisible hand” of the market channels self-interest toward socially desirable ends. Market competition has given us better goods at lower prices, and has demonstrably been a “rising tide” lifting many boats.

Why, then, is America’s capitalist economy generating so much criticism? What is the cause of the country’s growing and very worrisome inequality?

Two reasons are pretty apparent.

First, the system we currently have in the U.S. is not market capitalism. It is corporatism. Corporatism has been defined as the organization of society by major interest groups, specifically corporations. It isn’t exactly a secret that the last thing many of our captains of industry want is genuine competition. The legions of lobbyists sent to Washington and state capitals are not arguing for open markets; they are vying for competitive advantages and taxpayer subsidies.

The second reason is less obvious, but no less consequential. Markets don’t work everywhere.

In the areas of the economy where market competition is appropriate—in the production of consumer goods and services, most obviously—they work as Smith’s theory suggests. But as every student of economics learns, there are areas where competition is unworkable.

Historically, for example, America has regulated utilities, and (at least since Teddy Roosevelt) tried to prevent domination of a market through monopolistic practices. (As technologies and markets change over time, these categories may shift, and it isn’t always clear that our governing institutions keep pace, but that is a subject for another day.)

What doesn’t change, however, is a foundational premise: In order for a market to function, there must be a willing buyer and a willing seller, both of whom are in possession of the necessary relevant information. When there is a significant and unavoidable asymmetry of knowledge or information, a true market cannot exist.

Health care is the poster child for that asymmetry. Not only does the consumer lack the information and expertise necessary to “shop” for a seller/provider, the realities of illness make it likely that she will lack the time needed to evaluate her options. Add to that the way in which the health insurance industry has developed, with “in network” and “out of network” providers, and you don’t have to be an economist to recognize that market principles are simply inapplicable.

Most Western nations came to that conclusion many years ago, and most have national health care systems. Here in the U.S., even the modest movement toward government-insured access to health insurance has met with hysterical resistance—and lots of rhetoric about creeping socialism and the superiority of markets.

The immorality of this refusal to make important distinctions was most recently highlighted by the actions of one Martin Shkreli, who bought the rights to a drug and raised its price 5500%. As several commentators noted, America is the only developed nation that lets drug-makers set their own prices — maximizing profits the same way that sellers of chairs, mugs, shoes, or any other seller of manufactured goods would.

Shkreli’s behavior underscores the irrationality—and yes, the immorality—of America’s healthcare system, where corporations set public policies and insist upon market principles in an area where, by definition, genuine markets cannot function.

The moral of this story: don’t blame capitalism. This isn’t it.

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