capitalism and inequality essay

How Capitalism Actually Generates More Inequality

Why extending markets or increasing competition won’t reduce inequality.

By Geoffrey M. Hodgson

At least nominally, capitalism embodies and sustains an Enlightenment agenda of freedom and equality. Typically there is freedom to trade and equality under the law, meaning that most adults – rich or poor – are formally subject to the same legal rules. But with its inequalities of power and wealth, capitalism nurtures economic inequality alongside equality under the law.

Today, in the USA, the richest 1 per cent own 34 per cent of the wealth and the richest 10 per cent own 74 per cent of the wealth. In the UK, the richest 1 per cent own 12 per cent of the wealth and the richest 10 per cent own 44 per cent of the wealth. In France the figures are 24 cent and 62 per cent respectively. The richest 1 percent own 35 percent of the wealth in Switzerland, 24 per cent in Sweden and 15 percent in Canada. Although there are important variations, other developed countries show similar patterns of inequality within this range. [1]

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In their book The Spirit Level, Richard Wilkinson and Kate Pickett showed multiple deleterious effects of inequalities of income and wealth. Using data from twenty-three developed countries and from the separate states of the United States, they observed negative correlations between inequality, on the one hand, and physical health, mental health, education, child well-being, social mobility, trust and community life, on the other hand. They also found positive correlations between inequality and drug abuse, imprisonment, obesity, violence, and teenage pregnancies. They suggested that inequality creates adverse outcomes through psycho-social stresses generated through interactions in an unequal society.

Although economic inequality is endemic to capitalism, data gathered by Thomas Piketty in his Capital in the Twentieth Century , and in my book entitled Conceptualizing Capitalism , show that there are large variations in measures of inequality in different major capitalist countries, and through time. The existence of such variety within capitalism suggests that it possible to alleviate inequality, to a significant degree, within capitalism itself.

But first we must be clear about the drivers of inequality within the system. What are the mechanisms within capitalism that exacerbate inequalities of income or wealth?

Some inequality results from individual differences in talent or skill. But this cannot explain the huge gaps between rich and poor in many capitalist countries. Much of the inequality of wealth found within capitalist societies results from inequalities of inheritance. The process is cumulative: inequalities of wealth often lead to differences in education, economic power, and further inequalities in income. [2]

Do markets create inequality?

To what extent can inequalities of income or wealth be attributed to the fundamental institutions of capitalism, rather than a residual landed aristocracy, or other surviving elites from the pre-capitalist past? A familiar mantra is that markets are the source of inequality under capitalism. Can markets be blamed for inequality?

In real-world markets different sellers or buyers vary hugely in their capacities to influence prices and other outcomes. When a seller has sufficient saleable assets to affect market prices, then strategic market behaviour is possible to drive out competitors.

Would more competition, with greater numbers of market participants, fix this problem? If markets per se are to be blamed for inequality, then it has to be shown that competitive markets also have this outcome. Unless we can demonstrate their culpability, blaming competitive markets for inequalities of success or failure might be like blaming the water for drowning a weak swimmer.

To demonstrate that competitive markets are a source of inequality we would have to start from an imagined world where there was initial equality in the distribution of income and wealth, and then show how markets led to inequality. I know of no such theoretical explanation.

Markets involve voluntary exchange, where both parties to an exchange expect benefits. One party to the exchange may benefit more than the other; but there is no reason to assume that individuals who benefit more, or benefit less (in one exchange) will generally do so. And if some traders become more powerful in the market than others, then its competitiveness is reduced.

There is another reason why it is a mistake to focus on markets. In the sense of organized arenas of exchange, markets have existed for thousands of years. We need to look at new institutional drivers of inequality that became prominent in the last 400 years or so. These new institutional changes were additional to markets.

The sources of inequality within capitalism

So if markets per se are not the root cause of inequality under capitalism, then what is? A clear answer to this question is vital if effective policies to counter inequality are to be developed. Capitalism builds on historically-inherited inequalities of class, ethnicity, and gender. By affording more opportunities for the generation of profits, it may also exaggerate differences due to location or ability. Partly through the operation of markets, it can also enhance positive feedbacks that further magnify these differences. But its core sources of inequality lie elsewhere.

Because waged employees are not slaves, they cannot use their lifetime capacity for work as collateral to obtain money loans. The very commercial freedom of workers denies them the possibility to use their labour assets or skills as collateral. By contrast, capitalists may use their property to make profits, and as collateral to borrow money, invest and make still more money. Differences become cumulative, between those with and without collateralizable assets, and between different amounts of collateralizable wealth. Even when workers become home-owners with mortgages, the wealthier can still race ahead.

Unlike owned capital, free labour power cannot be used as collateral to obtain loans for investment. At least in this respect, capital and labour do not meet on a level playing field, this asymmetry is a major driver of inequality.

The foremost generator of inequality under capitalism is not markets but capital . This may sound Marxist, but it is not. In my Conceptualizing Capitalism I define capital differently from Marx and from most other economists and sociologists. My definition of capital corresponds to its enduring and commonplace business meaning. (Piketty’s definition is also similar to mine.) Capital is money, or the realizable money-value of collateralizable property . Unlike labour, capital can be used as collateral and the loan obtained can help generate further wealth.

Because workers are free to change jobs, employers have diminished incentives to invest in the skills of their workforce. Especially as capitalism becomes more knowledge-intensive, this can create an unskilled and low-paid underclass and further exacerbate inequality, unless compensatory measures are put in place. A socially-excluded underclass is observable in several developed capitalist countries.

Another source of inequality results from the inseparability of the worker from the work itself. By contrast, the owners of other factors of production are free to trade and seek other opportunities while their property makes money or yields other rewards. This puts workers at a disadvantage. Through positive feedbacks, even slight disadvantages can have cumulative effects.

None of these core drivers of inequality can be diminished by extending markets or increasing competition. These drivers are congenital to capitalism and its system of wage labour. If capitalism is to be retained, then the compensatory arrangements that are needed to counter inequality cannot simply be extensions of markets or private property rights.

These ineradicable asymmetries between labour and capital mean that ultra-individualist arguments against trade unions are misconceived. In a system that is biased against them, workers have a right to organize and defend their rights, even if it reduces competition in labour markets.

Reducing inequality – within capitalism

The twentieth-century socialist experiments in Russia and China undermined human rights in their efforts to reduce inequality. This is not a road that we should attempt to follow.

Instead, we have to look at ways of reducing inequality within capitalism, and which do not undermine capitalism’s unparalleled capacity to increase productivity and generate wealth.

Long ago, Thomas Paine (1737-1809) argued for an inheritance tax, but balanced this by a grant to each adult at reaching the age of maturity. In this way, wealth would be recycled from the dead to the young, providing greater equality of opportunity across the board. Paine also advocated welfare provision and a guaranteed pension for those over 50.

Bruce Ackerman and Anne Alstott took up Paine’s agenda in their proposal for a ‘stakeholder society.’ They argued that ‘property is so important to the free development of individual personality that everybody ought to have some’. They echoed Francis Bacon: ‘Wealth is like muck. It is not good but if it be spread.’

Ackerman and Alstott stressed progressive taxes on wealth rather than on income. Echoing Paine, they proposed a large cash grant to all citizens when they reach the age of majority, around the benchmark cost of taking a bachelor’s degree at private university in the United States. This grant would be repaid into the national treasury at death. To further advance redistribution, they argued for the gradual implementation of an annual wealth tax of two percent on a person’s net worth above a threshold of $80,000. Like Paine, they argued that every citizen has the right to share in the wealth accumulated by preceding generations. A redistribution of wealth, they proposed, would bolster the sense of community and common citizenship.

Increased wealth or inheritance taxes are likely to be unpopular because they are perceived as an attack on the wealth that we have built up and wish to pass on to our children or others of our choice. But the brilliance of Paine’s 1797 proposal for a cash grant at the age of majority is that it offers a quid-pro-quo for wealth or inheritance taxes at later life.

People will be more ready to accept wealth taxation if they have earlier benefitted from a large cash grant in their youth. Wealth would by recycled to younger generations rather than syphoned away. The more fortunate or successful can be persuaded to give up some of their advantages if they see the benefits for society as a whole.

In the economy, there are many ways of spreading power and influence more broadly. The idea of extending employee shareholding is growing in popularity. This is a flexible strategy for extending ownership of revenue-producing assets in society. In the USA alone, over ten thousand enterprises, employing over ten million workers, are part of employee-ownership, stock bonus, or profit-sharing schemes. Employee ownership can increase incentives, personal identification with the enterprise, and job satisfaction for workers.

As modern capitalist economies become more knowledge-intensive, access to education to develop skills becomes all the more important. Those deprived of such education suffer a degree of social exclusion, and, unless it is addressed, this problem is likely to get worse. Widespread skill-development policies are needed, alongside integrated measures to deal with job displacement and unemployment.

A key challenge for modern capitalist societies, alongside the needs to protect the natural environment and enhance the quality of life, is to retain the dynamic of innovation and investment while ensuring that the rewards of the global system are not returned largely to the richer owners of capital. As Paine put it in 1797:

All accumulation, therefore, of personal property, beyond what a man’s own hands produce, is derived to him by living in society; and he owes on every principle of justice, of gratitude, and of civilization, a part of that accumulation from whence the whole came.

We need to update Paine’s approach to dealing with inequality, to suit modern times.

[1] Data are for 2010 and from the Credit Suisse Research Institute (2012). See also Piketty (2014) for extensive data on inequality.

[2] See Bowles and Gindis (2002) and Credit Suisse Research Institute (2012). See Ackerman and Alstott, (1999) and Atkinson (2015) on policies to reduce inequality.

2016 August 11

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The great wealth wave

The tide has turned – evidence shows ordinary citizens in the western world are now richer and more equal than ever before.

by Daniel Waldenström   + BIO

Recent decades have seen private wealth multiply around the Western world, making us richer than ever before. A hasty glance at the soaring number of billionaires – some doubling as international celebrities – prompts the question: are we also living in a time of unparalleled wealth inequality? Influential scholars have argued that indeed we are. Their narrative of a new gilded age paints wealth as an instrument of power and inequality. The 19th-century era with low taxes and minimal market regulation allowed for unchecked capital accumulation and then, in the 20th century, the two world wars and progressive taxation policies diminished the fortunes of the wealthy and reduced wealth gaps. Since 1980, the orthodoxy continues, a wave of market-friendly policies reversed this equalising historical trend, boosting capital values and sending wealth inequality back towards historic highs.

The trouble with the powerful new orthodoxy that tries to explain the history of wealth is that it doesn’t fully square with reality. New research studies, and more careful inspection of the previous historical data, paint a picture where the main catalysts for wealth equalisation are neither the devastations of war nor progressive tax regimes. War and progressive taxation have had influence, but they cannot count as the main forces that led to wealth inequality falling dramatically over the past century. The real influences are instead the expansion from below of asset ownership among everyday citizens, constituted by the rise of homeownership and pension savings. This popular ownership movement was made possible by institutional changes, most important democracy, and followed suit by educational reforms and labour laws, and the technological advancements lifting everyone’s income. As a result, workers became more productive and better paid, which allowed them to get mortgages to purchase their own homes; homeownership rates soared in the West from the middle of the century. As standards of living improved, life spans increased so that people started saving for retirement, accumulating another important popular asset.

Today, the populations of Europe and the United States are substantially richer in terms of real purchasing-power wealth than ever before. We define wealth as the value of all assets, such as homes, bank deposits, stocks and pension funds, less all debts, mainly mortgages. When counting wealth among all adults, data show that its value has increased more than threefold since 1980, and nearly 10 times over the past century. Since much of this wealth growth has occurred in the types of assets that ordinary people hold – homes and pension savings – wealth has also become more equally distributed over time. Wealth inequality has decreased dramatically over the past century and, despite the recent years’ emergence of super-rich entrepreneurs, wealth concentration has remained at its historically low levels in Europe and has increased mainly in the US.

Among scholars in economics and economic history, a new narrative is just beginning to emerge, one that accentuates this massive rise of middle-class ownership and its implications for society’s total capital stock and its distribution. Capitalism, it seems, did not result in boundless inequality, even after the liberalisations of the 1980s and corporate growth in the globalised era. The key to progress, measured as a combination of wealth growth and falling or sustained inequality, has been political and institutional change that enabled citizens to become educated, better paid, and to amass wealth through housing and pension savings.

I n his book Capital in the Twenty-First Century (2014), Thomas Piketty examined the long-run evolution of capital and wealth inequality since industrialisation in a few Western economies. The book quickly received wide acclaim among both academics and policymakers, and it even became a worldwide bestseller.

Piketty’s narrative outlined wealth accumulation and concentration as following a U-shaped pattern over the past century. At the time of the outbreak of the First World War, wealth levels and inequality peaked as a result of an unregulated capitalism, low taxation or democratic influence. During the 20th century, wartime capital destruction and postwar progressive taxes slashed wealth among the rich and equalised ownership. Since 1980, however, goes Piketty’s narrative, neoliberal policies have boosted capital values and wealth inequality towards historic levels.

Immediately after publication, Capital generated fierce debate among economists, focused primarily on the book’s theoretical underpinnings. For example, Piketty had sketched a couple of ‘fundamental laws’ of capitalism, defining the economic importance of aggregate wealth. The first law stated that the share of capital income in total income (the other share coming from labour) is a function of how much capital there is in the economy and its rate of return to capital owners. The second law stated that the amount of capital in the economy, measured as its share in total output, is determined by the balance between saving to accumulate capital and income growth. While these laws were actually fairly uncontroversial relationships, almost definitions, they laid out a mechanistic view of inequality trends that attracted considerable attention and scrutiny among Piketty’s fellow theoretical economists.

My work arrives at a striking new conclusion for the history of wealth and inequality in the West

However, what the academic debate cared less about was the empirical side of the analysis. Almost nothing was said about the historical data and the empirical conclusions underlying the claims about U-shaped patterns and main driving forces. The void in critical scrutiny exposed a widespread disinterest among mainstream economists in history and the fine-grained aspects of source materials, measurement and institutional contexts.

In recent years, a new strand of historical wealth inequality research has emerged from universities around the world. It offers a more nuanced empirical picture, including new data and revised evidence, pointing to different results and interpretations. In Piketty’s book, most of the analysis centred on the historical experiences of France, and then there was additional evidence presented for the United Kingdom and Germany (together making up Europe) and the US. Newer work reexamines and extends the historical wealth accumulation and inequality trends. Some of these contributions also revise the earlier data series, such as those analysing Germany and the UK. Other studies expand the empirical base by incorporating previously unexplored countries, such as Spain and Sweden. A number of ongoing research projects into the history of wealth distribution examine more new countries, including Switzerland, the Netherlands and Canada. Their findings will soon be added to this historical wealth database.

My work with new data, published in my book Richer and More Equal (2024), arrives at a new conclusion for the history of wealth and inequality in the West. The new results are striking. Data show that we are both richer and more equal today than we were in the past. An accumulation of housing wealth and pension savings among workers in the middle classes emerges as the main factor producing greater equality: today, three-fourths of all private assets are either homes or long-term pension and insurance savings.

U nderlying the change in personal wealth formation over the 20th century are a number of political and economic developments. The democratisation of the Western world began with the extension of universal suffrage during the 1910s. This movement initiated a process of reforming the educational system, to extend basic schooling to the population and facilitating access to higher education. New labour laws improved working life by restricting the working hours per day, allowing unions to be active. Better training and nicer workplaces raised worker productivity and earnings, creating opportunity for working- and middle-class households to purchase their own homes. The improved living standards also led to longer lives. Between the 1940s and today, life expectancy at birth increased by almost 20 years in Western countries, most of which were spent in retirement. Pension systems started evolving during the postwar era, both as public-sector unfunded systems based on promises about a future income, and as private-sector funded systems where individual pension funds were accumulated as part of people’s long-term saving.

At the core of the new findings are three empirical observations.

The first is that the populations in Western countries are richer today than ever before in history. By rich, again, I mean having a high level of average wealth in the adult population. Why this measure of riches captures relevant aspects of welfare is because higher wealth permits a lot of good things in life. It allows for higher consumption, more savings and larger investment for future prosperity. It also promises better insurance against unforeseen events. Figure 1 below illustrates the growth in the average real per-capita wealth in a selection of Western countries over the past 130 years. It is dramatic. During the first half of the past century, the average wealth in the Western population hovered at a stable level. Since the end of the Second World War, asset values started to increase, doubling the level in only a couple of decades. From 1950 to 2020, average wealth in the West increased sevenfold.

Over the past 130 years, a monumental shift in wealth composition has taken place

A fact to notice specifically is how wealth has grown each single postwar decade up to the present day. For several reasons, this consistency of growth is a marvel. It affirms the robustness of the result: we are wealthier today than in history, and this fact does not depend on the choice of start or end date but holds regardless of the time period considered. The steady increase in wealth is not confined to investment-driven growth in Europe’s early postwar decades. Neither does it hinge on the market liberalisations of the 1980s and ’90s. However, it is notable how the lifting of regulations and the historically high taxes since the 1980s are indeed associated with the highest pace of value-creation that the Western world has ever experienced.

Figure 1: rising real average wealth in the Western world. Note: wealth is expressed in real terms, meaning that it is adjusted for the rise in consumer prices and thus expresses change in purchasing power. The line is an unweighted mean of the average wealth in the adult population in six countries (France, Germany, Spain, Sweden, the UK and the US) expressed in constant 2022 US dollars. Source: Waldenström (2024, Chapter 2)

A second fact coming out of the historical evidence is that wealth in the aggregate has changed in its appearance. The composition of assets people hold tells us about the economic structure of society and what functions wealth plays in the population. For example, whether most assets are tied to the agricultural economy or to industrial activities signifies the degree of economic modernisation in the historical analysis. The importance of ordinary people’s assets in the aggregate signifies the degree to which workers take part in the value-creation processes of the market economy. Figure 2 below displays the division across asset classes in the aggregate portfolio since the end of the 19th century. It is evident that, over the past 130 years, a monumental shift in wealth composition has taken place. A century ago, wealth comprised primarily agricultural land and industrial capital. Today, the majority of personal wealth is tied up in housing and pension funds.

Figure 2: the aggregate composition of assets: from elite wealth to people’s wealth . Note: unweighted average of six countries (France, Germany, Spain, Sweden, the UK and the US). Source: Waldenström (2024, Chapter 3)

The transformation of wealth composition has strong distributional implications. Individual ownership data, often called microdata, show how ownership structures across wealth distribution bear a pattern of who owns what. Historically, the rich held agricultural estates and shares in industrial corporations. This is especially true over the long term of history, but it remains so now too. In contrast, the working population acquires wealth in their homes and long-term savings in pension funds. Homeownership rates today range from 50 to 80 per cent. Labor-force participation rates are even higher. In substance, this tells us that housing and work-related pension funds are assets that dominate the ownership of ordinary people in the lower and middle classes, which in turn links the relative aggregate importance of housing and pension funds for wealth inequality.

L ooking closer at the relationship between the share of a country’s citizens who own their homes and the level of wealth inequality, the distributional pattern becomes evident. Figure 3 below plots countries according to their homeownership rates and wealth inequality, as measured by the common Gini coefficient that ranges from 0 (no inequality) to 1 (one individual owns everything), using recent wealth and homeownership surveys. Countries with higher levels of homeownership have lower wealth inequality. The straight line in the figure has a negative slope, which suggests that raising the homeownership rate by 10 points leads to an expected reduction in wealth inequality by 0.04 Gini points. As an example, France has a lower homeownership than Italy ( 60 per cent compared with 70 per cent), and a higher wealth inequality (0.67 versus Italy’s 0.61).

Figure 3: homeownership and wealth inequality in Europe and the US. Source: Waldenström (2024, Chapter 6)

The historical shift in the nature of wealth, from being elite-centric to more democratic, can thus be expected to have profound implications for the distribution of wealth. Figure 4 below presents the most recent data from European countries and the US. They reveal in graphical form how wealth inequality has decreased substantially over the past century. The wealthiest percentile once held around 60 per cent of all wealth. The share ranged from 50 per cent of wealth in the US and Germany to 70 per cent in the UK.

Most wealth today is in homes and pensions, assets predominantly of low- and middle-wealth households

Since the first half of the 20th century, the tide has turned. A great wealth equalisation took place throughout the Western world. From the 1920s to the 1970s, wealth concentration fell steadily. In the 1970s, wealth equalisation stopped, but then Europe and the US follow separate paths. In Europe, top wealth shares stabilise at historically low levels, perhaps with a slight increasing tendency. As of 2010, the richest 1 per cent in society holds a share of total wealth at around 20 per cent in Europe. That is roughly one-third of its share of national wealth from a century earlier. Countries like the UK, the Netherlands, Italy and Finland have top percentile shares of around 16-18 per cent. A bit higher are countries like Spain, Denmark, Norway and Sweden with top shares at around 21-24 per cent. Germany has an even higher share, around 27 per cent, and Switzerland’s richest percentile group owns about 30 per cent of all wealth.

This stability of post-1970 top wealth shares may seem contradictory when contrasted with the large increases in aggregate wealth values over recent decades. However, it is consistent with most of the asset ownership patterns documented above, with most of wealth today being in housing and pensions, assets predominantly held by low- and middle-wealth households.

The US wealth concentration experience is somewhat different. Wealth inequality in the beginning of the 20th century was somewhat lower in the US than in most European countries, perhaps reflecting being a younger nation with less established elite structures. The equalisation trend also happened in the US, but it was less pronounced than in Europe. Today, US wealth concentration is currently much higher than in Europe. This situation, as the figure below shows, is the result of several years of steady increase. In historical perspective, however, even the current US level of wealth inequality is lower than it was before the Second World War, and it pales in comparison with the extreme levels of wealth concentration that the people of Europe experienced 100 years ago.

Figure 4: the great wealth equalisation over the 20th century. Source: Waldenström (2024, Chapter 5)

H ow can we account for these historical trends showing a steady growth in average household wealth and, at the same time, wealth inequality falling to historically low levels, where it has remained in Europe but has risen lately in the US? One approach is to break down the top wealth shares into the accumulation of wealth in the top and bottom groups of the distribution. In other words, we decompose the change in top wealth shares by documenting the changes in absolute wealth holdings in the numerator and denominator of the top wealth-share ratio. Figure 5 below shows these numbers, and they are striking.

During no historical time period during the past century did the wealth amounts of the rich fall on average. The falling wealth concentration from 1910 to 1980 was instead the result of wealth accumulating faster in the middle classes than in the top. Since 1950, wealth holdings have actually grown in the entire population. Between 1950 and 1980, it grew faster among the lower groups in the wealth distribution, explaining the continued equalisation. After 1980, wealth has instead grown faster in the top percentile than in the lower classes, which accounts for the halt of the long equalisation trend and a slight upward trend in the top wealth share, driven by the US development, whereas the European countries remained at its historically low levels.

Figure 5: Western wealth growth: the middle class vs the rich. The graph shows a six-country average (France, Germany, Spain, Sweden, the UK, the US) of the average annual growth rate of real (inflation-adjusted) net wealth per adult individual in the top 1 per cent and the lower 90 per cent of the wealth distribution during three time periods. Source: Waldenström (2024, Chapter 6)

Looking at the specific factors that could account for these trends in wealth growth and wealth inequality, there are some that match the evidence better than others. According to the orthodox narrative, the main explanation was the shocks to capital during the world wars and postwar capital taxes, all of which are believed to have created equality through lowering the top of the wealth distribution. In this telling, the physical capital destruction in wars reduced the fortunes of the rich, and the immediate postwar hikes in capital taxes and market regulations, such as price controls and capital market restrictions, prevented the entrepreneurs from rebuilding their wealth.

Wealth and inheritance taxes reached almost confiscatory levels in the early 1970s

However, the thesis has some issues. One is that the evidence shows little difference between belligerent and non-belligerent countries. During both wars, the wealth share of the top 1 per cent fell equally in belligerent countries like France and the UK as in non-belligerent Sweden. Including the immediate postwar years, which were heavily influenced by wartime turbulence, does not change this pattern. Germany’s data from the wars is less clear, but it appears that the country experienced larger losses than others, reducing top wealth shares. Spain, which stayed out of both world wars but fought a civil war in the 1930s, saw the wealth share of the richest 1 per cent remain virtually unchanged between 1936 and 1939, according to preliminary estimates. Looking at the US, top wealth shares fell during both wars.

Analysing instead the changes in absolute wealth held by the rich and by the rest reinforces the conclusion that wars were not a devastating moment for capital owners. In fact, the fortunes of the elite did not shrink significantly, except in France during the First World War and seemingly in Germany during both wars. In other cases, the capital values of the rich remained almost constant, and the wealth equalisation observed can be attributed to growing ownership among groups below the top tier.

Progressive tax policies after the Second World War offer another potential explanation for the wealth-equalisation trend. Capital taxation increased rapidly between the 1950s and the 1980s in most Western countries. Wealth and inheritance taxes reached almost confiscatory levels in the early 1970s, and this coincided with stagnating business activities, few startups, slowed economic growth, and an exodus of prominent entrepreneurs from high- to low-tax countries. Few studies have been able to analyse systematically the extent to which these taxes prevented the rise of new large fortunes, but studies of later periods suggest that there are good grounds to believe they did.

A general problem for the factors above – which focus on shocks to the capital of the rich and thus lowering the top of wealth distribution as the primus motor behind the great wealth equalisation of the 20th century – is that the evidence presented in Figure 5 above shows that it was instead the lifting of the bottom of the distribution that accounted for the equalisation. Let us therefore shift focus and examine the two main channels through which this happened: the accumulation of homeownership and saving for retirement.

At the turn of the 20th century, owning a decent home and saving for retirement were luxuries enjoyed by only a select few – maybe a couple of tens of millions in Western countries. Today, the once-elusive dreams of home ownership and pensions have become a reality for several hundreds of millions of people. Homeownership rates went from 20-40 per cent in the first half of the former century to 50-80 per cent in the modern era. Retirement savings also increased in the postwar period, reflecting the longer life spans that came with the general improvement of living standards. Funded pensions and other insurance savings comprised 5-10 per cent of household portfolios around 1950, but this share increased to 20-40 per cent in the 2000s.

The most crucial equalisation resulted from expanded wealth ownership among ordinary citizens

History demonstrates that the significant wealth equalisation over the past century was primarily driven by a massive increase in homeownership and retirement savings. But what initiated this accumulation of assets by households? The most comprehensive evidence highlights the role of political changes and economic developments that explicitly included new groups in the productive market economy. Firstly, the 1910s and ’20s witnessed a broad wave of political democratisation, extending universal suffrage to the Western world. Following this regime shift, a series of reforms transformed the economic reality for the masses. Educational attainment was expanded, and higher education became accessible to broader segments of society. New labour laws improved workers’ rights, making workplaces safer and reducing working hours. These changes enhanced workers’ productivity and real incomes. Simultaneously, the financial system evolved by offering better services to this new constituency of potential customers, including cheaper loans, savings plans, mutual funds and other financial services.

Thus, the primary drivers behind the great wealth equalisation of the 20th century were not wars or the redistributive effects of capital taxation. While these factors had some impact, the most crucial equalisation resulted from expanded wealth ownership among ordinary citizens, particularly through homeownership and pension savings, and the institutional shifts that enabled the accumulation of these assets.

A general lesson from history is that wealth accumulation is a positive, welfare-enhancing force in free-market economies. It is closely linked to the growth of successful businesses, which leads to new jobs, higher incomes and more tax revenue for the public sector. Various historical, social and economic factors have contributed to the rise of wealth accumulation in the middle class, with homeownership and pension savings being the primary ones.

As a closing remark, it should be recognised that the story of wealth equalisation is not one of unmitigated success. There are still significant disparities in wealth within and among nations, generating instability and injustice. Over the past years, wealth concentration has increased in some countries, most notably in the US. The extent to which this is due to productive entrepreneurship generating products, jobs, incomes and taxes, or to forces that exclude groups from acquiring personal wealth causing tensions and erosive developments in society, is a question that needs to be studied more. However, at this point it is still vital to acknowledge the progress toward greater equality that has been made in our past and understand how it has happened. Only then can we be in a stronger position to lay the foundation for further advancements in our quest for a more just and prosperous world.

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Capitalism Has Become An Ideology In Today's America. Here's How It Happened

Rund Abdelfatah

Ramtin Arablouei

Capitalism: What Is It?

A demonstrator holds a sign reading "I love capitalism" during a protest against California's stay-at-home order in 2020. Capitalism started as an economic system; it has become an ideology in the modern United States. Robyn Beck/AFP via Getty Images hide caption

A demonstrator holds a sign reading "I love capitalism" during a protest against California's stay-at-home order in 2020. Capitalism started as an economic system; it has become an ideology in the modern United States.

The Throughline team has been thinking about capitalism a lot these days. It's hard not to when so many people are struggling just to get by.

Capitalism is an economic system, but it's also so much more than that. It's become a sort of ideology, this all-encompassing force that rules over our lives and our minds. It might seem like it's an inevitable force, but really, it's a construction project that took hundreds of years and no part of it is natural or just left to chance.

So here's what we did. First, we wanted to look at what makes American capitalism distinct, if it is even distinct ? Is it uniquely individual, uniquely efficient, uniquely cutthroat? Like, these are all the things that we've been thinking about a lot.

A young girl interacts with an employee maintaining one of tanks at New Jersey SEA LIFE Aquarium inside the American Dream mall in East Rutherford. Michael Loccisano/Getty Images hide caption

A young girl interacts with an employee maintaining one of tanks at New Jersey SEA LIFE Aquarium inside the American Dream mall in East Rutherford.

And so we brought together three REALLY DIFFERENT experts who come at these questions from REALLY DIFFERENT points of view.

Bryan Caplan's an economist and adjunct scholar at the Cato Institute, Vivek Chibber studies Marxist theory and historical sociology, and Kristen Ghodsee is an expert in what happened after the fall of communism in Russia and Eastern Europe.

And we had a conversational round of analysis that led us from colonial times, through waves of innovation and American development to the American Dream Mall in New Jersey.

We compared the happiness index in countries to see crazy things like how much happier people in Denmark report that they are, compared to Americans.

But that's not all. We wanted to dive deeper into the dominance of Capitalism in the 20th century American mindset .

What's the role of government in society? What do we mean when we talk about individual responsibility? What makes us free? 'Neoliberalism' might feel like a term that's hard to define and understand. But it's the dominant socio-economic ideology of both major American political parties — Republican and Democrats — no matter how much partisan rhetoric might be geared towards absolute division.

And this ideology, this belief in free markets, deregulation, and privatization can be traced back — pretty directly — to a group of men meeting in the Swiss Alps.

On April 10, 1947, a group of 39 economists, historians and sociologists gathered in a conference room of a posh ski resort at Mont Pelerin, Switzerland. Glasses clinked. Cigars burned. A mission statement was written.

And from that meeting, they would start an organization called The Mont Pelerin Society, MPS. The ideas discussed in that room more than 70 years ago would evolve and warp and, this is no exaggeration, come to shape the world we live in. Those ideas have dominated our economic system for decades. In the name of free market fundamentals, the forces behind neoliberalism act like an invisible hand, shaping almost every aspect of our lives.

From the TV advertisements we all grew up watching to the way the internet is understood today.

Capitalism: What Makes Us Free?

That's not all. We're also dropping a third episode on Capitalism this coming Thursday, July 8. For that episode, we explore how religion and capitalism joined forces to change the way we think about our work, our society, and ourselves — the Prosperity Gospel.

To receive it when it drops subscribe here in Apple Podcasts or wherever else you get your pods.

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Capitalism and Inequality

What the right and the left get wrong, by jerry z. muller.

Detail of A Social History of the State of Missouri by Thomas Hart Benton.

Recent political debate in the United States and other advanced capitalist democracies has been dominated by two issues: the rise of economic inequality and the scale of government intervention to address it. As the 2012 U.S. presidential election and the battles over the "fiscal cliff" have demonstrated, the central focus of the left today is on increasing government taxing and spending, primarily to reverse the growing stratification of society, whereas the central focus of the right is on decreasing taxing and spending, primarily to ensure economic dynamism. Each side minimizes the concerns of the other, and each seems to believe that its desired policies are sufficient to ensure prosperity and social stability. Both are wrong.

Inequality is indeed increasing almost everywhere in the postindustrial capitalist world. But despite what many on the left think, this is not the result of politics, nor is politics likely to reverse it, for the problem is more deeply rooted and intractable than generally recognized. Inequality is an inevitable product of capitalist activity, and expanding equality of opportunity only increases it—because some individuals and communities are simply better able than others to exploit the opportunities for development and advancement that capitalism affords. Despite what many on the right think, however, this is a problem for everybody, not just those who are doing poorly or those who are ideologically committed to egalitarianism—because if left unaddressed, rising inequality and economic insecurity can erode social order and generate a populist backlash against the capitalist system at large.

Over the last few centuries, the spread of capitalism has generated a phenomenal leap in human progress, leading to both previously unimaginable increases in material living standards and the unprecedented cultivation of all kinds of human potential. Capitalism's intrinsic dynamism, however, produces insecurity along with benefits, and so its advance has always met resistance. Much of the political and institutional history of capitalist societies, in fact, has been the record of attempts to ease or cushion that insecurity, and it was only the creation of the modern welfare state in the middle of the twentieth century that finally enabled capitalism and democracy to coexist in relative harmony.

In recent decades, developments in technology, finance, and international trade have generated new waves and forms of insecurity for leading capitalist economies, making life increasingly unequal and chancier for not only the lower and working classes but much of the middle class as well. The right has largely ignored the problem, while the left has sought to eliminate it through government action, regardless of the costs. Neither approach is viable in the long run. Contemporary capitalist polities need to accept that inequality and insecurity will continue to be the inevitable result of market operations and find ways to shield citizens from their consequences—while somehow still preserving the dynamism that produces capitalism's vast economic and cultural benefits in the first place.

COMMODIFICATION AND CULTIVATION

Capitalism is a system of economic and social relations marked by private property, the exchange of goods and services by free individuals, and the use of market mechanisms to control the production and distribution of those goods and services. Some of its elements have existed in human societies for ages, but it was only in the seventeenth and eighteenth centuries, in parts of Europe and its offshoots in North America, that they all came together in force. Throughout history, most households had consumed most of the things that they produced and produced most of what they consumed. Only at this point did a majority of the population in some countries begin to buy most of the things they consumed and do so with the proceeds gained from selling most of what they produced.

The growth of market-oriented households and what came to be called "commercial society" had profound implications for practically every aspect of human activity. Prior to capitalism, life was governed by traditional institutions that subordinated the choices and destinies of individuals to various communal, political, and religious structures. These institutions kept change to a minimum, blocking people from making much progress but also protecting them from many of life's vicissitudes. The advent of capitalism gave individuals more control over and responsibility for their own lives than ever before—which proved both liberating and terrifying, allowing for both progress and regression.

Commodification—the transformation of activities performed for private use into activities performed for sale on the open market—allowed people to use their time more efficiently, specializing in producing what they were relatively good at and buying other things from other people. New forms of commerce and manufacturing used the division of labor to produce common household items cheaply and also made a range of new goods available. The result, as the historian Jan de Vries has noted, was what contemporaries called "an awakening of the appetites of the mind"—an expansion of subjective wants and a new subjective perception of needs. This ongoing expansion of wants has been chastised by critics of capitalism from Rousseau to Marcuse as imprisoning humans in a cage of unnatural desires. But it has also been praised by defenders of the market from Voltaire onward for broadening the range of human possibility. Developing and fulfilling higher wants and needs, in this view, is the essence of civilization.

Because we tend to think of commodities as tangible physical objects, we often overlook the extent to which the creation and increasingly cheap distribution of new cultural commodities have expanded what one might call the means of self-cultivation. For the history of capitalism is also the history of the extension of communication, information, and entertainment—things to think with, and about.

Among the earliest modern commodities were printed books (in the first instance, typically the Bible), and their shrinking price and increased availability were far more historically momentous than, say, the spread of the internal combustion engine. So, too, with the spread of newsprint, which made possible the newspaper and the magazine. Those gave rise, in turn, to new markets for information and to the business of gathering and distributing news. In the eighteenth century, it took months for news from India to reach London; today, it takes moments. Books and news have made possible an expansion of not only our awareness but also our imagination, our ability to empathize with others and imagine living in new ways ourselves. Capitalism and commodification have thus facilitated both humanitarianism and new forms of self-invention.

Over the last century, the means of cultivation were expanded by the invention of recorded sound, film, and television, and with the rise of the Internet and home computing, the costs of acquiring knowledge and culture have fallen dramatically. For those so inclined, the expansion of the means of cultivation makes possible an almost unimaginable enlargement of one's range of knowledge.

FAMILY MATTERS

If capitalism has opened up ever more opportunities for the development of human potential, however, not everyone has been able to take full advantage of those opportunities or progress far once they have done so. Formal or informal barriers to equality of opportunity, for example, have historically blocked various sectors of the population—such as women, minorities, and the poor—from benefiting fully from all capitalism offers. But over time, in the advanced capitalist world, those barriers have gradually been lowered or removed, so that now opportunity is more equally available than ever before. The inequality that exists today, therefore, derives less from the unequal availability of opportunity than it does from the unequal ability to exploit opportunity. And that unequal ability, in turn, stems from differences in the inherent human potential that individuals begin with and in the ways that families and communities enable and encourage that human potential to flourish.

The role of the family in shaping individuals' ability and inclination to make use of the means of cultivation that capitalism offers is hard to overstate. The household is not only a site of consumption and of biological reproduction. It is also the main setting in which children are socialized, civilized, and educated, in which habits are developed that influence their subsequent fates as people and as market actors. To use the language of contemporary economics, the family is a workshop in which human capital is produced.

Over time, the family has shaped capitalism by creating new demands for new commodities. It has also been repeatedly reshaped by capitalism because new commodities and new means of production have led family members to spend their time in new ways. As new consumer goods became available at ever-cheaper prices during the eighteenth century, families devoted more of their time to market-oriented activities, with positive effects on their ability to consume. Male wages may have actually declined at first, but the combined wages of husbands, wives, and children made higher standards of consumption possible. Economic growth and expanding cultural horizons did not improve all aspects of life for everybody, however. The fact that working-class children could earn money from an early age created incentives to neglect their education, and the unhealthiness of some of the newly available commodities (white bread, sugar, tobacco, distilled spirits) meant that rising standards of consumption did not always mean an improvement in health and longevity. And as female labor time was reallocated from the household to the market, standards of cleanliness appear to have declined, increasing the chance of disease.

The late eighteenth and early nineteenth centuries saw the gradual spread of new means of production across the economy. This was the age of the machine, characterized by the increasing substitution of inorganic sources of power (above all the steam engine) for organic sources of power (human and animal), a process that increased productivity tremendously. As opposed to in a society based largely on agriculture and cottage industries, manufacturing now increasingly took place in the factory, built around new engines that were too large, too loud, and too dirty to have a place in the home. Work was therefore more and more divorced from the household, which ultimately changed the structure of the family.

At first, the owners of the new, industrialized factories sought out women and children as employees, since they were more tractable and more easily disciplined than men. But by the second half of the nineteenth century, the average British workingman was enjoying substantial and sustained growth in real wages, and a new division of labor came about within the family itself, along lines of gender. Men, whose relative strength gave them an advantage in manufacturing, increasingly worked in factories for market wages, which were high enough to support a family. The nineteenth-century market, however, could not provide commodities that produced goods such as cleanliness, hygiene, nutritious meals, and the mindful supervision of children. Among the upper classes, these services could be provided by servants. But for most families, such services were increasingly provided by wives. This caused the rise of the breadwinner-homemaker family, with a division of labor along gender lines. Many of the improvements in health, longevity, and education from the mid-nineteenth to the mid-twentieth century, de Vries has argued, can be explained by this reallocation of female labor from the market to the household and, eventually, the reallocation of childhood from the market to education, as children left the work force for school.

DYNAMISM AND INSECURITY

For most of history, the prime source of human insecurity was nature. In such societies, as Marx noted, the economic system was oriented toward stability—and stagnancy. Capitalist societies, by contrast, have been oriented toward innovation and dynamism, to the creation of new knowledge, new products, and new modes of production and distribution. All of this has shifted the locus of insecurity from nature to the economy.

Hegel observed in the 1820s that for men in a commercial society based on the breadwinner-homemaker model, one's sense of self-worth and recognition by others was tied to having a job. This posed a problem, because in a dynamic capitalist market, unemployment was a distinct possibility. The division of labor created by the market meant that many workers had skills that were highly specialized and suited for only a narrow range of jobs. The market created shifting wants, and increased demand for new products meant decreased demand for older ones. Men whose lives had been devoted to their role in the production of the old products were left without a job and without the training that would allow them to find new work. And the mechanization of production also led to a loss of jobs. From its very beginnings, in other words, the creativity and innovation of industrial capitalism were shadowed by insecurity for members of the work force.

Marx and Engels sketched out capitalism's dynamism, insecurity, refinement of needs, and expansion of cultural possibilities in The Communist Manifesto :

The bourgeoisie has, through its exploitation of the world market, given a cosmopolitan character to production and consumption in every country. To the great chagrin of reactionaries, it has drawn from under the feet of industry the national ground on which it stood. All old-established national industries have been destroyed or are daily being destroyed. They are dislodged by new industries, whose introduction becomes a life and death question for all civilized nations, by industries that no longer work up indigenous raw material, but raw material drawn from the remotest zones; industries whose products are consumed, not only at home, but in every quarter of the globe. In place of the old wants, satisfied by the production of the country, we find new wants, requiring for their satisfaction the products of distant lands and climes. In place of the old local and national seclusion and self-sufficiency, we have intercourse in every direction, universal inter-dependence of nations.

In the twentieth century, the economist Joseph Schumpeter would expand on these points with his notion that capitalism was characterized by "creative destruction," in which new products and forms of distribution and organization displaced older forms. Unlike Marx, however, who saw the source of this dynamism in the disembodied quest of "capital" to increase (at the expense, he thought, of the working class), Schumpeter focused on the role of the entrepreneur, an innovator who introduced new commodities and discovered new markets and methods. 

The dynamism and insecurity created by nineteenth-century industrial capitalism led to the creation of new institutions for the reduction of insecurity, including the limited liability corporation, to reduce investor risks; labor unions, to further worker interests; mutual-aid societies, to provide loans and burial insurance; and commercial life insurance. In the middle decades of the twentieth century, in response to the mass unemployment and deprivation produced by the Great Depression (and the political success of communism and fascism, which convinced many democrats that too much insecurity was a threat to capitalist democracy itself), Western democracies embraced the welfare state. Different nations created different combinations of specific programs, but the new welfare states had a good deal in common, including old-age and unemployment insurance and various measures to support families.

The expansion of the welfare state in the decades after World War II took place at a time when the capitalist economies of the West were growing rapidly. The success of the industrial economy made it possible to siphon off profits and wages to government purposes through taxation. The demographics of the postwar era, in which the breadwinner-homemaker model of the family predominated, helped also, as moderately high birthrates created a favorable ratio of active workers to dependents. Educational opportunities expanded, as elite universities increasingly admitted students on the basis of their academic achievements and potential, and more and more people attended institutions of higher education. And barriers to full participation in society for women and minorities began to fall as well. The result of all of this was a temporary equilibrium during which the advanced capitalist countries experienced strong economic growth, high employment, and relative socioeconomic equality.

LIFE IN THE POSTINDUSTRIAL ECONOMY

For humanity in general, the late twentieth and early twenty-first centuries have been a period of remarkable progress, due in no small part to the spread of capitalism around the globe. Economic liberalization in China, India, Brazil, Indonesia, and other countries in the developing world has allowed hundreds of millions of people to escape grinding poverty and move into the middle class. Consumers in more advanced capitalist countries, such as the United States, meanwhile, have experienced a radical reduction in the price of many commodities, from clothes to televisions, and the availability of a river of new goods that have transformed their lives.

Most remarkable, perhaps, have been changes to the means of self-cultivation. As the economist Tyler Cowen notes, much of the fruit of recent developments "is in our minds and in our laptops and not so much in the revenue-generating sector of the economy." As a result, "much of the value of the internet is experienced at the personal level and so will never show up in the productivity numbers." Many of the great musical performances of the twentieth century, in every genre, are available on YouTube for free. Many of the great films of the twentieth century, once confined to occasional showings at art houses in a few metropolitan areas, can be viewed by anybody at any time for a small monthly charge. Soon, the great university libraries will be available online to the entire world, and other unprecedented opportunities for personal development will follow. 

All this progress, however, has been shadowed by capitalism's perennial features of inequality and insecurity. In 1973, the sociologist Daniel Bell noted that in the advanced capitalist world, knowledge, science, and technology were driving a transformation to what he termed "postindustrial society." Just as manufacturing had previously displaced agriculture as the major source of employment, he argued, so the service sector was now displacing manufacturing. In a postindustrial, knowledge-based economy, the production of manufactured goods depended more on technological inputs than on the skills of the workers who actually built and assembled the products. That meant a relative decline in the need for and economic value of skilled and semiskilled factory workers—just as there had previously been a decline in the need for and value of agricultural laborers. In such an economy, the skills in demand included scientific and technical knowledge and the ability to work with information. The revolution in information technology that has swept through the economy in recent decades, meanwhile, has only exacerbated these trends.

One crucial impact of the rise of the postindustrial economy has been on the status and roles of men and women. Men's relative advantage in the preindustrial and industrial economies rested in large part on their greater physical strength—something now ever less in demand. Women, in contrast, whether by biological disposition or socialization, have had a relative advantage in human skills and emotional intelligence, which have become increasingly more important in an economy more oriented to human services than to the production of material objects. The portion of the economy in which women could participate has expanded, and their labor has become more valuable—meaning that time spent at home now comes at the expense of more lucrative possibilities in the paid work force.

This has led to the growing replacement of male breadwinner-female homemaker households by dual-income households. Both advocates and critics of the move of women into the paid economy have tended to overemphasize the role played in this shift by the ideological struggles of feminism, while underrating the role played by changes in the nature of capitalist production. The redeployment of female labor from the household has been made possible in part by the existence of new commodities that cut down on necessary household labor time (such as washing machines, dryers, dishwashers, water heaters, vacuum cleaners, microwave ovens). The greater time devoted to market activity, in turn, has given rise to new demand for household-oriented consumer goods that require less labor (such as packaged and prepared food) and the expansion of restaurant and fast-food eating. And it has led to the commodification of care, as the young, the elderly, and the infirm are increasingly looked after not by relatives but by paid minders.

The trend for women to receive more education and greater professional attainments has been accompanied by changing social norms in the choice of marriage partners. In the age of the breadwinner-homemaker marriage, women tended to place a premium on earning capacity in their choice of partners. Men, in turn, valued the homemaking capacities of potential spouses more than their vocational attainments. It was not unusual for men and women to marry partners of roughly the same intelligence, but women tended to marry men of higher levels of education and economic achievement. As the economy has passed from an industrial economy to a postindustrial service-and-information economy, women have joined men in attaining recognition through paid work, and the industrious couple today is more likely to be made of peers, with more equal levels of education and more comparable levels of economic achievement—a process termed "assortative mating."

INEQUALITY ON THE RISE

These postindustrial social trends have had a significant impact on inequality. If family income doubles at each step of the economic ladder, then the total incomes of those families higher up the ladder are bound to increase faster than the total incomes of those further down. But for a substantial portion of households at the lower end of the ladder, there has been no doubling at all—for as the relative pay of women has grown and the relative pay of less-educated, working-class men has declined, the latter have been viewed as less and less marriageable. Often, the limitations of human capital that make such men less employable also make them less desirable as companions, and the character traits of men who are chronically unemployed sometimes deteriorate as well. With less to bring to the table, such men are regarded as less necessary—in part because women can now count on provisions from the welfare state as an additional independent source of income, however meager.

In the United States, among the most striking developments of recent decades has been the stratification of marriage patterns among the various classes and ethnic groups of society. When divorce laws were loosened in the 1960s, there was a rise in divorce rates among all classes. But by the 1980s, a new pattern had emerged: divorce declined among the more educated portions of the populace, while rates among the less-educated portions continued to rise. In addition, the more educated and more well-to-do were more likely to wed, while the less educated were less likely to do so. Given the family's role as an incubator of human capital, such trends have had important spillover effects on inequality. Abundant research shows that children raised by two parents in an ongoing union are more likely to develop the self-discipline and self-confidence that make for success in life, whereas children—and particularly boys—reared in single-parent households (or, worse, households with a mother who has a series of temporary relationships) have a greater risk of adverse outcomes.

All of this has been taking place during a period of growing equality of access to education and increasing stratification of marketplace rewards, both of which have increased the importance of human capital. One element of human capital is cognitive ability: quickness of mind, the ability to infer and apply patterns drawn from experience, and the ability to deal with mental complexity. Another is character and social skills: self-discipline, persistence, responsibility. And a third is actual knowledge. All of these are becoming increasingly crucial for success in the postindustrial marketplace. As the economist Brink Lindsey notes in his recent book Human Capitalism , between 1973 and 2001, average annual growth in real income was only 0.3 percent for people in the bottom fifth of the U.S. income distribution, compared with 0.8 percent for people in the middle fifth and 1.8 percent for those in the top fifth. Somewhat similar patterns also prevail in many other advanced economies.

Globalization has not caused this pattern of increasingly unequal returns to human capital but reinforced it. The economist Michael Spence has distinguished between "tradable" goods and services, which can be easily imported and exported, and "untradable" ones, which cannot. Increasingly, tradable goods and services are imported to advanced capitalist societies from less advanced capitalist societies, where labor costs are lower. As manufactured goods and routine services are outsourced, the wages of the relatively unskilled and uneducated in advanced capitalist societies decline further, unless these people are somehow able to find remunerative employment in the untradable sector.

THE IMPACT OF MODERN FINANCE

Rising inequality, meanwhile, has been compounded by rising insecurity and anxiety for people higher up on the economic ladder. One trend contributing to this problem has been the financialization of the economy, above all in the United States, creating what was characterized as "money manager capitalism" by the economist Hyman Minsky and has been called "agency capitalism" by the financial expert Alfred Rappaport.

As late as the 1980s, finance was an essential but limited element of the U.S. economy. The trade in equities (the stock market) was made up of individual investors, large or small, putting their own money in stocks of companies they believed to have good long-term prospects. Investment capital was also available from the major Wall Street investment banks and their foreign counterparts, which were private partnerships in which the partners' own money was on the line. All of this began to change as larger pools of capital became available for investment and came to be deployed by professional money managers rather the owners of the capital themselves.

One source of such new capital was pension funds. In the postwar decades, when major American industries emerged from World War II as oligopolies with limited competition and large, expanding markets at home and abroad, their profits and future prospects allowed them to offer employees defined-benefit pension plans, with the risks involved assumed by the companies themselves. From the 1970s on, however, as the U.S. economy became more competitive, corporate profits became more uncertain, and companies (as well as various public-sector organizations) attempted to shift the risk by putting their pension funds into the hands of professional money managers, who were expected to generate significant profits. Retirement income for employees now depended not on the profits of their employers but on the fate of their pension funds.

Another source of new capital was university and other nonprofit organizations' endowments, which grew initially thanks to donations but were increasingly expected to grow further based on their investment performance. And still another source of new capital came from individuals and governments in the developing world, where rapid economic growth, combined with a high propensity to save and a desire for relatively secure investment prospects, led to large flows of money into the U.S. financial system.

Spurred in part by these new opportunities, the traditional Wall Street investment banks transformed themselves into publicly traded corporations—that is to say, they, too, began to invest not just with their own funds but also with other people's money—and tied the bonuses of their partners and employees to annual profits. All of this created a highly competitive financial system dominated by investment managers working with large pools of capital, paid based on their supposed ability to outperform their peers. The structure of incentives in this environment led fund managers to try to maximize short-term returns, and this pressure trickled down to corporate executives. The shrunken time horizon created a temptation to boost immediate profits at the expense of longer-term investments, whether in research and development or in improving the skills of the company's work force. For both managers and employees, the result has been a constant churning that increases the likelihood of job losses and economic insecurity.

An advanced capitalist economy does indeed require an extensive financial sector. Part of this is a simple extension of the division of labor: outsourcing decisions about investing to professionals allows the rest of the population the mental space to pursue things they do better or care more about. The increasing complexity of capitalist economies means that entrepreneurs and corporate executives need help in deciding when and how to raise funds. And private equity firms that have an ownership interest in growing the real value of the firms in which they invest play a key role in fostering economic growth. These matters, which properly occupy financiers, have important consequences, and handling them requires intelligence, diligence, and drive, so it is neither surprising nor undesirable that specialists in this area are highly paid. But whatever its benefits and continued social value, the financialization of society has nevertheless had some unfortunate consequences, both in increasing inequality by raising the top of the economic ladder (thanks to the extraordinary rewards financial managers receive) and in increasing insecurity among those lower down (thanks to the intense focus on short-term economic performance to the exclusion of other concerns).

THE FAMILY AND HUMAN CAPITAL

In today's globalized, financialized, postindustrial environment, human capital is more important than ever in determining life chances. This makes families more important, too, because as each generation of social science researchers discovers anew (and much to their chagrin), the resources transmitted by the family tend to be highly determinative of success in school and in the workplace. As the economist Friedrich Hayek pointed out half a century ago in The Constitution of Liberty , the main impediment to true equality of opportunity is that there is no substitute for intelligent parents or for an emotionally and culturally nurturing family. In the words of a recent study by the economists Pedro Carneiro and James Heckman, "Differences in levels of cognitive and noncognitive skills by family income and family background emerge early and persist. If anything, schooling widens these early differences."

Hereditary endowments come in a variety of forms: genetics, prenatal and postnatal nurture, and the cultural orientations conveyed within the family. Money matters, too, of course, but is often less significant than these largely nonmonetary factors. (The prevalence of books in a household is a better predictor of higher test scores than family income.) Over time, to the extent that societies are organized along meritocratic lines, family endowments and market rewards will tend to converge.

Educated parents tend to invest more time and energy in child care, even when both parents are engaged in the work force. And families strong in human capital are more likely to make fruitful use of the improved means of cultivation that contemporary capitalism offers (such as the potential for online enrichment) while resisting their potential snares (such as unrestricted viewing of television and playing of computer games).

This affects the ability of children to make use of formal education, which is increasingly, at least potentially, available to all regardless of economic or ethnic status. At the turn of the twentieth century, only 6.4 percent of American teenagers graduated from high school, and only one in 400 went on to college. There was thus a huge portion of the population with the capacity, but not the opportunity, for greater educational achievement. Today, the U.S. high school graduation rate is about 75 percent (down from a peak of about 80 percent in 1960), and roughly 40 percent of young adults are enrolled in college.

The Economist recently repeated a shibboleth: "In a society with broad equality of opportunity, the parents' position on the income ladder should have little impact on that of their children." The fact is, however, that the greater equality of institutional opportunity there is, the more families' human capital endowments matter. As the political scientist Edward Banfield noted a generation ago in The Unheavenly City Revisited , " All education favors the middle- and upper-class child, because to be middle- or upper-class is to have qualities that make one particularly educable." Improvements in the quality of schools may improve overall educational outcomes, but they tend to increase, rather than diminish, the gap in achievement between children from families with different levels of human capital. Recent investigations that purport to demonstrate less intergenerational mobility in the United States today than in the past (or than in some European nations) fail to note that this may in fact be a perverse product of generations of increasing equality of opportunity. And in this respect, it is possible that the United States may simply be on the leading edge of trends found in other advanced capitalist societies as well.

DIFFERENTIAL GROUP ACHIEVEMENT

The family is not the only social institution to have a major impact on the development of human capital and eventual success in the marketplace; so do communal groupings, such as those of religion, race, and ethnicity. In his 1905 book, The Protestant Ethic and the Spirit of Capitalism , the sociologist Max Weber observed that in religiously diverse areas, Protestants tended to do better economically than Catholics, and Calvinists better than Lutherans. Weber presented a cultural explanation for this difference, grounded in the different psychological propensities created by the different faiths. A few years later, in The Jews and Modern Capitalism , Weber's contemporary Werner Sombart offered an alternative explanation for differential group success, based partly on cultural propensities and partly on racial ones. And in 1927, their younger colleague Schumpeter titled a major essay "Social Classes in an Ethnically Homogeneous Environment" because he took it for granted that in an ethnically mixed setting, levels of achievement would vary by ethnicity, not just class.

The explanations offered for such patterns are less important than the fact that differential group performance has been a perennial feature in the history of capitalism, and such differences continue to exist today. In the contemporary United States, for example, Asians (especially when disaggregated from Pacific Islanders) tend to outperform non-Hispanic whites, who in turn tend to outperform Hispanics, who in turn tend to outperform African Americans. This is true whether one looks at educational achievement, earnings, or family patterns, such as the incidence of nonmarital births.

Those western European nations (and especially northern European nations) with much higher levels of equality than the United States tend to have more ethnically homogeneous populations. As recent waves of immigration have made many advanced post­industrial societies less ethnically homogeneous, they also seem to be increasingly stratifying along communal lines, with some immigrant groups exhibiting more favorable patterns than the preexisting population and other groups doing worse. In the United Kingdom, for example, the children of Chinese and Indian immigrants tend do better than the indigenous population, whereas those of Caribbean blacks and Pakistanis tend to do worse. In France, the descendants of Vietnamese tend to do better, and those of North African origin tend to do worse. In Israel, the children of Russian immigrants tend to do better, while those of immigrants from Ethiopia tend to do worse. In Canada, the children of Chinese and Indians tend to do better, while those of Caribbean and Latin American origin tend to do worse. Much of this divergence in achievement can be explained by the differing class and educational backgrounds of the immigrant groups in their countries of origin. But because the communities themselves act as carriers and incubators of human capital, the patterns can and do persist over time and place.

In the case of the United States, immigration plays an even larger role in exacerbating inequality, for the country's economic dynamism, cultural openness, and geographic position tend to attract both some of world's best and brightest and some of its least educated. This raises the top and lowers the bottom of the economic ladder.

WHY EDUCATION IS NOT A PANACEA

A growing recognition of the increasing economic inequality and social stratification in postindustrial societies has naturally led to discussions of what can be done about it, and in the American context, the answer from almost all quarters is simple: education.

One strand of this logic focuses on college. There is a growing gap in life chances between those who complete college and those who don't, the argument runs, and so as many people as possible should go to college. Unfortunately, even though a higher percentage of Americans are attending college, they are not necessarily learning more. An increasing number are unqualified for college-level work, many leave without completing their degrees, and others receive degrees reflecting standards much lower than what a college degree has usually been understood to mean.

The most significant divergence in educational achievement occurs before the level of college, meanwhile, in rates of completion of high school, and major differences in performance (by class and ethnicity) appear still earlier, in elementary school. So a second strand of the education argument focuses on primary and secondary schooling. The remedies suggested here include providing schools with more money, offering parents more choice, testing students more often, and improving teacher performance. Even if some or all of these measures might be desirable for other reasons, none has been shown to significantly diminish the gaps between students and between social groups—because formal schooling itself plays a relatively minor role in creating or perpetuating achievement gaps.

The gaps turn out to have their origins in the different levels of human capital children possess when they enter school—which has led to a third strand of the education argument, focusing on earlier and more intensive childhood intervention. Suggestions here often amount to taking children out of their family environments and putting them into institutional settings for as much time as possible (Head Start, Early Head Start) or even trying to resocialize whole neighborhoods (as in the Harlem Children's Zone project). There are examples of isolated successes with such programs, but it is far from clear that these are reproducible on a larger scale. Many programs show short-term gains in cognitive ability, but most of these gains tend to fade out over time, and those that remain tend to be marginal. It is more plausible that such programs improve the noncognitive skills and character traits conducive to economic success—but at a significant cost and investment, employing resources extracted from the more successful parts of the population (thus lowering the resources available to them) or diverted from other potential uses.

For all these reasons, inequality in advanced capitalist societies seems to be both growing and ineluctable, at least for the time being. Indeed, one of the most robust findings of contemporary social scientific inquiry is that as the gap between high-income and low-income families has increased, the educational and employment achievement gaps between the children of these families has increased even more.

WHAT IS TO BE DONE?

Capitalism today continues to produce remarkable benefits and continually greater opportunities for self-cultivation and personal development. Now as ever, however, those upsides are coming with downsides, particularly increasing inequality and insecurity. As Marx and Engels accurately noted, what distinguishes capitalism from other social and economic systems is its "constant revolutionizing of production, uninterrupted disturbance of all social conditions, [and] everlasting uncertainty and agitation."

At the end of the eighteenth century, the greatest American student and practitioner of political economy, Alexander Hamilton, had some profound observations about the inevitable ambiguity of public policy in a world of creative destruction:

Tis the portion of man assigned to him by the eternal allotment of Providence that every good he enjoys, shall be alloyed with ills, that every source of his bliss shall be a source of his affliction—except Virtue alone, the only unmixed good which is permitted to his temporal Condition. . . . The true politician . . . will favor all those institutions and plans which tend to make men happy according to their natural bent which multiply the sources of individual enjoyment and increase those of national resource and strength—taking care to infuse in each case all the ingredients which can be devised as preventives or correctives of the evil which is the eternal concomitant of temporal blessing. 

Now as then, the question at hand is just how to maintain the temporal blessings of capitalism while devising preventives and correctives for the evils that are their eternal concomitant.

One potential cure for the problems of rising inequality and insecurity is simply to redistribute income from the top of the economy to the bottom. This has two drawbacks, however. The first is that over time, the very forces that lead to greater inequality reassert themselves, requiring still more, or more aggressive, redistribution. The second is that at some point, redistribution produces substantial resentment and impedes the drivers of economic growth. Some degree of postmarket redistribution through taxation is both possible and necessary, but just how much is ideal will inevitably be contested, and however much it is, it will never solve the underlying problems.

A second cure, using government policy to close the gaps between individuals and groups by offering preferential treatment to underperformers, may be worse than the disease. Whatever their purported benefits, mandated rewards to certain categories of citizens inevitably create a sense of injustice among the rest of the population. More grave is their cost in terms of economic efficiency, since by definition, they promote less-qualified individuals to positions they would not attain on the basis of merit alone. Similarly, policies banning the use of meritocratic criteria in education, hiring, and credit simply because they have a "differential impact" on the fortunes of various communal groups or because they contribute to unequal social outcomes will inevitably impede the quality of the educational system, the work force, and the economy.

A third possible cure, encouraging continued economic innovation that will benefit everybody, is more promising. The combination of the Internet and computational revolutions may prove comparable to the coming of electricity, which facilitated an almost unimaginable range of other activities that transformed society at large in unpredictable ways. Among other gains, the Internet has radically increased the velocity of knowledge, a key factor in capitalist economic growth since at least the eighteenth century. Add to that the prospects of other fields still in their infancy, such as biotechnology, bioinformatics, and nanotechnology, and the prospects for future economic growth and the ongoing improvement of human life look reasonably bright. Nevertheless, even continued innovation and revived economic growth will not eliminate or even significantly reduce socioeconomic inequality and insecurity, because individual, family, and group differences will still affect the development of human capital and professional accomplishment.

For capitalism to continue to be made legitimate and palatable to populations at large, therefore—including those on the lower and middle rungs of the socioeconomic ladder, as well as those near the top, losers as well as winners—government safety nets that help diminish insecurity, alleviate the sting of failure in the marketplace, and help maintain equality of opportunity will have to be maintained and revitalized. Such programs already exist in most of the advanced capitalist world, including the United States, and the right needs to accept that they serve an indispensable purpose and must be preserved rather than gutted—that major government social welfare spending is a proper response to some inherently problematic features of capitalism, not a "beast" that should be "starved."

In the United States, for example, measures such as Social Security, unemployment insurance, food stamps, the Earned Income Tax Credit, Medicare, Medicaid, and the additional coverage provided by the Affordable Care Act offer aid and comfort above all to those less successful in and more buffeted by today's economy. It is unrealistic to imagine that the popular demand for such programs will diminish. It is uncaring to cut back the scope of such programs when inequality and insecurity have risen. And if nothing else, the enlightened self-interest of those who profit most from living in a society of capitalist dynamism should lead them to recognize that it is imprudent to resist parting with some of their market gains in order to achieve continued social and economic stability. Government entitlement programs need structural reform, but the right should accept that a reasonably generous welfare state is here to stay, and for eminently sensible reasons.

The left, in turn, needs to come to grips with the fact that aggressive attempts to eliminate inequality may be both too expensive and futile. The very success of past attempts to increase equality of opportunity—such as by expanding access to education and outlawing various forms of discrimination—means that in advanced capitalist societies today, large, discrete pools of untapped human potential are increasingly rare. Additional measures to promote equality are therefore likely to produce fewer gains than their predecessors, at greater cost. And insofar as such measures involve diverting resources from those with more human capital to those with less, or bypassing criteria of achievement and merit, they may impede the economic dynamism and growth on which the existing welfare state depends.

The challenge for government policy in the advanced capitalist world is thus how to maintain a rate of economic dynamism that will provide increasing benefits for all while still managing to pay for the social welfare programs required to make citizens' lives bearable under conditions of increasing inequality and insecurity. Different countries will approach this challenge in different ways, since their priorities, traditions, size, and demographic and economic characteristics vary. (It is among the illusions of the age that when it comes to government policy, nations can borrow at will from one another.) But a useful starting point might be the rejection of both the politics of privilege and the politics of resentment and the adoption of a clear-eyed view of what capitalism actually involves, as opposed to the idealization of its worshipers and the demonization of its critics.

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Understanding Capitalism

The Role of Capitalism in Shaping Social Inequality

Ethical implications of capitalism, consequences of unchecked capitalism, in conclusion.

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Social Inequality, Capitalism, and Globalization

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Modern society has several problems and tasks worthy of attention and solutions. However, among all the problems, the most ancient and significant one stands out: inequality. Inequality exists between the inhabitants of one country, continent, and the whole world. The problem of social inequality has existed almost since the emergence of civilization. Nevertheless, injustice and poor distribution of resources have not diminished through the course of scientific, technological, social, and economic progress but, on the contrary, only became stronger. Capitalism has become the central institution that creates inequality and leads humanity towards a dystopian future. It replaces slavery of antiquity and negatively affects almost all aspects of society, from the inequality of men and women to the sphere of science and education.

In developed countries, along with racial inequality, there is a difference in society’s attitude towards men and women. The institution of patriarchy, common in many cultures, has suppressed women for millennia, viewing them primarily as a resource. Women were looked upon only as domestic servants and reproductive instruments. Only a few centuries have passed since such a discriminatory attitude was relevant; the advent of suffragism has partially solved the problem.

On the one hand, capitalism was successful in sustaining absolute freedom to women in first world countries since it is an institution that is not interested in the origin, gender, and nation of a person and looks only at their abilities. Modern corporate consumerism adherents are also interested in equalizing women’s rights, but only to make the corporation earn more money. Big companies support feminism and equality only as long as they are not forced to commit resources to truly support women. Instead of supporting women because of their physiological characteristics, such as pregnancy, large companies often quietly lay them off, replacing staff. Due to the inability of maternal leave, singe mothers could not purse the development of their careers. Besides, childcare is way too expensive for them. Since women are involved in children’s upbringing and domestic chores, they rarely can take up leadership roles. As a result, one can observe that capitalism supports the institution of patriarchy without providing tangible support to women, only exacerbating inequality.

It is also worth considering the idea of ​​inequality between states and society since regular discourse about inequality only indirectly mentions this. At first glance, if one looks at the words of large corporations and developed countries, it may seem that developing countries are poor only due to their fault. Low industrialization, inability to compete with other economies, and the like, are mentioned. However, looking at most of the developing countries, the main sectors of their production and economies, an obvious source of problems could be seen. In South America, Africa, and Southeast Asia, all of the most profitable manufacturing and trading sectors are owned, directly or indirectly, by foreign corporations (Stiglitz, 2013). Thus, inequality and capitalism are involved in the process of impoverishment across nations.

Moreover, all the HQs of large corporations are primarily situated in only a few places: Europe, North America, and China. As a result, it could be seen that corporations from developed countries exploit ordinary people from developing countries. The Frank Zone, Chinese Economic Zones, and American corporations are all neo-colonial hegemons that exacerbate global inequality. Based on the preceding, institution of globalization and capitalism only aggravates inequality, beneficial to a small number of countries and individuals, at the cost of the rest of the world.

As mentioned earlier, capitalism and globalization are predatory and cruel not only to other countries but also to people within the societies where they place their government. As noted by Eduardo Galeano in Injustice 101 (2001), the modern system is hypocritical and unfair. This is seen in the problems of poverty, the availability of such essential matters for a person as education and medicine. It can be seen that in countries where capitalism does not stand above society but is embedded in society itself, people are much happier since they have affordable, sometimes even free healthcare and education. This can be observed in contrast between the attitude of the United States and Canada towards their people, where the former completely ignore the availability of public goods, and the latter strive to do so. The absence of formal state education, medicine, marginalization of the proletariat, and poor people in favor of capital can be observed in the States. These same problems are absent in Canada, Germany, and other socially-oriented societies. In general, it can be concluded that socially-oriented economies are much more practical about their citizens and their equality.

Although the problem of inequality stands clearly and stands out against the background of other socio-economic issues, not many agree with the methods of solving it. In Stiglitz’s The Price of Inequality, he explicitly and well criticizes the modern social system and the establishment (Stiglitz, 2013). However, it is worth considering the lack of explicit specifics in Stiglitz regarding the solution of the identified problems, which is somewhat embarrassing. There are many answers to solving the problem of inequality, for example, ignoring the problem for economic development. It should be noted that economic growth is not an indicator of the happiness of citizens and often goes despite it. There is also an alternative view from modern social democratic philosophers and economists, who note the usefulness of social policy. This slows down economic development in the short term but will multiply it in the long term. It follows from this that the development of the economy should not be higher than the public good because, at the cost of costs here and now, we will get growth in the future. Summing up, it is easy to see that both ends of the spectrum of the problem of solving inequality have their arguments, but many factors must be taken into account.

The problem of inequality is treated differently in the academic environment, and the influence of capitalism on this area is debated. Considering the trends of many years, it can be seen that the academic environment is increasingly focused on solving the problems posed by business and not public needs. The development of the technical branch of science is increasingly focusing on creating innovative products for the market and the consumer segment of the economy. This is because investor and government money goes to a small but influential segment of consumer goods innovation, to the detriment of all other industries. Based on this, it can be seen that such an allocation of resources primarily harms the rest of science.

Moreover, science popularizers often discredit the academic environment with loud statements, politicization, and radical views. The resources for organizing their performances and publishing their works are great, but there is also a problem. Despite all the benefits that rational and adequate popularization of the scientific approach brings, the money going to the loudest and most attractive audiences of popularizers does not go into actual research. The situation is problematic but straightforward because the market benefits from the inequality between the scientific and popularizing environment.

Summing up all that has been said, it will be noted that the problem of inequality is essential and significant, and it only gets worse every decade. The existence of inequality between different population groups, classes, and states leads to a hypocritical and predatory attitude of the rich towards the poor. The problem of neo-colonialism of corporations in developing countries is touched upon and specific groups of the population such as single mothers or women at work in general. Ignoring the problem of inequality will ultimately destabilize the situation in society, and the future will only lead to a worsening of the situation. To summarize, as long as there is inequality in society, and as long as the minority exploits and suppresses the majority, the world will experience crisis episodes, and the situation will only worsen.

Galeano, E., Posada, J. G., & Fried, M. (2001). Upside down: A primer for the Looking-Glass world (1 st ed.). Picador.

Stiglitz, J. E. (2013). The price of inequality: How today’s divided society endangers our future (Reprint ed.). W. W. Norton & Company.

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1000-Word Philosophy: An Introductory Anthology

Philosophy, One Thousand Words at a Time

Arguments for Capitalism and Socialism

Author: Thomas Metcalf Category: Social and Political Philosophy Wordcount: 993

Editor’s Note: This essay is the second in a two-part series authored by Tom on the topic of capitalism and socialism. The first essay, on defining capitalism and socialism, is available here .

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Suppose I had a magic wand that allowed one to produce 500 donuts per hour. I say to you, “Let’s make a deal. You use this wand to produce donuts, and then sell those donuts for $500 and give me the proceeds. I’ll give you $10 for every hour you spend doing this. I’ll spend that time playing video games.”

My activity—playing video games—seems pretty easy. Your job requires much more effort. And I might end up with a lot more money than $10 for every hour you work. How is that fair?

In the story, the magic wand is analogous to capital goods : assets (typically machinery and buildings, such as robots, sewing machines, computers, and factories) that make labor, or providing goods and services, more productive. Standard definitions of ‘capitalism’ and ‘socialism’ indicate that, in general, capitalist systems permit people to privately own and control capital goods, whereas socialist systems do not. And capitalist systems tend to contain widespread wage labor, absentee ownership, and property income; socialist systems generally don’t. [1]

Capital goods are morally interesting. As in the case of the magic wand, ownership of capital goods can allow one to make lots of money without working. In contrast, other people have to work for a living. This might be unfair or harmful. This essay surveys and explains the main arguments in this debate. [2]

1. Capitalism

Arguments for capitalism tend to hold that it’s beneficial to society for there to be incentives to produce, own, and use capital goods like the magic wand, or that it’s wrong to forcibly prevent people from doing so. Here are four arguments for capitalism, stated briefly:

(1) Competition: ‘When individuals compete with each other for profits, this benefits the consumer.’ [3]

Critique : Competition also may encourage selfish and predatory behavior. Competition can also occur in some socialist systems. [4]

(2) Freedom: ‘Preventing people from owning capital restricts their freedom. Seizing their income in the form of taxes may constitute theft.’ [5]

Critiques : Maybe owning property, itself, restricts freedom, by excluding others from using it. [6] If I announce that I own something, I may be thereby announcing that I will force you not to use it. And maybe “freedom” requires the ability to pursue one’s own goals, which in turn requires some amount of wealth. [7] Further, if people must choose between work and starvation, then their choice to work may not be really “free” anyway. [8] And the general distribution of wealth is arguably the result of a morally arbitrary “natural lottery,” [9] which may not actually confer strict property-rights over one’s holdings. [10] I didn’t choose where I was born, nor my parents’ wealth, nor my natural talents, which allow me to acquire wealth. So perhaps it’s not a violation of my rights to take some of that property from me.

(3) Public Goods: [11] ‘When objects, including capital, must be shared with others, then no one is strongly motivated to produce them. In turn, society is poorer and labor is more difficult because production is inefficient.’ [12]

Critique : People might be motivated to produce capital for altruistic reasons, [13] or may be coerced in some socialist systems to do so. Some putatively socialist systems allow for profitable production of capital goods. [14]

  (4) Tragedy of the Commons: ‘When capital, natural resources, or the environment are publicly controlled, no one is strongly motivated to protect them.’ [15]

Critique : As before, people might be motivated by altruism. [16] Some systems with partially-private control of capital may nevertheless qualify as socialist. [17]

2. Socialism

Arguments for socialism tend to hold that it’s unfair or harmful to have a system like in the story of the magic wand, a system with widespread wage labor and property income. Here are four arguments for socialism, stated briefly:

(1) Fairness: ‘It’s unfair to make money just by owning capital, as is possible only in a capitalist system.’ [18]

Critique : Perhaps fairness isn’t as morally important as consent, freedom, property rights, or beneficial consequences. And perhaps wage laborers consent to work, and capital owners have property rights over their capital. [19]

(2) Inequality: ‘When people can privately own capital, they can use it to get even richer relative to the poor, and the wage laborers are left poorer and poorer relative to the rich, thereby worsening the inequality that already exists between capital-owners and wage-laborers.’ [20]

Critiques : This is a disputable empirical claim. [21] And perhaps the ability to privately own capital encourages people to invest in building capital goods, thereby making goods and services cheaper. Further, perhaps monopolies commonly granted by social control over capital are “captured” by wealthy special-interests, [22] which harm the poor by enacting regressive laws. [23]

(3) Labor: ‘Wage laborers are alienated from their labor, exploited, and unfree because they must obey their bosses’ orders.’ [24]

Critiques : If this alienation and exploitation are net-harmful to workers, then why do workers consent to work? If the answer is ‘because they’ll suffer severe hardship otherwise,’ then strictly speaking, this is a critique of allowing poverty, not a critique of allowing wage labor.

(4) Selfishness: ‘When people can privately own capital, they selfishly pursue profit above all else, which leads to further inequality, environmental degradation, non-productive industries, economic instability, colonialism, mass murder, and slavery.’

Critique : These are also disputable empirical claims. Maybe when people are given control over socially -owned capital, they selfishly extract personal wealth from it. [25] Maybe when the environment is socially controlled, everyone is individually motivated to over-harvest and pollute. [26] State intervention in the economy may be a major cause of the existence of non-productive industry, pollution, and economic instability. [27] Last, some of the worst perpetrators of historical evils are governments, not private corporations. [28]

  3. Conclusion

It is difficult to justifiably draw general conclusions about what a pure capitalism or socialism would be like in practice. [29] But an examination of the merits and demerits of each system gives us some guidance about whether we should move a society in either direction.

[1] See my Defining Capitalism and Socialism for an explanation of how to define these systems.

[2] For much-more-extensive surveys, see Gilabert and O’Neill n.d. and Arnold n.d.

[3] By analogy, different people might try to construct even better magic wands, or use them for better purposes. Typically the benefits are thought to include lower prices, increased equality, innovation, and more options. See Smith 2003 [1776]: bk. 1, ch. 2 and Friedman and Friedman 1979: ch. 1.

[4] Schweickart 2011 presents an outline of a market socialism comprising much competition.

[5] By analogy, if I legitimately own the magic wand, then what gives you the right to threaten violence against me if I don’t give it to you? Nozick 1974: ch. 7 presents a general discussion of how socialism might restrict freedom and how taxation may be akin to theft or forced labor.

[6] Spencer 1995 [1871]: 103-4 and Zwolinski 2015 discuss how property might require coercion. See also Scott 2011: 32-33. Indeed, property in general may essentially be theft (Proudhon 1994 [1840]).

[7] See Rawls (1999: 176-7) for this sort of argument. See John Rawls’ ‘A Theory of Justice’ by Ben Davies for an introduction.

[8] See e.g. Burawoy 1979 for a discussion of whether workers consent to work. See also Marx 2004 (1867): vol. IV, ch. VII.

[9] Rawls 1999: 62 ff.

[10] Relatedly, while one may currently hold capital, one may greatly owe the existence of that product to many other people or to society in general. See e.g. Kropotkin 2015 [1913]: chs. 1-3 and Murphy and Nagel 2002.

[11] A public good is a good that is non-excludable (roughly, it is expensive to prevent people from using it) and non-rivalrously consumed (roughly, preventing people from using it causes harm without benefiting anyone) (Cowen 2008).

[12] By analogy, why bother building magic wands at all if someone else is immediately going to take it from me and start using it? Standard economic theory holds that public goods (non-excludable and non-rivalrous goods) will, on the free market, be underproduced. This is normally taken to be an argument for government to produce public goods. See e.g. Gaus 2008: 84 ff.

[13] For example, according to Marxist communism, the ideal socialist society would comprise production for use, not for profit. See e.g. Marx 2004 [1867]: vol. 1 ch. 7. See also Kropotkin 1902, which is a defense of the general claim that humans will tend to be altruistic, at least in anarcho-communist systems.

[14] In a market-socialist system (cf. Schweickart 2011), it is possible to make capital goods and sell them at a profit that gets distributed to the laborers.

[15] By analogy, if I know that anyone in the neighborhood can use the magic wand, I might not invest my own time and money to maintain it. But if it’s mine alone, I care a lot more about maintaining it. This is the basis of the well-known ‘Tragedy of the Commons’ alleged problem. See, e.g., Hardin 1968.

[16] Kropotkin 1902.

[17] As before, in Schweickart’s (2011) system, firms will be motivated to protect capital if they must pay for capital’s deprecation, even though the capital is owned by society.

[18] By analogy, as noted, the wand-owner might make lots of money for basically doing no work. Sherman 1995: 130; Schweickart 2011: § 3.2.

[19] See e.g. Friedman 2002 for a collection of consequentialist arguments for capitalism, and Nozick 1974: chs. 3 and 7 for some arguments concerning freedom and capitalist systems.

[20] By analogy, the wand-owner might accumulate so much money as to start buying other magic wands and renting those out as well. See e.g. Piketty 2014.

[21] Taking the world as a whole, wealth in absolute terms has been increasing greatly, and global poverty has been decreasing steeply, including in countries that have moved in mostly capitalist directions. See e.g. World Bank Group 2016: 3. Friedman 1989: ch. 5 argues that capitalism is responsible for the improved position of the poor today compared to the past.

[22] See e.g. Friedman 1989: ch. 7 for a discussion of regulatory capture.

[23] Friedman 2002: chs. IV and IX; Friedman 1989: ch. 4.

[24] By analogy, the person I’ve hired to use the wand might need to obey my orders, because they don’t have a wand of their own to rent out, and they might starve without the job I’ve offered them. Marx 2009 [1932] introduces and develops this concept of alienation. See Dan Lowe’s 2015 Karl Marx’s Conception of Alienation for an overview. See also Anderson 2015 for an argument that private corporations coercively violate their workers’ freedom.

[25] See n. 21 above. This result is most-obvious in countries in which dictators enrich themselves, but there is nothing in principle preventing rulers of ostensibly democratic countries from doing so as well. Presumably this worry explains the presence of the Emoluments Clause in the U. S. Constitution.

[26] See n. 14.

[27] See e.g. Friedman 2002: chs. III and V and the example of compliance costs for regulations.

[28] See Huemer 2013: ch. 6 ff.

[29] All or nearly all large-scale economies have been mixed economies. In contrast, a pure capitalism would be an anarcho-capitalism (see e.g. Gaus 2010: 75 ff. and Huemer 2013), and a pure socialism wouldn’t permit people to privately own scissors. See also the entry “Defining Capitalism and Socialism.”

Anderson, Elizabeth. 2015. Private Government: How Employers Rule Our Lives (and Why We Don’t Talk about It) . Princeton, NJ: Princeton University Press.

Arnold, Samuel. N. d. “Socialism.” In The Internet Encyclopedia of Philosophy (ed.), The Internet Encyclopedia of Philosophy , URL = < https://www.iep.utm.edu/socialis/ >

Burawoy, Michael. 1979. Manufacturing Consent: Changes in the Labor Process under Monopoly Capitalism . Chicago, IL and London, UK: The University of Chicago Press.

Cohen, G. A. 2009. Why Not Socialism? Princeton, NJ: Princeton University Press.

Cowen, Tyler. 2008. “Public Goods.” In David R. Henderson (ed.), The Concise Encyclopedia of Economics . Indianapolis, IN: Liberty Fund.

Dagger, Richard and Terence Ball. 2019. “Socialism.” In Encyclopædia Britannica, inc. (ed.), E ncyclopædia Britannica . Retrieved from https://www.britannica.com/topic/socialism

Dahl, Robert A. 1993. “Why All Democratic Countries have Mixed Economies.” Nomos 35: 259-82.

Dictionary.com. N.d. “Capitalism.” URL = < https://www.dictionary.com/browse/capitalism >

Editors of Encyclopædia Britannica. 2019. “Henri de Saint-Simon.” In Encyclopædia Britannica , Retrieved from https://www.britannica.com/biography/Henri-de-Saint-Simon

Friedman, David D. 1989. The Machinery of Freedom: Guide to a Radical Capitalism , Second Edition. La Salle, IL: Open Court Publishing Company.

Friedman, Milton. 2002. Capitalism and Freedom . Chicago, IL: University of Chicago Press.

Friedman, Milton and Rose Friedman. 1979. Free to Choose: A Personal Statement . New York, NY: Harcourt Brace.

Gaus, Gerald. 2010. “The Idea and Ideal of Capitalism.” In George G. Brenkert and Tom L. Beauchamp (eds.), The Oxford Handbook of Business Ethics . New York, NY: Oxford University Press.

Gaus, Gerald. 2008. On Philosophy, Politics, and Economics . Belmont, CA: Thomson Wadsworth.

Gilabert, Pablo and Martin O’Neill. 2019. “Socialism.” In E. N. Zalta (ed.), The Stanford Encyclopedia of Philosophy . Retrieved from https://plato.stanford.edu/entries/socialism/ .

Hardin, Garrett. 1968. “The Tragedy of the Commons.” Science 162(3859): 1243-48.

Herzog, Lisa. 2019. “Markets.” In E. N. Zalta (ed.), The Stanford Encyclopedia of Philosophy , Spring 2019 Edition, URL =https://plato.stanford.edu/archives/spr2019/entries/markets/

Huemer, Michael. 2013. The Problem of Political Authority: An Examination of the Right to Coerce and the Duty to Obey . Houndmills, UK and New York, NY: Palgrave Macmillan.

Investopedia. 2019. “Mixed Economic System.” Retrieved from https://www.investopedia.com/terms/m/mixed-economic-system.asp

Kropotkin, P. 1902. Mutual Aid: A Factor of Evolution . New York, NY: McClure Phillips & Co.

Kropotkin, Peter. 2015 [1913]. The Conquest of Bread. London, UK: Penguin Classics.

Lowe, Dan. 2015. “Karl Marx’s Conception of Alienation.” 1000-Word Philosophy . Retrieved from https://1000wordphilosophy.com/2015/05/13/karl-marxs-conception-of-alienation/.

Marx, Karl. 2009 [1932]. “Economic and Philosophic Manuscripts of 1844.” In Karl Marx and Friedrich Engels, Economic and Philosophic Manuscripts of 1844 and the Communist Manifesto , tr. Martin Milligan (Amherst, NY: Prometheus Books), pp. 13-202.

Marx, Karl. 2004 [1867]. Capital: A Critique of Political Economy, Volume One . New York, NY: Penguin Classics.

Merriam-Webster. N.d. “Capitalism.” URL = < https://www.merriam-webster.com/dictionary/capitalism >

Mill, John Stuart. 1965 [1848]. Principles of Political Economy with Some of Their Applications to Social Philosophy, Volume I: The Principles of Political Economy I , ed. J. M. Robson. Toronto, ON: University of Toronto Press.

Murphy, Liam and Thomas Nagel. 2002. The Myth of Ownership: Taxes and Justice. Oxford, UK: Oxford University Press.

Nozick, Robert. 1974. Anarchy, State, and Utopia . New York, NY: Basic Books.

Oxford English Dictionary, N.d. a. “Capital.” Retrieved from http://www.oed.com/view/Entry/27450

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Oxford English Dictionary. N.d. d. “Socialism.” Retrieved from http://www.oed.com/view/Entry/183741

Piketty, Thomas. 2014. Capital in the Twenty-First Century , tr. Arthur Goldhammer. Cambridge, MA: Harvard University Press.

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Schweickart, David. 2011. After Capitalism , Second Edition. Lanham, MD: Rowman & Littlefield.

Scott, Bruce R. 2011. Capitalism: Its Origins and Evolution as a System of Governance . New York, NY: Springer Science+Business Media.

Sherman, Howard J. 1995. Reinventing Marxism . Baltimore, MD: Johns Hopkins University Press.

Smith, Adam. 2003 [1776]. The Wealth of Nations . New York, NY: Bantam Dell.

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Zwolinski, Matt. 2015. “Property Rights, Coercion, and the Welfare State: The Libertarian Case for a Basic Income for All.” The Independent Review 19(4): 515-29

Related Essays

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Events, news & press, capitalism vs. socialism.

Over the last century countries have experimented with variations on both capitalism and socialsm. So how do socialism, capitalism, and their many variants compare?

From economic shutdowns to trillions of dollars in new government spending, the 2020 COVID-19 pandemic led to a dramatic increase in government action. While much of the increase was temporary, there is now a growing desire to further expand government. We see calls for single-payer health care systems, expanded child-care subsidies, and trillions of dollars in federal infrastructure investments.

Arguments about what government should and should not do are not new. We regularly see them in the debates over the merits of socialism versus free market capitalism. While these debates are often in the abstract, over the last century countries have experimented with variations on both economic systems. The  Hoover Institution’s Human Prosperity Project  critically examined many of these experiments to see which economic system is best for human flourishing. The video below describes the project’s objectives:

So how do socialism, capitalism, and their many variants compare?

Part 2: How do socialism and capitalism affect income and opportunities?

Delivering broad-based prosperity should be the primary goal of all economic systems, but not all systems deliver the same results. Supporters of capitalism argue that free markets give people—entrepreneurs, investors, and workers—the right incentives to create goods and services that people value. The result is higher standards of living. Those sympathetic to socialism, however, respond that capitalism may produce wealth for some, but without government involvement in the economy many are left behind.

In his Human Prosperity Project essay  Socialism, Capitalism, and Income  economist Edward Lazear analyzed decades of income trends across 162 countries. He studied how incomes for low and high earners changed as countries shifted from government-controlled economies to more market-oriented economies. His conclusion?

The historical record provides evidence on how countries have fared under the two extreme systems as well as under intermediate cases, where countries adopt primarily private ownership and economic freedom but couple that with a large government sector and transfers. The general evidence suggests that both across countries and over time within a country, providing more economic freedom improves the incomes of all groups, including the lowest group.

Lazear points to several specific examples. First, China: in the 1980s, the Chinese Communist government began to adopt market-based reforms. Lazear finds that the market reforms, as skeptics of capitalism would predict, did increase income inequality. But, more importantly, the market reforms lifted millions of people out of poverty. Lazear notes:

Today, the poorest Chinese earn five times as much as they did just two decades earlier. Throughout the 1980s and before, a large fraction of the Chinese population lived in abject poverty. Today’s poor in China remain poor by developed-country standards, but there is no denying that they are far better off than they were even two decades ago. Indeed, the rapid lifting of so many out of the worst state of poverty is likely the greatest change in human welfare in world history.

As the video below highlights, market reforms led to similar economic miracles in India, Chile, and South Korea:

Part 3: What about mixed economies?

Of course, most modern-day critics of capitalism are not advocating for complete government control over the economy. They don’t want the economic policies of the Soviet Union or early Communist China; instead, they point to nations with mixed economies to emulate, such as those featuring social democracy. So how do these policies affect incomes and opportunities?

Economist Lee Ohanian compares the labor market policies of Europe and the United States in his essay The Effect of Economic Freedom on Labor Market Efficiency and Performance . Compared to the United States, European nations have higher minimum wages, stricter rules that prevent the firing of workers, and high rates of unionization. These rules are intended to protect workers, but Ohanian finds that they discourage employment and result in lower compensation rates. His analysis indicates:

These findings have important implications for economic policy making. They indicate that policies that enhance the free and efficient operation of the labor market significantly expand opportunities and increase prosperity. Moreover, they suggest that economic policy reforms can substantially improve economic performance in countries with heavily regulated labor markets and high tax rates.

The video below highlights some of Ohanian’s key findings:

What about the effects of income redistribution and the taxes that pay for it? Supporters argue that these programs keep people out of poverty. Critics, however, argue that financing these systems comes with high costs both to taxpayers and to recipients.

In their essay Taxation, Individual Actions, and Economic Prosperity: A Review , Joshua Rauh and Gregory Kearney consider the effects of raising tax rates on high-income Americans to finance new government spending. They examine the effects of income and wealth taxes in Europe. They find that wealth taxes and high income tax rates discourage high-income filers from investing in a country, which ultimately reduces economic growth. Thus, calls in the United States to increase income and wealth taxes “come despite a body of evidence showing that the country is already one of the more progressive tax regimes in the world, that wealth confiscation results in worse outcomes for the broader economy.”

The long-term consequences of redistribution don’t fall just on taxpayers. Such transfer systems also create incentives for individuals to leave or stay out of the work force. In their contribution to the Human Prosperity Project , economist John Cogan and Daniel Heil consider the effects of Universal Basic Income (UBI) programs, which would provide a “no-strings-attached” cash benefit to families. They find that modern UBI proposals in the United States would either prove costly—requiring tax rates that would reduce incentives to work and invest—or would require steep phase-out provisions that punish recipients who try to re-enter the workforce. In either case, the result is that UBI programs are likely to reduce employment rates, ultimately depriving recipients of long-term economic opportunities.

Part 4: What about other aspects of human flourishing?

Human flourishing is more than material prosperity. For example, it requires a clean environment and access to good health care.

It might seem that socialist economies—where government controls the means of production—would have better environmental track records. Yet the evidence suggests the opposite. In his essay Environmental Markets vs. Environmental Socialism: Capturing Prosperity and Environmental Quality Economist , Terry Anderson summarizes the literature on economic systems’ effects on the environment. He points to research showing that countries with more economic freedom tend to have better environmental outcomes:

Seth Norton calculated the statistical relationship between various freedom indexes and environmental improvements. His results show that institutions—especially property rights and the rule of law—are key to human well-being and environmental quality. Dividing a sample of countries into groups with low, medium, and high economic freedom and similar categories for the rule of law, Norton showed that in all cases except water pollution, countries with low economic freedom are worse off than those in countries with moderate economic freedom, while in all cases those in countries with high economic freedom are better off than those in countries with medium economic freedom. A similar pattern is evident for the rule-of-law measures.

Anderson explains this surprising result with the adage that “no one washes a rental car.” In free-market societies, property rights give individuals incentive to protect and preserve the resources they own. In countries without these property rights provisions, no one has the right incentives, much like no one has the incentive to wash a rental car (except the rental car companies). The video below further explains why free markets and cleaner environments go hand and hand.

What about health care? Many developed nations that have generally free economies have still opted for government-run health care. The programs vary by country. Even in the United States, the government plays a large role in health care. Large government programs such as Medicare and Medicaid provide health care to low-income families, the disabled, and seniors. Nevertheless, relative to most developed nations, the United States relies far more heavily on the private sector and markets.

In his essay  The Costs of Regulation and Centralization in Health Care  Dr. Scott Atlas compares health care in the United States with that in other developed nations. The United States consistently ranks high across a variety of quality metrics. The system offers shorter wait times and faster access to life-saving drugs and medical equipment. The result is that the US system tends to deliver better medical outcomes than other developed nations. Watch this video to learn more:

Part 5: Conclusion

We’ve seen that whether we look at income statistics or environmental outcomes, economies with freer markets tend to have better outcomes. Nevertheless, there still may be unseen dimensions of economic systems that these statistics don’t address. Is there another way to determine which system is best for human flourishing?

Perhaps the best method is to observe where people choose to live when offered the choice. In his essay  Leaving Socialism Behind: A Lesson from German History ,  Russell Berman catalogues widespread immigration from East Germany to West Germany during the Cold War. Watch this video to learn its causes:

Citations and Additional Reading

• Why did liberal democracies succeed while communist nations failed in the twentieth century? Hoover Institution senior fellow Peter Berkowitz provides an answer in his essay  Capitalism, Socialism, and Freedom .
• In his essay  Socialism vs. The American Constitutional Structure: The Advantages of Decentralization and Federalism , John Yoo highlights the constitutional provisions that would make it difficult for the United States to adopt widescale socialist policies.
• Explore the other Human Prosperity Project essays  here .

View the discussion thread.

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Grace Blakeley

August 28th, 2024, capitalism’s gaping inequalities are also its main weakness – and the spur for resistance.

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Estimated reading time: 7 minutes

Inequality is central to the workings of capitalism, writes Grace Blakeley , with the battle for power between workers and bosses a perennial feature of the system. Yet in recent decades, people seem to have accepted extreme inequality as a natural occurrence. How has this happened? And how can capitalism’s exploitative ideology be overcome?

Inequality is a part of the foundations of capitalism. For a capitalist economy to function, some people must own all the resources required to produce commodities, while others are forced to sell their labour power merely to survive.

The creation of this divide between worker and capitalist was a critical step in the development of capitalism. Common land was enclosed, leading to the emergence of a landless class of workers with no choice other than to sell their labour power to industrialists in towns and cities. But the exploitation of these workers, crowded together in small spaces with little hope for the future, also laid the groundwork for the emergence of socialism. To this day, this divide remains critical for the ongoing functioning of global capitalism – while also being one of its greatest weaknesses.

The exploitative essence of capitalism

The profitability of the world’s largest companies, centred in the rich world, depends upon the exploitation of workers centred in the global South.

Fast fashion companies like Shein pay garment workers across China as little as 3p per item they produce, forcing them to work up to 18 hour days with no weekends. Apple’s iPhones are manufactured using metals stripped out of war-torn countries like the Democratic Republic of Congo, and put together by hyper-exploited workers huddled together in factories across China. Even the modern AI revolution would not be possible were it not for the poorly-paid, repetitive work of those labelling images and sorting information so it can be exploited by powerful tech companies.

But workers do not accept these conditions lying down. Wherever there is exploitation, there is resistance. Today, as has been the case throughout the history of capitalism, workers all over the world are organising, often in extraordinarily challenging conditions, to fight for their freedom.

In Bangladesh, garment workers went on strike last year demanding higher pay and better conditions, leading to the shutdown of hundreds of factories across the country. Amazon workers all over the world – from the UK and the US, to Germany and Poland – have been attempting to form unions, in the face of extreme resistance from the company. Even in China, where the state exerts such intense control over workers’ lives in the service of capitalist interests, the number of strikes tripled between 2022 and 2023.

This battle for power between workers and bosses has been a perennial feature of capitalism. For most of history, the trend was towards much greater levels of organizing. The workers exploited by capital were supposed to be its gravediggers. But over recent decades, people seem to have accepted extreme inequality – it has become naturalized. How has this happened?

How inequality came to be seen as natural

The first factor is globalization. Capital is able to move around the world seamlessly, while workers are stuck in place, which means powerful monopolistic corporations headquartered in the rich world are able to exploit workers in the global South. Poor workers living in poor countries find themselves unable to leave in search of better economic opportunities, and their attempts to organize are quashed by authoritarian governments captured by corporate interests. Wealthy states also seek to maintain this global division of labour through rigid policing of national borders.

The end result is that the poor remain stuck in poor countries with few economic opportunities and very little freedom, producing commodities to be consumed by people in rich countries. This inequality is not naturalized so much as it is rendered invisible. No iPhone user ever sees the conditions in which their phones are made, and even if they did, they would never have to worry that they might face similar working conditions.

The second factor is ideology. Even within the rich world, people seem to accept extreme inequalities that are very much visible. Elon Musk and Jeff Bezos are viewed as heroes in our societies, despite their outsize role in exploiting workers and undermining democratic values like personal privacy and freedom of the press .

Capitalist ideology suggests that inequality naturally emerges from the operation of the free market. Intelligent, capable, hard-working individuals with valuable skills are paid more than unintelligent, lazy, low-skilled individuals. Some of those intelligent individuals are gifted with skills so far beyond those of the average person that they are able to create their own capitalist enterprises, transforming themselves from workers into entrepreneurs.

This story of the plucky entrepreneur who comes from nothing to make his fortune has always been the exception rather than the rule . In the UK, the birthplace of industrial capitalism, capitalism emerged as a joint venture between aristocrats, merchants, and financiers – all supported by the British state – which only served to consolidate the power and wealth of those at the top. Even today , one third of billionaire wealth is inherited, while another third comes from “crony connections to government and monopoly”.

There should be no mistake: those who make their wealth “on their own” do so by exploiting both common resources – from legal systems, to infrastructure, to the natural environment – and the labour power of other human beings. The people being exploited in this relationship are not too stupid, inept or unskilled to run their own businesses – they were simply unlucky enough to be born into situations in which the economic opportunities taken for granted by the wealthy did not exist.

Those who make their wealth “on their own” do so by exploiting both common resources – from legal systems to the natural environment – and the labour power of other human beings

Nevertheless, the ideology of inequality remains an incredibly powerful force naturalizing the gap between rich and poor. The belief that inequality is somehow justified is the glue that holds advanced capitalist societies together. It is the foundation of the legitimacy of the ruling class in these societies. It is the basis of the American Dream.

The real possibilities of a genuinely egalitarian economy

It is only when this ideology is challenged that we begin to see resistance to inequality re-emerge. And this ideology is only challenged when workers realize that they have the power, and the skills, to govern themselves.

In Vulture Capitalism , I look at the example of the Lucas Plan, where workers at Lucas Aerospace developed a plan to transform their ailing employer from a privately-owned weapons manufacturer into a worker-owned, democratically governed producer of socially useful technologies. Workers from across the organization contributed ideas as to how existing resources could be repurposed to create technologies like wind turbines and kidney dialysis machines – and they proposed a clear and coherent plan as to how the governance of the organization could be democratized.

Naturally, the Lucas Plan terrified the British establishment. Not because the transformation of one single firm would threaten the interests of capital, but because it challenged the ideology that legitimised the entire system of production: the idea that workers had to be governed and controlled by their superiors.

Today, the spirit of the Lucas Plan is kept alive by workers, community organizers and activists seeking to create a democratic economy. From community wealth building, to participatory budgeting, to the tenants’ movement and the labour movement, those organizing to take control of the resources we all need to survive are at the forefront of the fight against inequality.

Inequality is sustained by the unfounded belief that those at the top are destined to rule, while those at the bottom are destined to obey. The only way to build a genuinely egalitarian economy is to build a democratic economy.

All articles posted on this blog give the views of the author(s). They do not  represent  the position of LSE Inequalities, nor of the London School of Economics and Political Science.  

Image credits: Zeynep Demir Aslim and Mamunur Rashid via Shutterstock

About the author

Grace Blakeley is a staff writer at Tribune Magazine and author of several books, including 'Vulture Capitalism: Corporate Crimes, Backdoor Bailouts and the Death of Freedom'. She has formerly been the economics commentator for the New Statesman and a Research Fellow at the Institute of Public Policy Research.

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Capitalism is an economic system in which private individuals or businesses own capital goods. At the same time, business owners employ workers who receive only wages; labor doesn't own the means of production but instead uses them on behalf of the owners of capital.

The production of goods and services under capitalism is based on supply and demand in the general market, also known as the market economy . This is in contrast to a planned economy or a command economy , in which prices are set through central planning.

The purest form of capitalism is free-market or laissez-faire capitalism. Here, private individuals are unrestrained. They may determine where to invest, what to produce or sell, and at which prices to exchange goods and services. The laissez-faire marketplace operates without checks or controls. Today, most countries practice a mixed capitalist system that includes some degree of government regulation of business and some extent of public ownership of select industries.

Key Takeaways

• Capitalism is an economic system characterized by private ownership of the means of production, with labor solely paid wages.
• Capitalism depends on the enforcement of private property rights, which provide incentives for investment in and productive use of capital.
• Capitalism developed out of feudalism and mercantilism in Europe and dramatically expanded industrialization and the large-scale availability of mass-market consumer goods.
• Pure capitalism can be contrasted with pure socialism, in which all means of production are collective or state-owned.

Capitalism is one type of system of economic production and resource distribution. Instead of planning economic decisions through centralized political methods, as with socialism or feudalism, economic planning under capitalism occurs via decentralized, competitive, and voluntary decisions.

Capitalism is essentially an economic system in which the means of production—factories, tools, machines, raw materials, etc—are organized by one or more business owners, also known as capitalists. Capitalists then hire workers to operate the means of production in return for wages. Workers have no claim on the means of production or on the profits generated from their labor; these belong to the capitalists.

As such, private property rights are fundamental to capitalism. Most modern concepts of private property stem from John Locke's theory of homesteading, in which human beings claim ownership by mixing their labor with unclaimed resources. Once owned, the only legitimate means of transferring property are through voluntary exchange, gifts, inheritance , or the re-homesteading of abandoned property.

Private property promotes efficiency by giving the owner of resources an incentive to maximize the value of their property. The more valuable a resource is, the more trading power it provides the owner. In a capitalist system, the person who owns the property is entitled to any value associated with that property.

Why Private Property Rights Matter for Capitalism

For individuals or businesses to deploy their capital goods confidently, a system must exist that protects their legal right to own or transfer private property. A capitalist society relies on the use of contracts, fair dealing, and tort law to facilitate and enforce these private property rights.

When property isn't privately owned but rather is shared by the public, a problem known as the tragedy of the commons can emerge. With a common pool resource—which all people can use and none can limit access to—all individuals have an incentive to extract as much use-value as they can and no incentive to conserve or reinvest in the resource. Privatizing the resource is one possible solution to this problem, along with various voluntary or involuntary collective action approaches.  

Under capitalist production, the business owners retain ownership of the goods being produced. If a worker in a shoe factory were to take home a pair of shoes that they made, it would be theft. This concept is known as the alienation of workers from their labor.

Profits are closely associated with the concept of private property. By definition, an individual only enters into a voluntary exchange of private property when they believe the exchange benefits them in some psychic or material way. In such trades, each party gains extra subjective value, or profit, from the transaction.

The profit motive , or the desire to earn profits from business activity, is the driving force of capitalism. It creates a competitive environment in which businesses compete to be the low-cost producer of a certain good in order to gain market share. If it is more profitable to produce a different type of good, then a business is incentivized to switch.

Voluntary trade is another, related mechanism that drives activity in a capitalist system. The owners of resources compete with one another over consumers, who, in turn, compete with other consumers over goods and services. All this activity is built into the price system, which balances supply and demand to coordinate the distribution of resources.

A capitalist earns the highest profit by using capital goods such as machinery and tools most efficiently while producing the highest-value good or service. By contrast, the capitalist suffers losses when capital resources aren't used efficiently and instead create less-valuable outputs.

Capitalism vs. Markets

Capitalism is a system of economic production. Markets are systems of distribution and allocation of goods already produced. While they often go hand-in-hand, capitalism and free markets refer to two distinct systems.

Capitalism is a relatively new type of social arrangement for producing goods in an economy. It arose largely along with the advent of the Industrial Revolution , some time in the late 17th century. Before capitalism, other systems of production and social organization were prevalent.

Feudalism and the Roots of Capitalism

Capitalism grew out of European feudalism. Up until the 12th century, a very small percentage of the population of Europe lived in towns. Skilled workers lived in the city but received their keep from feudal lords rather than a real wage, and most workers were serfs for landed nobles. However, by the late Middle Ages, rising urbanism, with cities as centers of industry and trade, became more and more economically important.

Under feudalism, society was segmented into social classes based on birth or family lineage. Lords (nobility) were the landowners, while serfs (peasants and laborers) didn't own land but were under the employ of the landed nobility.

The advent of industrialization revolutionized the trades and encouraged more people to move into towns where they could earn more money working in a factory than existing at a subsistence level in exchange for labor.

Mercantilism

Mercantilism gradually replaced the feudal economic system in Western Europe and became the primary economic system of commerce during the 16th to 18th centuries. Mercantilism started as trade between towns, but it wasn't necessarily competitive trade. Initially, each town had vastly different products and services that were slowly homogenized over time by demand.

After the homogenization of goods, trade was carried out in broader and broader circles: town to town, county to county, province to province, and, finally, nation to nation. When too many nations were offering similar goods for trade, the trade took on a competitive edge that was sharpened by strong feelings of nationalism on a continent that was constantly embroiled in wars.

Colonialism flourished alongside mercantilism, but the nations seeding the world with settlements weren't trying to increase trade. Most colonies were set up with an economic system that smacked of feudalism, with their raw goods going back to the motherland and, in the case of the British colonies in North America, being forced to repurchase the finished product with a pseudo- currency that prevented them from trading with other nations.

It was economist Adam Smith who noticed that mercantilism was a regressive system that was creating trade imbalances between nations and keeping them from advancing. His ideas for a free market opened the world to capitalism.

The Growth of Industry

Adam Smith's ideas were well-timed, as the Industrial Revolution was starting to cause tremors that would soon shake the Western world. The (often-literal) gold mine of colonialism had brought new wealth and new demand for the products of domestic industries, which drove the expansion and mechanization of production.

As technology leaped ahead and factories no longer had to be built near waterways or windmills to function, industrialists began building in the cities where there were now thousands of people to supply labor.

Capitalism involved reorganizing society into social classes based not on ownership of land, but ownership of capital (in other words, businesses). Capitalists were able to earn profits from the surplus labor of the working class, who earned only wages. Thus, the two social classes defined by capitalism are the capitalists and the laboring classes.

Industrial tycoons were the first people to amass wealth, often outstripping both the landed nobles and many of the money-lending/banking families. For the first time in history, common people could have hopes of becoming wealthy. The new money crowd built more factories that required more labor, while also producing more goods for people to purchase.

During this period, the term "capitalism"—originating from the Latin word " capitalis ," which means "head of cattle"—rose to prominence. In 1850, French socialist Louis Blanc used the term to signify a system of exclusive ownership of industrial means of production by private individuals rather than shared ownership.

Pros and Cons of Capitalism

More efficient allocation of capital resources

Competition leads to lower consumer prices

Wages and general standards of living rise overall

Spurs innovation and invention

Creates inherent class conflict between capital and labor

Generates enormous wealth disparities and social inequalities

Can incentivize corruption and crony capitalism in the pursuit of profit

Produces negative effects such as pollution

Pros Explained

More efficient allocation of capital resources : Labor and means of production follow capital in this system because supply follows demand.

Competition leads to lower consumer prices : Capitalists are in competition against one another, and so will seek to increase their profits by cutting costs, including labor and materials costs. Mass production also usually benefits consumers.

Wages and general standards of living rise overall : Wages under capitalism increased, helped by the formation of unions. More and better goods became cheaply accessible to wide populations, raising standards of living in previously unthinkable ways.

Spurs innovation and invention : In capitalism, inequality is the driving force that encourages innovation, which then pushes economic development.

Cons Explained

Creates inherent class conflict between capital and labor : While capitalists enjoy the potential for high profits, workers may be exploited for their labor, with wages always kept lower than the true value of the work being done.

Generates enormous wealth disparities and social inequalities : Capitalism has created an immense gap between the wealthy and the poor, as well as social inequalities.

Can incentivize corruption and crony capitalism in the pursuit of profit : Capitalism can provide incentives for corruption emerging from favoritism and close relationships between business people and the state.

Produces negative effects such as pollution : Capitalism often leads to a host of negative externalities , such as air and noise pollution, and these costs paid for by society, rather than the producer of the effect.

In terms of political economy , capitalism is often contrasted with socialism . The fundamental difference between the two is the ownership and control of the means of production.

In a capitalist economy, property and businesses are owned and controlled by individuals. In a socialist economy, the state owns and manages the vital means of production. However, other differences also exist in the form of equity, efficiency, and employment.

The capitalist economy is unconcerned about equitable arrangements. The primary concern of the socialist model is the redistribution of wealth and resources from the rich to the poor, out of fairness, and to ensure equality in opportunity and equality of outcome. Equality is valued above high achievement, and the collective good is viewed above the opportunity for individuals to advance.

The capitalist argument is that the profit incentive drives corporations to develop innovative new products desired by the consumer and in demand in the marketplace. It is argued that the state ownership of the means of production leads to inefficiency because, without the motivation to earn more money, management, workers, and developers are less likely to put forth the extra effort to push new ideas or products.

In a capitalist economy, the state doesn't directly employ the workforce. This lack of government-run employment can lead to unemployment during economic recessions and depressions .

In a socialist economy, the state is the primary employer. During times of economic hardship, the socialist state can order hiring, so there is full employment. Also, there tends to be a stronger "safety net" in socialist systems for workers who are injured or permanently disabled. Those who can no longer work have fewer options available to help them in capitalist societies.

Karl Marx, Capitalism, and Socialism

Philosopher Karl Marx was famously critical of the capitalist system of production because he saw it as an engine for creating social ills, massive inequalities, and self-destructive tendencies. Marx argued that , over time, capitalist businesses would drive one another out of business through fierce competition, while, at the same time, the laboring class would swell and begin to resent their unfair conditions. His solution was socialism, through which the means of production would be handed over to the laboring class in an egalitarian fashion.

Varieties of Capitalism

Today, many countries operate with capitalist production, but this also exists along a spectrum . In reality, there are elements of pure capitalism that operate alongside otherwise-socialist institutions.

The standard spectrum of economic systems places laissez-faire capitalism at one extreme and a complete planned economy—such as communism —at the other. Everything in between could be said to be a mixed economy. The mixed economy has elements of both central planning and unplanned private business. By this definition, nearly every country in the world has a mixed economy.

Mixed Capitalism

When the government owns some but not all the means of production and may legally circumvent, replace, limit, or otherwise regulate private economic interests, it is said to be a mixed economy or mixed economic system . A mixed economy respects property rights, but places limits on them.

Property owners are restricted as to how they exchange with one another. These restrictions come in many forms, such as minimum wage laws, tariffs, quotas, windfall taxes, license restrictions, prohibited products or contracts, direct public expropriation , antitrust legislation, legal tender laws, subsidies, and eminent domain . Governments in mixed economies also fully or partly own and operate certain industries, especially those considered public goods .

Anarcho-Capitalism

In contrast, with pure capitalism, also known as laissez-faire capitalism or anarcho-capitalism , all industries are left up to private ownership and operation, including public goods, and no central government authority provides regulation or supervision of economic activity in general.

What Is an Example of Capitalism?

An example of capitalist production would be if an entrepreneur starts a new widget company and opens a factory. This individual uses available capital that they own or from outside investors and buys the land, builds the factory, orders the machinery, and sources the raw materials. Workers are then hired by the entrepreneur to operate the machines and produce widgets. Note that the workers don't own the machines they use or the widgets that they produce. Instead, they receive only wages in exchange for their labor. These wages represent a small fraction of what the entrepreneur earns from the venture.

Who Benefits From Capitalism?

Capitalism tends to benefit capitalists the most. These include business owners, investors, and other owners of capital. While capitalism has been praised for improving the standard of living for many people across the board, it has by far benefited those at the top.

Why Is Capitalism Harmful?

Because of how it is structured, capitalism will always pit business owners and investors against the working class. Capitalists are also in competition against one another, and so will seek to increase their profits by cutting costs, including labor costs. At the same time, workers seek higher wages, fairer treatment, and better working conditions. These two incentives are fundamentally at odds, which creates class conflict.

Is Capitalism the Same as Free Enterprise?

Capitalism and free enterprise are often seen as synonymous. In truth, they are closely related yet distinct terms with overlapping features. It is possible to have a capitalist economy without complete free enterprise, and a free market without capitalism. Any economy is capitalist as long as private individuals control the factors of production . However, a capitalist system can still be regulated by government laws, and the profits of capitalist endeavors can still be taxed heavily. "Free enterprise" can roughly be understood to mean economic exchanges free of coercive government influence.

Capitalism is an economic and political system where trade and industry are controlled by private owners for profit. Its core principles are accumulation, ownership, and profiting from capital. In its purest form, capitalism works best when these private owners have assurances that the wealth they generate will be kept in their own pocket, which is often a controversial proposition.

Capitalism is the dominant world economic system, although it often isn’t pure in form. In many countries, interventions from the state, a core trait of socialism, are frequent. Businesses are able to chase profit but within the boundaries set by the government. Most political theorists and nearly all economists argue that capitalism is the most efficient and productive system of exchange.

International Monetary Fund. " What Is Capitalism ?"

Nelson, Peter Lothian. " To Homestead a Nature Preserve: A Response to Block and Edelstein, 'Popsicle Sticks and Homesteading Land for Nature Preserves '. "  Review of Social and Economic Issues , vol. 2, no. 1, Spring 2019, pp. 71+. (Subscription required.)

Harvard Business School. " Tragedy of the Commons: What It Is and 5 Examples ."

Lester C. Thurow. " Profits ."

Michael Sonenscher. " Capitalism: The Word and the Thing ."

Laura LaHaye. " Mercantilism ."

Trinity University. " Adam Smith on Money, Mercantilism, and the System of Natural Liberty ."

Milios, John. " Social Classes in Classical and Marxist Political Economy ," The American Journal of Economics and Sociology, vol. 59, no. 2 (April 2000), pp. 283-302. (Subscription required.)

Cambridge University Press. " Cries of Pain: The Word 'Capitalism' ."

Columbia College. " Karl Marx ."

New World Encyclopedia. " Anarcho-Capitalism ."

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Africa: Climate Change Has Deep Historical Roots - Amitav Ghosh Explores How Capitalism and Colonialism Fit in

Amitav Ghosh is an internationally celebrated author of 20 historical fiction and non-fiction books. The Indian thinker and writer has written extensively on the legacies of colonialism, violence and extractivism. His most famous works explore migration, globalisation and commercial violence and conquest during the colonial period, against the backdrop of the opium trade in the 1800s .

Caroline Southey , from The Conversation Africa , asked economics professor Imraan Valodia and climate and inequality researcher Julia Taylor about the significance of his work.

What has Ghosh contributed to our understanding about the root causes of climate change?

Julia Taylor: In Ghosh's recent non-fiction book, The Nutmeg's Curse: Parables for a Planet in Crisis , he used his storytelling prowess to outline the roots of climate change within two systems of power and oppression: imperialism and capitalism.

Imperialism is the expansion of influence over other countries through military force and colonisation. It usually entails the destruction of the environment to support imperial interests.

Capitalism is the dominant economic system where ownership of the means of production (industry) is private. Private actors are driven by profit and growth, which has relied on combustion of fossil fuels.

What Ghosh makes clear is that violence and destruction of the environment are key to capitalism, as they were to colonialism.

Imraan Valodia: Ghosh challenges us to think more deeply about the role of conquest and violence in shaping the planetary crisis we're facing. And the need to reshape our economic and social relations to address climate change. He does this with remarkable acumen and clarity in another of his works of non-fiction, The Great Derangement . In the book he seeks to explain our failure to address the urgency of climate change. He asks very powerfully whether the current generation is deranged by our inability to grasp the scale, violence and urgency of climate change.

He uses the history of nutmeg to illustrate some of his main points. What does he draw from this history?

Julia Taylor: The story of the nutmeg is one among many of conquest of both people and land during colonisation which led to the industrial revolution and the explosion of greenhouse gas emissions.

In the present day these conquests take different forms. But they continue, particularly in the context of mining and extractivism.

Imraan Valodia: Ghosh traces the history of the household spice - nutmeg - all the way to its origins in the Banda Islands of Indonesia. He uses the analogy of the nutmeg to explain how colonisation of land and people has led to the climate disaster.

The nutmeg was harvested from trees in the Banda Islands and traded by the Bandanese for centuries. With the growth in value of spices, various European countries sought to claim exclusive rights to the nutmeg trade in the Banda Islands. The local population resisted. However, in 1621, representatives of the Dutch East India Company chose to destroy the settlements of the Bandanese population and massacre or enslave anyone who could not escape, to gain control over the nutmeg trade.

Ghosh explains these horrifying events in the context of Anglo-Dutch tensions and the trend of empire in Europe, sanctioned by religious beliefs of racial superiority.

A major theme of his work is the link between imperialism and the planetary crisis. What's his main line of argument?

Julia Taylor: Ghosh argues in The Nutmeg's Curse: Parables for a Planet in Crisis that

the discussion of climate change, as of every aspect of the planetary crisis, tends to be dominated by the question of capitalism and other economic issues; geopolitics, empire, and questions of power figure in it far less. (p116)

However, he highlights that

the era of Western military conquests predates the emergence of capitalism by centuries. Indeed, it was these conquests, and the imperial systems that arose in their wake, that fostered and made possible the rise to dominance of what we now call capitalism ... colonialism, genocide and structures of organised violence were the foundations on which industrial modernity was built. (p116)

Imraan Valodia: This argument forces us to grapple with both capitalism and the dominance of the west in our understanding of climate change. It highlights the power dynamics and violence which enabled the destruction of many lands in the form of deforestation, industrial agriculture, mining and more.

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To respond to climate change, we need to rethink these dominant systems and relationships with land and the environment. This can be linked to the need to address inequality and power dynamics if we are to have any hope of addressing climate change.

Professor Valodia will be hosting Amitav Ghosh for a series of events at the University of the Witwatersrand in South Africa from 10 to 12 September 2024. The university has partnered with the Presidential Climate Commission, the Wits Institute for Social and Economic Research (WiSER) and the University of Pretoria to host the sessions.

Julia Taylor , Researcher: Climate and Inequality, University of the Witwatersrand

Imraan Valodia , Pro Vice-Chancellor: Climate, Sustainability and Inequality and Director: Southern Centre for Inequality Studies., University of the Witwatersrand

This article is republished from The Conversation Africa under a Creative Commons license. Read the original article .

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