- Desert Island
- Strategy 1: No Rules
- Strategy 2: Unchecked Exchanging
- Strategy 3: Checked Free Market
- Strategy 4: Cooperation
- Which Economy is Best?
- Mitigating Negative Effects of Capitalism
- Public Industry Exceptions
- Changes to US Economy
- Call to Action
Republicans and democrats debate over many issues:
- Which is better: capitalism or democratic socialism?
- Should we tax the rich more than the poor?
- Do we need more social safety nets or less?
- Should education be public or private?
- Is universal health care a good idea?
Whatever your political ideology, you probably agree on one thing: as a collective country, we are not as happy as we could be.
What does the design of our economy have to do with any of this? Everything. Our economy is at the heart of not only wealth and job distribution, but how we live. It plays a pivotal role in our collective wellbeing and happiness. If the design of our economy is so important, how should it be structured? To answer that question, let’s agree on an end goal: maximize the collective long-term happiness of our society.
If we can agree on an ideal economic design, then this will give us insight into what changes need to be made to the current US economy in order to better achieve our end goal. How should we go about deciding which economic design best maximizes the collective long-term happiness of society?
As a thought experiment, let’s take a journey to a hypothetical desert island. Using the island, we can think through different economic strategies and observe their natural outcomes. This will help us understand the root mechanisms at play, so that we can select an economic design that naturally maximizes the collective long-term happiness of our society.
- The design of the United States economy plays a pivotal role in our collective well-being and happiness
- We should strive for an economy that maximizes the collective long-term happiness of our society
- We will use a hypothetical desert island thought experiment to help determine the ideal economic design
- This will pinpoint changes that need to be made to the current US economy
We find ourselves on a desert island, together with 100 other people on it. We are the only human beings on the planet in this isolated experience. This desert island will form the foundation of our economic thought experiment. The island has trees, rocks, fruit, vegetables, soil, water, and theoretically all the natural resources we need to survive, but the resources are finite, so we have to utilize them sustainably and efficiently.
A few caveats to our thought experiment are worth calling out:
- There are important practical considerations related to scale that the 100-person desert island does not encapsulate. Nonetheless, the ideas discussed will apply no matter the size of the society, and we will discuss scale if it is particularly relevant to certain points.
- Our thought experiment will ignore the discussion of which responsibilities should belong to local vs. federal governments. While important, this topic is outside the scope of this post.
- A desert island economy is very different in form than today’s largely digital economy. Nonetheless, the economic principles we discuss will be universal.
With that, let’s think through different economic designs, and determine which one maximizes collective long-term happiness of the members of this desert island society!
Strategy 1: No Rules
Suppose we agree upon no rules or collective organization on our island. There can still be some form of cooperation and trade, but it will be unorganized and deregulated. Let’s think through how this may play out on our desert island.
It is very likely that of the 100 of us on this desert island, we do not agree upon the same ethical or moral code. For instance, I might have no moral problem murdering you to take all of your crops, shelter, and belongings. Even more rigorous personal moral codes tend to collapse for the sake of survival. Most people would rather steal crops than watch their family starve to death.
With no agreed upon form of punishment or shared form of accountability, injustices manifest themselves. Our economy devolves into a form of survival of the fittest. The people who get “ahead” in this society are the people who commit more injustices.
An argument could be made that “survival of the fittest” is how humanity should function. However, this type of economy certainly does not maximize collective long-term happiness on our island. Some inhabitants will probably end up dead, and a good majority of others end up living in poverty and fear. In this case, we probably won’t advance the collective standard of living much, which hurts even the “winners” of such an economy. Surely we can do better than this.
This brings us to the first role of organized cooperation in our society. At a minimum, we should all, as inhabitants of our desert island, agree upon a shared moral and ethical code. For example, no murdering people. No stealing from others.
In essence, what are our laws? What is our legislation? We need to define not only what these rules are, but how we as a society will evaluate disputes when they inevitably come up. Who broke which rules? How do we know? This becomes the role of some sort of judicial function of our society: judging and interpreting the laws we’ve created. What happens to people when they do break our rules/laws? We may want some sort of punishment to dissuade people from breaking rules. Finally, how do we enforce that our laws are upheld? We may want some sort of policing as part of an executive function of our society to physically enforce the rules and laws we’ve created.
Theoretically, we could attempt to fill all of these functions on our desert island without a centralized organization. For example, we could create a form of law enforcement by ganging up on the person who broke a law. We could create laws by gathering at the center of the island weekly and voting on what the laws should be. However, these approaches are inefficient and won’t scale. If the number of people on our island grows, or our society expands to encompass surrounding islands, or our island advances, we simply won’t be able to efficiently manage our cooperative ethical code with this approach.
Hence, we need to create some form of centralized organization to help our society effectively and efficiently cooperate on shared moral and ethical rules. In order for this centralized organization to succeed, we all need to collectively “pitch in” so that the desert island citizens in charge of operating it have the resources they need to succeed. This is fair, because we all inherently benefit from the successful implementation and enforcement of the laws and rules of our desert island. Let’s call this centralized organization the government, and our collective contributions to its success taxes.
- Strategy 1 is known as anarchy. With no shared rules, society devolves into lawless chaos and survival of the fittest. We do not maximize collective long-term happiness
- The existence of laws mutually benefits everyone in our society, and the nature of their existence requires cooperation
- A centralized organization called a government is our most effective way at creating and managing laws, judging them, and enforcing them
- Citizens must contribute to this government through taxes so it can do its job effectively.
Strategy 2: Unchecked Exchanging
In this strategy, let’s suppose that we as individuals are all free to produce and exchange our goods and services however we wish. No laws exist regulating the economy. What happens on the desert island with this approach?
Economy: The Exchange of Goods and Services
If we didn’t exchange goods and services with each other, we would all need to meet our basic needs ourselves: food, shelter, water, injury treatment, and warmth. There may be a particularly handy few who could actually maintain a decent standard of living all by themselves without anyone else’s help in this way. Most people, however, would not be able to do this effectively.
Specialization is a more efficient way for our economy to operate. If you are an excellent shelter-builder, you can build shelters for other people on the island. In exchange, they can give you goods like crops or drinking water that they specialize in. Everyone is better off as a whole because we are collectively leveraging areas of focus and expertise. We reap the benefits of each-other’s strengths.
This exchange of goods and services is in essence what an economy is. It is a more efficient way for our desert island society to boost everyone’s standard of living compared to surviving in isolation. This is why GDP (Gross Domestic Product) and other economic measures often focus on metrics like the goods and services that are being produced by a country.
As an aside, the role of money is simply to facilitate the exchange of goods and services on our island. If everyone on the island agrees to accept “money” in exchange for goods and services, money becomes valuable. To have more money simply means that others will be willing to give you goods or do you services.
Unchecked Free Market
So exchanging goods and services naturally takes place on our island, even without rules in place. With this type of economy, natural competition emerges.The idea is that there may be 2 people (or more) on our desert island who can build shelters, competing with each other for the business of shelter-building on the island.
If you are a shelter-builder and don’t get enough money from shelter-building, nobody will be willing to give you any goods or services. If that happens, you will quite possibly not be able to meet your basic survival needs. Thus, it is in your interest to do business with as many desert island inhabitants as possible, to maximize your money. Similarly, every citizen on our island also has incentive to maximize their own money. So they will generally choose the shelter-builder who will build their shelter for the cheapest price, all other things being equal.
If you can reduce your costs to build your shelters for cheaper, you will get more business. Thus, you could employ morally despicable practices that are bad for society’s collective happiness like child or slave labor. In your effort to reduce costs and build more efficiently, you may engage in other practices bad for society. For example, you could pile your waste in the center of town. Or you could have transport mules you use to bring supplies from the forest poop in the nearby river that a lot of people drink out of to save time.
You may disagree with these practices on a moral basis. However, just like with anarchy, there will inevitably be at least one shelter-builder on our island whose moral and ethical code is limited to the laws our society has created. And even if there’s not, all of the shelter-builders are worried that there is one, and the threat of there being one can be enough to make others engage in these practices. Because if they don’t, the shelter-builder who does will offer the cheapest price and get most of the business. The competition who plays by the rules will get left by the wayside.
We can agree as a desert island society that these business malpractices reduce collective long-term societal happiness. Couldn’t desert island inhabitants just avoid purchasing from the shelter-builders that do these things? Unfortunately not. For one, they may not know what the shelter-builders are doing. Even if the malpractices are known, the price of the shelter outweighs any other factor for an island citizen who barely has enough money to survive. They can’t afford to consider the inputs to production and any malpractices that were involved.
- Strategy 2 is known as an unchecked free market. Citizens exchange goods and services with each other and advance the collective standard of living
- Business malpractices that hurt society’s collective long-term happiness run amok
Strategy 3: Checked Free Market
As a society, we need to cooperate to outlaw business practices and actions that are bad for society but naturally occur. A government was the most effective way to outlaw individual acts bad for society. Similarly, we should use the government to outlaw business acts that reduce society’s long-term collective happiness, like child or slave labor.
People will still be free to exchange goods and services as they wish within the bounds of the laws we create. These laws will help ensure the free market is working to serve the best interest of the people in it. In essence, we will create a “checked free market”.
What happens to our desert island with this strategy? As we discussed above, competition is a hallmark of such an economy.
This competition can lead to naturally great outcomes for our society. Shelter building companies on the island have a natural incentive to offer cheaper shelters to attract more customers, so they want their shelter-building to be as efficient as possible. Additionally, if price is comparable, consumers are generally going to choose the higher-quality shelter. This creates a natural incentive to build better shelters. Finally, there is a natural incentive for shelter-building companies to treat customers well. If they don’t, people will go to the competition!
Consumers, through the choice of where they spend money, are implicitly deciding which company is providing a better shelter-building service. Companies have a financial incentive to produce goods and services that island inhabitants desire. This is a beautifully natural way for citizens to decide what they value, both intra and inter-industry. In this way, collective standard of living can be very efficiently improved.
It also feels fair and just to desert island inhabitants, assuming consumers are making unbiased buying decisions. You reap exactly what you sow for society, as determined by society’s choice of where it spends its money.
Entrepreneurship and innovation are also naturally encouraged. Industries and societal needs aren’t predetermined through some organized process. Thus, if somebody creates a product that could benefit society, citizens decide through consumer demand if it’s valuable. The high-reward potential of a successful creation provides financial incentive to entrepreneurs to innovate and take chances. Entire industries can be transformed or upended if they aren’t benefiting consumers as well as they could be.
All of the societal benefits we just discussed are predicated on the foundational idea of consumer choice. However, if that choice is reduced, we can no longer trust the spending of consumer money as an indication of what society wants. Rather, it then becomes an indication of what consumers are forced to accept. The free market is no longer benefiting society when this happens. Unfortunately, as our desert island thought experiment will show, a free market inevitably leads to a state of diminished consumer choice.
- Consumer choice forms the bedrock of a free market
- A free market can improve the collective standard of living. Companies are incentivized to serve society, reduce price, improve quality, and treat customers well. Entrepreneurship is encouraged
- Society implicitly decides what’s valued through consumer demand
Monopolies and Oligopolies
Suppose you were the only shelter-builder on the island. In this case, all the power is in your hands because consumers don’t have a choice. There is no financial incentive for you to improve your shelter quality. You can also charge whatever you want: people have no alternative choice. This is known as a monopoly, and it creates significant dangers to an economy.
An industry oligopoly, or the consolidation of an industry to a small number of companies, is financially beneficial to you for similar reasons. Suppose there are 10 total shelter-building companies on the island. In this case, each company will own on average 1/10th of the available business. If the number of shelter-building companies shrinks to 3, each shelter-building company owns on average 1/3rd of the available business. This means more money for you.
Furthermore, you can charge a higher price with less competition. Supply and demand economics dictate that as the supply of a product goes down, its price goes up. In this example, the supply is the count of shelter-building companies. Consumers have less choice, which means more bargaining power for the companies, and more money from the pockets of consumers.
This creates a natural financial incentive for you to engage in business practices that reduce consumer choice. Things like predatory pricing, where you temporarily reduce prices to put other shelter-builders out of business. Or buying another corporation for the purpose of reducing shelter-building competition. Or using vertical integration to control the supply chain by paying wood gathering companies a premium to provide wood exclusively to you and not other shelter-building companies. Or you can collude with other businesses where you all agree to keep prices above a certain amount. Collusion becomes logistically simpler to achieve with less businesses in the market. You will also want to thwart entrepreneurship wherever you can. Any new shelter-builder threatens to give consumers more choice and take business away from you.
All of these things are bad for consumers and bad for society’s collective happiness. They increase corporate profits without benefiting society through the creation of superior products/services or reducing costs. But wait. What if you as a shelter-building company genuinely want to benefit society and do not wish to engage in these detrimental practices?
Unfortunately, you likely don’t have a choice. Just like with anarchy and business malpractices like child labor, there will inevitably be at least one company that attempts to reduce consumer choice. If you don’t, you will be at a disadvantage and could very well go out of business. Furthermore, you may answer to corporate shareholders (other desert island inhabitants who have an invested financial interest in your business) who require you to make decisions that maximize corporate profit.
Monopolies and oligopolies are inevitable with a free market even if none of the companies on our island engage in any business practices intended to reduce consumer choice. To illustrate, let’s suppose that there are initially 5 competing shelter-builders on our island. Naturally, through superior skill or luck, some companies will end up with more of the market share than others. If you were one of these companies, you could use your extra money to further invest in your business.
For example, you could buy a saw to increase wood cutting efficiency, or hire somebody to gather wood, freeing up your time to build more shelters. You can then start charging less than your competitors, because your costs are lower due to higher efficiency, and also because you have more customers, so you need less of a profit margin on each transaction to make an equivalent amount of money as compared to a company with less customers.
Because your shelters are cheaper, you get even more of the market share, and the effects compound. You can use your wealth, or capital, to grow your business more and more, taking more and more of the market share for yourself and leaving less for your competitors. Assume I own a competing shelter-building company that was initially getting less business than yours. Because of these compounding effects, I keep getting less and less business until I need to go out of business. However, it is very likely that your “winning” shelter-building company would want to hire me as your business expands since I have demonstrated quality shelter-building experience. I could certainly switch industries or look for work elsewhere, but it’s likely that shelter-building is my best skill and where I’m valued by society the most. Thus, I end up working as an employee for you to build shelters.
The effect of smaller businesses closing keeps occurring until there are less and less businesses in a given industry, and bigger corporations own more and more of the market share. As we’ve just seen, this effect happens naturally and compounds, even if the bigger corporations engage in no business practices explicitly intended to reduce competition. If they do, it simply happens faster and more ruthlessly. For example, in the United States, the number of corporations in each industry keeps getting smaller. And as we’ve already discussed, this natural effect is bad for consumers and bad for society, because it reduces consumer choice.
This free market inevitably leads to the rich getting richer, and the poor getting poorer. This is because individuals and corporations can invest capital (money) to get even more money, and those with less capital can’t. All of their money goes towards meeting basic needs. Additionally, we previously discussed how consumers dictate the structure of the economy through the spending of money. It naturally follows that those with more money have more influence over the economy itself. With that influence, they can therefore shape the economy in such a way that gives them even more money, and this effect compounds. For example, in Q2 2020, the top 1% of Americans owned over 16 times as much wealth as the entire bottom 50% combined, and that gap has gotten larger over time.
This could be seen as a good thing. After all, aren’t people simply getting what they deserve in accordance with their contributions to society and hard work? However, a gap as big as the free market creates does not achieve our goal of maximizing collective long-term societal happiness for 3 reasons:
- If most of the wealth is owned by the few, and most people have very little wealth, then most people will be struggling to make ends meet and won’t be happy.
- Standard of living regresses if consumer choice is reduced and corporations are increasing profits without improving society.
- When individuals have an excess of money, that money is more likely to end up sitting in their pockets, instead of being transacted and stimulating the economy. This can impact GDP and hurt our economic efficiency, causing standard of living to collectively decline.
As discussed above, as the corporations get bigger in a given industry, it becomes harder for you as an individual to create or maintain a competing small business. It requires more capital to start or run a business, and it is very likely that you simply do not have the means or the capital required to get started, or justify the risk.
Thus, you are left with little choice other than to work for one of the big corporations. Even if you have a choice, working for one of the big corporations is more likely to give you a livable wage and more money than starting your own business. Thus, you become a waged employee for one of the big shelter-building corporations. As the number of shelter-building companies shrinks, the demand for your skills decreases. Thus, the value of your work goes down, and you lose bargaining power. You’re technically “choosing” to work for your employer, so you’re not a slave. But there’s no real choice, because you have no other realistic option. The employer can pay you a dirt cheap wage and not treat you very well, and you just have to take it, thus widening the wealth gap even more.
As corporations grow and their wealth expands, their influence does too. If the winning shelter-building companies or individuals are allowed to lobby for political figures, they can use their wealth to influence public island policy and government decisions that benefit them, like tax breaks, to compound the problems of capitalism on our desert island even more. For example, in the United States, corporate lobbying accounts for more money than the House and Senate budget combined.
Let’s suppose that when our island economy was created, there was a prevailing belief that all goods produced by people under 6 feet tall were cursed. Imagine how hard it would be for people under 6 feet tall to earn wealth in society. Even if that belief was later proved to be incorrect, generations of people shorter than 6 feet tall on our island would suffer the wealth consequences of that early discrimination because of the compounding wealth effects of our desert economy.
If certain groups of people are discriminated against, those discriminatory effects compound over generations in a free market economy. This reduces collective long-term happiness for everyone in our society. The marginalized group is negatively affected directly. But the rest of society loses out on potentially brilliant contributions from members of the marginalized group who never stood a chance to make them. Thus, with this compounding discrimination, even the privileged groups are worse off than they would have been.
A free market is ineffective at achieving long-term societal goals, especially if those goals require cooperation. The free market’s central idea is competition, which is inherently not cooperative. Furthermore, the centralized focus on profits and wealth, both for consumers and corporations, prioritizes short-term gains over long-term benefits. For example, all of the natural resources of our desert island could get depleted. Additionally, if our society desires a goal from a moral perspective, such as animal rights, a free market won’t achieve it. Unfettered growth is strived for, even if that growth does not increase happiness.
- A free market is the foundational idea behind a capitalist economy
- A free market inevitably creates monopolies and/or oligopolies, where consumer choice is reduced and companies increase profits without benefiting society. This leads to less progress as a society and a lower net quality of living
- An ever-widening wealth gap is a natural effect of a free market
- Most citizens end up as waged employees for big corporations with no bargaining power
- Big corporations can use wealth to influence favorable laws through political lobbying
- Discrimination and inequality compound with a free market
- A free market struggles to achieve long-term or cooperative societal goals, like environment conservation or animal rights
Role of Government
How can we reap the benefits of a free market economy while avoiding the inevitable consequences that detract from collective long-term societal happiness? We must create laws and policies that curb or eliminate the negative effects while allowing the free market to function. Thus, it becomes the role of the government in this economy to implement policies and laws that achieve the following:
- Curb a naturally widening wealth gap, because an unchecked gap leads to our society’s standard of living decreasing as a whole
- Keep money out of politics, because money in politics leads to the compounding negative effects of capitalism discussed above and compromises the integrity of our agreed-upon governmental system
- Lower barrier of entry for entrepreneurship, because entrepreneurship drives innovation forward and combats industry consolidation
- Create antitrust (anti-monopoly) legislation to prevent and eliminate monopolies and oligopolies, because they reduce consumer choice
- Prohibit business practices designed to make corporations more profitable at the expense of society: vertical integration, predatory pricing, collusion, etc.
- Prohibit discrimination to promote equal opportunity for all, on moral grounds but also so society can benefit from potential contributions of everyone
- Protect employees/wage workers rights, especially in unskilled domains, because the free market can put people in positions of desperation with little bargaining power
- Ensure long-term goals like natural resource conservation or animal rights are met
In addition to the above, there is an argument to be made on moral grounds for the government to help people who cannot contribute to society, whether through lack of skill or incapacitation, to maintain a certain standard of living. This will help maximize collective societal happiness. An idea for how this could be done as a side effect of a government policy that helps to solve a lot of the societal issues above will be discussed later.
- Strategy 3 is a free market, which is a bedrock of a capitalist economy
- It imposes as few rules as possible on the exchange of goods and services in the economy
- Privately owned corporations compete to maximize profit, which ideally is aligned with the interest of the collective happiness of society
- The government must create laws and policies to curb or eliminate negative effects that naturally occur with a free market
Strategy 4: Cooperation
Another approach we could take to designing our island economy is to try to work together, cooperatively, to achieve our goals as a society. The free market strategy was about imposing as few economic rules and regulations as possible in hopes that natural demand and competition implicitly do what is best for society. Let’s characterize strategy 4 as its corollary. We explicitly decide as a society what work should be done, how we should do it, and who gets rewarded for it.
Just like with the creation of laws, this could theoretically happen naturally on our island if the scale was small enough. However, with a sufficiently large desert island, or multiple islands, this approach is inefficient. It is more efficient to have some sort of central organization that controls the assignment of people to tasks as well as the allocation of the output. Naturally, we use the government to coordinate this public approach at production and distribution of goods and services in society.
Let’s discuss the merits of strategy 4 by analyzing how it would play out for a specific industry on our desert island. We will compare it to what would happen with strategy 3, the free market.
Public Healthcare Industry
Suppose that we endeavor to make the industry of healthcare “public” on our desert island. In this case, everyone on our island is agreeing to pay taxes to the government in exchange for the service of healthcare. The government needs to use the tax money to hire people and build systems and infrastructure to provide this healthcare. For example, it needs to spend the tax money to hire doctors to treat injuries, or build wooden splints for treating broken bones, or build “shelters” for treating patients.
Imagine you are a doctor on the island. There will be little practical difference to you whether the industry is governed by strategy 3 (free market) or strategy 4 (cooperation). In either case, you are getting paid by an entity (whether it’s a corporation or the government) to do a specific job. Theoretically, there are performance implications in both cases. The corporation wants quality doctors to maximize profits, and the government wants quality doctors to benefit the health of the people. If you do a bad job, you could get fired. If you do a good job, you could get a raise or promotion. The economic structure of the industry is of little importance to you as a doctor.
With a publicly controlled industry, fairness for waged employees can be easier to achieve. The public can influence the wages that workers in that industry are paid, through voting. It is also easier to ensure the production of goods and services are obeying the law, due to the increased accountability and transparency of public industries.
Additionally, equitable distribution of the industry’s goods and services can be easier to achieve with this cooperative approach. For example, the government can ensure that everyone in our society can get the healthcare they need. This can be particularly important for industries that are considered “basic needs” although the definition of a basic need is potentially arbitrary. With a purely free market system, some will win and others will lose, and losing could potentially mean not being able to afford that particular good or service. For certain industries that outcome could be considered acceptable, but for others, like healthcare or drinking water, it is decidedly not acceptable given our goal of maximizing collective societal happiness. An old crippled man on the desert island morally deserves a warm shelter and clean drinking water, even if he’s unable to contribute to society in a meaningful way.
One downside to our public healthcare approach is that consumers can be forced to pay for services they don’t use. There is a disconnect between what island inhabitants pay for the service, and what they actually use from it. The mandatory taxes are fair for industries that inherently benefit everyone, like laws that prevent murder. However, it may not be fair for an inhabitant who has no medical maladies to pay a healthcare tax for something they don’t use.
Lack of Incentive
There could also be a lack of incentive for the leaders of the public healthcare industry to provide the best possible service. Imagine you are an executive of a healthcare company in a healthily competitive free market. You will want to improve the system, make things more efficient, and benefit your customers so you make more money and avoid going out of business. On the other hand, if you were in charge of the public healthcare industry, there is far less financial incentive for you to do a better job.
If you do a bad job, the public could vote you out of office, but that may take a long time, or not happen at all. Conversely, suppose you implement a brilliant innovative idea that doubles the healthcare industry efficiency. The public could vote to pay you more, but again, that may take a long time, or not happen at all. After all, that would mean higher taxes for them. Or, if tax rate is automatically proportional to industry costs, that gain in efficiency would actually earn you less money!
Single Point of Failure
You would also want to avoid high-risk high-reward decisions. The public healthcare system is what engineers refer to as a single point of failure. If you make unwise strategic decisions, the entire industry will do poorly and waste a ton of everyone’s money. This risk could be mitigated by creating redundant organizations and healthcare providers that are all funded by the central government, but any problem that occurs at the root will propagate down to the constituent healthcare providers and negatively impact the entire industry as a result. With a healthy competitive privatized healthcare industry, if one provider does poorly, the others are there to keep the industry afloat.
If the government runs the industry, the barrier of entry for entrepreneurship isn’t just high: it’s nonexistent. Certainly the government could invest in citizens or corporations who have ideas to improve the healthcare industry. However, if the government chooses not to invest, there’s no opportunity for that individual to get funding from an angel investor or try to implement their idea on their own. This is because the government controls the spending of the entire industry. There’s no consumer demand outside of the taxes that get paid to the government.
In effect, what we’ve created here is the ultimate monopoly. All of the employees in this healthcare system are waged workers of the ultimate corporation, the government. However, there are a few differences between a public industry and a monopoly that results from a free market. The main one is that this “monopoly” is elected by the people and theoretically exists to serve the best interests of the people vs. making a corporate profit. For that reason alone, it is better to have a social, publicly created monopoly than one created from the free market.
Politics and the economy become tightly coupled with a public industry. We as the people are electing through our political system the head of an industry that is important to our overall economy. This isn’t a problem per se, but if corruption exists in the political system we have in place, this can bleed more into the economy than it otherwise would have with a free market.
This type of system also leads to economic inefficiencies. The value of healthcare, relative to other industries, is pre-determined through taxes, rather than implicitly decided via a free market. Thus, it becomes more likely that economic allocation and prioritization doesn’t match society’s true desires and needs as closely as it could.
An important note here is that government subsidizing corporations doesn’t change the nature of any of the problems discussed. With subsidization, consumers are still financing the industry through taxes (paying the government) instead of paying the corporations directly for their goods and services. Then, the government pays the subsidized corporations, who provide goods and services to the citizens. At that point, the government is still the monopolizing corporation, just with different “teams” or “organizations” composed of waged employees.
- Strategy 4, when applied to an entire economy, is known as socialism
- Socialism, when applied to specific industries as opposed to the entire economy, is known as democratic socialism
- Public industries can help ensure fairness for employees, transparency, and equitable distribution of goods and services from the industry. This can be especially important for industries that provide basic survival needs to people
- Public industries can lead to a lack of incentive and economic inefficiencies. This can detract from long-term collective societal happiness if the industry is not producing quality goods and services
- Citizens can be forced to pay taxes for things they don’t use
- Political corruption can bleed into an economy more than with a free market
- With a true public industry, the government is essentially a “public monopoly”
Which Economy is Best?
One key tradeoff between capitalism vs. democratic socialism is this. With a public market (democratic socialism), the people are voting on people and policies that they think will make society better. It banks on the people in positions of power to not be selfish. It relies on selflessness and moral standards to outweigh selfish desires. In a competitive free market (capitalism), the goal is not to avoid human selfishness, but to encourage it, and attempt to align selfish interests with what benefits the good of society.
As we’ve seen, a free market with healthy competition and consumer choice is the economic strategy that best innovates, produces higher quality goods and services, and increases the standard of living. However, without certain governmental laws and restrictions, capitalism leads to a reduction of consumer choice and does not achieve the goal of maximizing long-term societal happiness. With certain laws in place, we can reap the benefits of a free market while avoiding its natural negative outcomes. This is the best economic strategy for achieving long-term collective societal happiness.
Mitigating Negative Effects of Capitalism
Distribute Wealth Equitably
A capitalist economy must have a tax structure that combats the inevitable huge wealth gap that the free market creates. To do this, the wealthy citizens of the capitalist market need to be taxed heavily. A percentage-based tax system is not aggressive enough towards the wealthy, because 25% of $1 billion still leaves that person with $750 million, which is way more than anyone needs, while 25% from a family that makes $50,000/year hits that family particularly hard. The top of the top in a capitalist society end up with most of the wealth of society. Therefore, it follows that most of the taxes should come from the top of the top.
Another potential mechanism to help ensure a more equitable wealth distribution is to legally cap the amount a corporate CEO can make relative to their employees. If this were enforced by requiring the distribution of restricted stock units (RSUs) to employees, it would have the added benefit of creating a more engaged, productive workforce for corporations. If the company succeeds, the value of those RSUs increase, and all of the employees benefit from the success of the corporation.
There are two main arguments against laws like these that attempt to redistribute wealth in the economy. The first is that they aren’t “fair”, because the wealthy earned their wealth fair and square, and the government shouldn’t have the right to take it away. The second is that they will lead to a worse economy by taking away incentive for people to become richer. These are both valid points, but when considering them we must keep in mind both the natural effects of a capitalist society, as well as our end goal of collective societal happiness.
Remember that in a capitalist economy, the wealth gap will naturally continually increase until virtually everyone is at the bottom and a select few at the top. This is simply not the distribution of wealth that collectively benefits the happiness of society the most. The loss of an arbitrary amount of money, say $1,000, from the wealthiest individual will result in less of a happiness loss for that person than the equivalent gain of happiness that $1,000 would give to a person who’s starving to death, homeless, jobless, or just barely making ends meet. So if we want to maximize net happiness, we need to distribute wealth differently than the distribution that naturally occurs from a capitalist economy, and that’s to say nothing of the economic inefficiencies and problems that occur from such a wealth gap, as we discussed before.
This redistribution of wealth at the expense of fairness for the top few is worth the collective happiness increase for the bottom many, although it’s not even unfair. Remember that with a natural capitalist society, most people end up as wage workers, with little alternative choice. By having the government distribute wealth more evenly, it combats the “unfairness” that results from a natural capitalist economy. Thus, it leads to a more equitable wealth distribution. And all of this is assuming the playing field was level to begin with! It is decidedly not level to begin with in the United States, particularly for certain underrepresented groups like black citizens, so that’s all the more justification to redistribute wealth. This can be viewed as a form of reparation since a large portion of people the redistributed wealth would be going to are citizens who never stood a reasonable chance of success in the first place.
As for the suggested lack of incentive for the wealthy if you tax them more aggressively, this is hardly the case. For one, keep in mind that the design of the United States’ tax system is progressive. Higher tax rates are only paid on income earned above a certain threshold. In other words, the first $50K of everyone’s income is taxed at that marginal tax rate, whether you make $50K total or $5 million in the year. Additionally, entrepreneurs and business leaders are usually highly driven people motivated not just by money but by the desire to succeed and be important. And even if the business idea that explodes and makes $1 billion ends up making $500 million instead because the government took half of it to redistribute it, that’s still more than enough financial incentive to work hard on the idea and innovate. The reality is that ultra-wealthy individuals would likely be just as happy with less money to a certain point, and the money that sits in the pockets of the ultra wealthy could better serve society by being redistributed more aggressively to lower-income individuals more likely to spend that money, further stimulating the economy.
- An aggressive taxing strategy that heavily taxes the ultra-wealthy leads to a more equitable wealth distribution that combats the widening wealth gap that results from a free market capitalist economy
- Redistributing wealth helps boost the collective long-term societal happiness by guiding wealth to where it will most increase happiness
Universal Basic Income
Redistribution of wealth will help close the wealth gap, but it does not solve the problem of ensuring everyone’s basic needs are met. Getting taxed less does not help you live if you weren’t making enough to hit a basic standard of living to begin with, or if you were jobless. If the government is going to take more money from the wealthy to redistribute, how do they go about actually redistributing it?
The best way to redistribute the wealth while ensuring everyone’s basic needs are met is through a Universal Basic Income (UBI). The UBI would not have any means-testing or conditions attached. All tax-paying, un-imprisoned adult citizens would receive it. The government would determine how much it costs to achieve a certain standard of living by factoring in the economic costs of what are considered to be basic needs. Then it would simply give all individuals/families that amount of money every year. People are still free to work to earn additional income, but their basic needs are met through the UBI.
UBI vs. Means-Testing
The advantage of UBI over a means-tested welfare system is that it eliminates the administration overhead of the means-testing, and the arbitrary thresholds and decisions that must be made with means-testing. It also has less of an incentive problem than welfare. If you were making a salary just enough to disqualify you from receiving welfare, you are incentivized to stop working because you can achieve a similar standard of living by not working compared to working. With UBI, on the other hand, you receive that basic standard of living paycheck from the government whether you work or not. Therefore, any work you do will be giving you more wealth and boosting your standard of living. It’s relatively more beneficial for you to work with a UBI system than it is with a means-tested welfare system.
Naturally, the UBI needed to achieve a certain standard of living would change over time, due to inflation or other economic factors. The government could track this, and adjust the UBI at a certain cadence, similar to the inflation rate and money circulation. The UBI would also vary in accordance with region, number of people/children in a family, and individual needs. Families with more children would get a slightly higher UBI, and individuals in regions with higher cost of living would get a higher UBI, among other factors. Admittedly, it would not match perfectly with the actual cost of living for every family. But the aim is that it would be as close as practically possible through economic calculation, with an acceptable margin of error.
A UBI would help mitigate or eliminate many of the natural societal problems that arise from a capitalist economy. It leads to a more equitable wealth distribution to combat the wealth gap, and ensures everyone is meeting a basic standard of living. Additionally, it gives wage workers more power and prevents them from getting exploited. With a UBI, corporations are forced to pay a wage and offer benefits that make working preferable to not working. Choice and bargaining power are returned to employees, because they can choose to not work if the employer is not treating them fairly, knowing they will have their basic needs met. And freedom of choice is the bedrock of capitalism.
It also lowers the barrier of entry, or at least the risk, of entrepreneurship, which increases the likelihood of additional beneficial competition in industry markets. People are more likely to attempt innovative business ideas knowing that if they fail their basic needs are still met. Citizens are also more likely to choose work that interests them, which is a big deal for two reasons. First, people tend to do better when working on things they are passionate about. Second, job satisfaction is highly correlated with happiness, which could make a big positive impact towards maximizing collective long-term happiness of society.
Despite mitigating most of the negative effects of a capitalist economy, UBI comes with one significant concern. Is there enough incentive to work? If less people work, will our economic progress decline? Could the economy collapse altogether? For example, on our desert island, there could no longer be enough people working to provide island inhabitants with food, clean drinking water, or shelters.
First of all, this incentive problem theoretically already exists in the United States, since we have a means-tested welfare system. We do not currently see a huge percentage of people choosing to be unemployed, so there is little reason to believe that would change significantly if we switched from means-tested to UBI. After all, UBI presents less of an incentive problem than welfare. In reality, most people want to live above a basic standard. People like having discretionary spending power for buying nice things and enjoying fun leisure activities.
Additionally, people work for reasons other than purely just to make money. Some people get a sense of status from their job or from the wealth that results. Others like achievement and get a sense of importance from their work. Others like to willingly contribute to society and get a sense of purpose from serving others. Some people actually enjoy their jobs and derive pleasure from them. All of these natural incentives still exist with a UBI, perhaps even more so than without.
With a UBI, it’s likely not the case that most people will choose not to work. Rather, more people will end up choosing work that they actually enjoy. What good is economic progress as a society and maximizing our output if most people are miserable, doing jobs they hate and working most of their life away? This is detrimental to maximizing collective long-term happiness. There is a tendency with a capitalist-borne mindset to only focus on the outputs of a company, industry, or society, without considering the inputs, like worker happiness.
In that vein, even if an economy lost efficiency or produced less goods and services with a UBI, the tradeoff would be worth it. Instead of most people hating their jobs, most people would enjoy them. People would not be forced to work if they didn’t care about living above a basic standard. Work wouldn’t rule everyone’s lives unwillingly, and we would all have a better collective work-life balance. In a way, UBI would help us strike an appropriate balance as a society between working hard and enjoying the fruits of our labor. Research shows that increasing the GDP past a certain point is not sustainable, and does not increase collective long-term happiness of a society.
Let’s assume that a very solid proportion of our workforce, say 50%, chooses not to work following the implementation of a UBI. Would the economy collapse? One likely outcome of this scenario could be an increase in price of goods and services across the board. Companies would be less efficient producing goods and services because they have less workers, and would raise their prices.
Because the price of goods and services for basic needs has increased, the UBI then needs to adjust upwards to compensate. The government needs cash to pay a higher UBI, so it needs to take that money from everyone who is still choosing to work in order to finance the higher UBI. However, because 50% of the population is living off of the UBI, that means 50% of the population only has enough money to pay for basic needs, not any discretionary spending. Therefore, the demand for discretionary goods and services goes down relative to the demand for basic needs. As this happens, more of the workforce would end up working jobs that relate to basic human needs in response to the relative increase in consumer demand. In this way, the economy is self-adjusting to account for a smaller workforce.
Would more and more people stop working as taxes increase due to the UBI, producing a compounding self-collapsing economy? No. As the workforce shrinks, the supply of workers shrinks. Thus, in accordance with supply-demand economics, the workers who remained would make higher wages. Because of the higher wages, it would likely draw some of the people who initially chose not to work and live off of the UBI back into working, and would naturally stabilize.
Tax strategy can also prevent economic collapse. If we’re aggressively taxing the wealthy vs. workers making less money, then increased taxes would have less of an effect on the workers working the lower-paying jobs. These workers are the ones who would be more likely to accept the UBI and stop working. If taxes increased for the ultra-wealthy, it’s less likely they would choose to stop working altogether and accept the UBI as compared to people earning lower incomes because the UBI makes up a miniscule fraction of their total income. Furthermore, the percentage of the population working is something that the government could track and adjust as needed, similar to inflation rate. If there was any risk of economic collapse, the government could tune the UBI down to incentivize more people to work.
- A UBI would ensure to everyone a basic standard of living. This empowers employees, promotes entrepreneurship and healthy competition, and combats the wealth gap
- It would help society strike a balance between progress and enjoyment. People would enjoy their work more and have healthier work-life balances
- Most people would still choose to work even with a UBI. Even in the worst-case scenario, the economy self-adjusts, and the government can decrease the UB if needed to enlarge the size of the workforce.
- UBI is superior to means-testing due to less administrative overhead and less of an incentive problem.
Strict laws against discrimination need to be in place. The government needs to do everything it can to ensure everyone has a reasonable opportunity for success. This is because having an opportunity for success is the bedrock and the basic idea behind a free market. If inequalities exist initially, capitalism exacerbates them.
Promote Healthy Competition
The government should also create laws to help keep free market industries competitive. It should tax big businesses more aggressively than small businesses. This will help small businesses compete against bigger businesses, thereby increasing competition in the market. Another mechanism to do this is to enforce a certain degree of profit sharing from big companies to all of their employees. This helps reduce the wealth gap, gives more power to the wage worker, and incentivizes wage workers to care about the quality of the work they’re doing.
There need to be explicit laws against any business practice that is intended to generate wealth by reducing competition, reducing choice, or doing something bad for society as a whole. Finally, lobbying of politicians needs to be illegal. If big corporations or wealthy individuals can lobby politicians in exchange for favorable policies, it threatens both democracy and the economy. Democracy is threatened because the government can no longer be trusted to pursue policies and laws in the best interest of the people. The economy is threatened because the policies and laws the politician will put in place favor the big corporation who paid them, which compounds all of the negative effects of a capitalist economy.
Achieve Long-Term Goals
A free market focuses on short-term gains and unfettered economic growth at the expense of all else. The government must provide incentives or create laws that allow us to achieve goals that increase societal happiness over a longer time horizon. This includes outcomes like resource conservation and animal rights.
- Aggressively taxing the ultra-wealthy helps redistribute wealth more equitably
- A UBI helps achieve long-term collective societal happiness in many ways
- The government must prevent discrimination of any form
- The government should encourage healthy industry competition by preventing business practices that reduce consumer choice, taxing bigger corporations more aggressively, and preventing political lobbying
Public Industry Exceptions
There are several industries that should be public, government-run, as opposed to a free market. We’ve already covered a few: legislation, the judicial system, executive power, and the prison system, if we desire a prison. This is because the existence of these industries collectively benefits everyone in society. Additionally, they require cooperation from everyone in society by the very nature of their existence. Similarly, industries that classify as natural monopolies should also be made public.
The core essence of a natural monopoly is that the industry is naturally more efficiently run as a monopoly than as a conglomeration of competing corporations in a privatized market. The defining characteristic of a natural monopoly is that the industry benefits from a high degree of cooperation among members of society.
Public roads are one example of this. We all mutually benefit from them, yet none of us would be willing to front the cost of the building of them. This is because they are very expensive and also because it doesn’t make sense for one individual to pay for something that benefits everyone collectively. Furthermore, it would be so inefficient for a company to create one tiny road that only you have access to that runs from your house to the grocery store. So it makes sense for all of us to cooperate on their creation, and they mutually benefit everyone in the area. Just like the “legislation” industry, these are the key reasons why it makes sense for natural monopolies to be government-run. Some of these industries also naturally have a long-term horizon vs. a short-term profit motive, which a free market is ineffective at achieving, as previously discussed. Natural monopoly industries that should be government-run are the following:
- Piped water
- Garbage/waste collection and recycling
- Wired electricity
- Piped natural gas
- Telephone landlines
- Cable internet
- Cable television
- Public roads
- Physical mail delivery
An important caveat here is that the entire natural monopoly industry is not forever public. It is only one specific implementation of that industry that manifests as a natural monopoly and thus should be public. To illustrate, consider the internet. Cabled internet delivered to your home exists as a natural monopoly. If an internet service provider (ISP) is going to connect one house on your block up to the internet, it may as well wire your whole neighborhood for little additional cost. Satellite internet, on the other hand, does not have this same cooperative property to it. A corporation could very efficiently grant just one house on the entire block access to satellite internet. Thus, “cabled internet” rather than “internet” as a whole should be made public. This allows us to reap the benefits as a society of the natural monopoly of cabled internet, while also staying open to the major technological innovations that the private sector can bring.
Education is an industry that should also be public, for two main reasons. First of all, it shares the same qualities as a natural monopoly: it benefits from a high degree of cooperation among members of society. It is more efficient to have a one-to-many teacher-to-student ratio for society than requiring a unique teacher for every student. Education also often requires resources like books and computers, which can efficiently be managed and shared by a school. Finally, kids can learn from their peers and practice skills like teamwork in a cooperative setting such as a school.
Additionally, education determines whether kids have equal opportunities for success or not. Inequalities in education lead to the rich getting richer, and the poor getting poorer. This is because education is the primary means of acquiring valuable workplace skills and knowledge. If there are differences in education quality, some are at an inherent advantage compared to others. If schools were competing corporations in a free market, then those families with more money are the ones who could afford to pay the premium for better education. In this way, inequalities in education have a compounding effect and threaten the idea of equal opportunity that is so important to capitalism serving society equitably. By making education public, we can reap a major benefit of public industries: ensuring equality.
In today’s day and age, where a large majority of corporations and high-paying jobs are looking for people with college degrees, college education should also be public. Otherwise, some people can afford to go to college and others can’t, through no fault of their own. Private college education contributes to the wealth gap in a capitalist economy because it threatens the idea of equal opportunity. The rich get richer through acquiring education and knowledge that will make them valuable in the workplace. And the poor get poorer, because they don’t have the money to acquire the education and knowledge that will make them an asset in the workplace.
Health care as a whole is an industry that should be a free market. However, there must be healthy industry competition to prevent corporations from price gouging, and a UBI must exist to ensure consumers have the money to afford healthcare. Nonetheless, emergency health care is a special case that needs to be government-run.
During a medical emergency, consumer choice is reduced. If you have a family member who is having a heart attack, you are going to the closest hospital, no matter what. In this situation, there’s no consumer choice because it’s an emergency and time is of the essence. As previously discussed, free markets only function well when consumers have a choice. For this reason, emergency healthcare should be a public industry. This can help ensure that hospitals are within range and affordable, which increases the collective long-term happiness of society.
How do we allow these industry exceptions to be public, while mitigating the inefficiencies and incentive problems that government-run industries inevitably face? For one, clear industry outcomes should be created and measured against. Employees in an industry should be financially rewarded for achieving these outcomes. This can help hold the public “corporation” of that industry accountable and reward it for good performance. For example, reduction of costs could be one outcome that the industry gets rewarded for if it achieves. Additionally, public funding of research and development can help foster innovation, even in public spaces. Finally, the government can benefit from trickle-down innovations from free market industries by offering tax breaks or directly buying technology from the companies who create it.
- Natural monopolies should be government-run because they benefit from a high degree of cooperation and mutually benefit everyone
- Education should be government-run for two reasons: it benefits from cooperation, and equality is crucial because education determines opportunities for success. College education also needs to be public in today’s day and age
- Health care as a whole should be a free market when coupled with UBI, but emergency healthcare needs to be public due to lack of consumer choice in emergencies
- Clear public industry goals should be measured against, and achievement rewarded
Changes to US Economy
How does the United States economy need to change in order to better achieve long-term collective societal happiness?
Public vs. Free Market Industries
Cable internet and emergency healthcare are two industries that are technically private in the United States economy, so those should be made public.
The United States economy currently has a tiered, percentage-based tax structure for individuals. However, this tax structure is not nearly as aggressive as it needs to be. In particular, it needs to target the ultra-wealthy way more than it currently does. It also needs to not target lower-income families as much as it does. Additionally, big businesses need to be taxed more aggressively than they currently are in the US economy, and small businesses need more tax breaks.
Unfortunately, individual and corporate lobbying is a huge part of the United States economy and government. It is the biggest reason why big businesses get so many tax breaks, and leads to corruption. Laws banning political lobbying must get created.
The US economy currently has a means-tested welfare system. The welfare program needs to be replaced with a UBI.
The United States has antitrust laws. However, beginning around 1970, the enforcement of these laws has gotten lax, which has allowed big businesses to consolidate and thrive at the expense of small businesses. These need to be re-examined and enforced more aggressively.
Laws Preventing Malicious Business Behavior
Fortunately, the United States does have laws intended to prevent business practices that reduce consumer choice. However, it needs to bolster these laws to ensure maximum healthy competition in the privatized industries.
The United States does have anti-discrimination laws. However, the economy was built on an unequal playing field for certain groups, due to slavery, sexism, and other factors. As we discussed, any existing inequality gets compounded in a capitalist economy. So some groups have been marginalized throughout history, and are at a significant disadvantage today because of it, even if the underlying discrimination theoretically vanished, which it most definitely has not.The government needs to create laws and policies to address systemic inequality. It must look into forms of reparation to help groups that have been at a disadvantage throughout the course of United States history. And it must encourage citizens to combat their own unconscious biases and microaggressions that still occur today.
The United States runs a particular public/private hybrid for some of these natural monopolies. Corporations provide the services, but the government regulates the price the service is offered based on the corporation’s demonstrated cost of the service. A big problem with this approach is that there is no financial incentive for the companies to reduce costs. Indeed, reducing costs brings them no additional profit, because the money they collect from customers stays the same based on the government’s formula. The performance, goals, and reward-based structure of these industries needs to change to incentivize them to hit goals that more closely align with our current goals as an economy and society.
Education is for the most part public in the United States currently. However, universities are not truly public, even though taxes do fund them partially, because individuals still have to pay to get a college education at a public university. Furthermore, the costs of a college education have skyrocketed recently due to the privatization of this industry. Public colleges need to become truly public. They should be free to attend for tax-paying citizens, because with the current status quo those who can afford to attend college are at a significant economic advantage compared to those who cannot. That advantage is unearned for most since they themselves did not accumulate the wealth that allowed them to attend university.
Another big problem is inequality in education. The primary contributing factor for this is differences in funding between different states, counties, cities, and school districts. The government needs to do more to address these inequalities and ensure schools across the nation are equally funded. Furthermore, we need to closely examine the education industry to ensure it is getting adequate public funding. This way, teachers are not getting overworked and are getting paid a fair wage for the work they are doing, and students have access to the resources they need to learn.
A lot of the effects of economic designs compound over time. Furthermore, it is nearly impossible for us to imagine all the ways our country and the world will change over time. We could never design an economy at a certain point in time that would work forever without adapting. Automated mechanisms need to be built that alter the structure of our economy over time to mitigate negative effects and amplify positive outcomes. It is also important that laws are not so rigid that the economy cannot be adjusted to account for changing times or emerging needs. Adaptability and flexibility are key.
Call to Action
As highlighted above, the current United States economy falls short on achieving our goal of long-term collective happiness for society. Given these shortcomings, what can you do to help achieve this goal?
Voting for politicians and public officials who support economic policies and goals that bring greater collective happiness to society is crucial. The laws of our country dictate the structure of our economy, and public officials determine the laws. Voting is the single best thing you can do to improve the well-being of society.
Support Small Businesses
Whenever possible, you should buy from small businesses to help combat the natural negative effects of capitalism. Until our economic laws maintain healthy competition in each industry, you can manually help by trying to buy from small businesses if product quality is similar. Remember that it will always be harder for a smaller business to match the price of a larger business. They need a higher profit margin to stay in business.
Avoid Purchasing From Amazon
Amazon is worth calling out in particular due to their influence over what’s known as the means of production. Read “Amazon’s Effect on the Economy” in the Appendix for more details. Avoiding Amazon may not always be practical. However, it is oftentimes the case that a product offered on Amazon is also offered by that brand’s website directly, or another online retailer. It may cost slightly more, but if you have the financial means, this will make a big difference to the well-being of society in the long run!
Be a Mindful Consumer
Research companies and products you are considering purchasing. What are the overall goals, mission, and actions of the company you are purchasing from, and what goes into the production of the product? For example, does the company exploit workers from other countries known for using child labor and allowing people to work in terrible working conditions? Does the company purchase goose down from suppliers who rip feathers from the underbelly of geese while they’re still alive? Does the company sell guns to militants in exchange for those militants agreeing to mow down wage workers of that company protesting for fair treatment and wages? Is the company known for allowing sexism and racism to go unchecked in its workplace? The input is as important as the output. We as consumers have a responsibility to factor things into our purchase decisions other than strictly price or convenience if we care about the collective wellbeing of society.
Donate to Worthy Causes
If you find yourself well-off financially, remember that our capitalist economy naturally widens the wealth gap. Thus, you inherently benefit from the structure of the economy, while others struggle from it, possibly from no fault of their own. You probably worked hard for your wealth, so the purpose of this is not to make you feel guilty. It is to highlight the fact that the current distribution of wealth does not maximize economic efficiency or the collective long-term happiness of society. Thus, it is in the best interest of society and the economy for you to donate money to worthy causes wherever you can. This could be many things:
– Donating money, food, or other goods to homeless or unemployed people directly
– Donating to organizations that help specific marginalized groups, or the poor in general
– Supporting businesses run by members of marginalized communities
– Donating to any cause that combats the aforementioned negative effects of capitalism
Combat Discrimination and Inequality
Discrimination is embedded into the United States economy, and is detrimental to maximizing collective societal happiness. Explicitly combating discrimination from others is important. However, the most important thing you can do is to improve yourself. Everyone has unconscious biases, and sometimes these unconscious biases can lead to unintended but impactful microaggressions against marginalized groups. These actions, whether intended or not, contribute to existing economic inequality. Work on yourself to acknowledge unconscious biases you may have. Realizing that you are part of the problem is the first step to fixing it. The impact of any other step without doing this could actually cause more harm than good.
Amazon’s Effect on the Economy
Amazon, like most big corporations, can be considered to be a “winner” of our capitalist economy. They earned a lot of wealth by producing many beneficial goods and services for society. However, like all colossal corporations who become winners in particular industries, Amazon creates dangers for society if allowed to grow unchecked. Colossal corporations contribute to a widening wealth gap as they get more money. Anyone connected to the corporation gets more wealth, while everyone who’s not profiting from it falls behind. We see this today in the tech industry with big tech corporations. The Bay Area and Seattle are two great examples of this, as gentrification has pushed non-tech locals out of their neighborhoods.
Additionally, more money means more political leverage, which allows successful corporations to lobby politicians to get favorable tax policies and laws. For example, Boeing left Seattle to move to a region where local policymakers would give them more favorable tax treatment, and Amazon plans to do the same. Amazon, however, poses a particular problem even more detrimental to the long-term collective happiness of our society. This is because they span across many industries. Amazon owns (or contributes significantly) to a particular component of almost every single industry called the means of production.
The “means of production” is a term economists use to describe how goods get produced and ultimately distributed into the hands of customers. In an agrarian economy, goods are primarily crops and the distribution is horse-drawn carriages. In today’s digital age, there are a variety of goods, but a huge part of distribution is online. Any retailer, like Fred Meyer, Safeway, or Walmart, is going to be involved in the means of production of goods in the economy. However, if a significant consolidation of power occurs within the means of production, this creates a huge problem.
To illustrate, suppose you are a small business owner who creates and sells vegan brownies for a living. Now, let’s assume that 80% of the exchanges of goods and services occur in Fred Meyer specifically. Fred Meyer controls a large percentage of the market share.
In this case, you would have no choice but to enter into a contract with Fred Meyer to sell your goods in their store. You’d go out of business otherwise because most people shop at Fred Meyer. Unfortunately, Fred Meyer knows this, and so they have all the power in this negotiation. In order to maximize their profits, Fred Meyer can keep most of the profit from the sale of your brownies, offering you only a small percentage of the cut. You’re forced to accept these unfair terms, because your only alternative is to not sell your brownies to Fred Meyer, and you will likely go out of business if you do that.
Even if you do sell your goods to Fred Meyer, you’ll be competing with other vegan brownie businesses who are also selling their brownies to Fred Meyer. In a retail store, there are preferential product placements: for instance, eye-level shelves vs. bottom-level shelves. Fred Meyer can offer preferential product placement to companies who pay them more money. Who are going to be the corporations with extra money to pay for that privilege? Bigger corporations. So again, you as a small business vegan brownie owner are at a disadvantage.
In this way, huge corporations who control significant shares of the means of production in a society contribute to wealth gaps, corporate consolidation, small businesses going out of business, and big corporations thriving across all industries. They produce the ultimate perpetuation of the negative effects of capitalism.
You can replace Fred Meyer in the thought experiment above with Amazon. All of the same principles apply even more so because they are online, which means they are globalizing competition across industries. While this has an initial positive effect of increasing competition in industries, the problem is that Amazon is pocketing a lot of the profit from that competition. As an online retailer with an arguable monopoly in that space, Amazon controls a large portion of what is considered a means of production because it is how goods get distributed to customers. In fact, COVID-19 has made Amazon control even more of the means of production as more consumers are shopping online than they were before.
To illustrate this effect, let’s go back to our example. Suppose your vegan brownie business operates in a small midwest town. Before Amazon, you competed with other dessert businesses for the local small town desert market. There was enough local competition to incentivize you to provide awesome vegan brownies for people. Additionally, you have a natural incentive to do so because you love seeing the smile on your customer’s faces when they eat your brownies. You charge a fair price for your brownies, one that covers your costs and allows you to pocket a livable profit and sustain your business.
Now, Amazon exists, and can deliver vegan brownies across the country within 2 hours to locals in your small midwest town. Yes, this provides more incentive for you to make even better brownies, provide excellent customer service, and offer your brownies for cheaper from the increased competition. But you already had incentive before Amazon, so the only effect this has is forcing you to accept a thinner profit margin.
As Amazon controls more of the online retail market, most people in your town shop online for everything. Covid-19 exacerbates this effect. You must start selling your brownies online and shipping them to customers. However, as a small business, you likely don’t have the financial means to create a website and a distribution network to ship to customers across the country. Even if you did, most consumers shop online at Amazon anyways. So you need to use Amazon to distribute your goods.
Just like in our Fred Meyer example, Amazon knows this and has all of the bargaining power to pocket most of your profit. They also pride themselves on their ability to offer cheap goods, which forces you to lower your prices even more. Also, you’re competing with bigger dessert companies who can pay Amazon for more preferential product placement on their website. You were operating on razor-thin profit margins before, and now it’s just no longer feasible for you to operate your small business. You go out of business. Looking for work, you find that there’s an Amazon fulfillment center an hour away hiring wage workers to pack boxes. You’ve gone from operating a vegan brownie business you love to packing boxes for minimum wage at Amazon.
The growth of Amazon has transformed the economy in a lot of positive ways. Amazon is not inherently evil. They are simply big winners of a capitalist economy that exacerbates inequality. This has many detrimental effects. Cost of living in Seattle is skyrocketing, though to their credit they are trying to engage in reparation by donating to nonprofit organizations. More goods are shipped across the country, replacing business that would have been done locally, which hurts the environment, though to their credit, they are trying to make their operations as green as they can. They have used their enormous wealth to lobby local governments for favorable tax treatment, making it harder for other local companies to compete with them and creating an unjust tie between the economy and politics. But by far the biggest problem Amazon poses to the economy is the power they control over the means of production. This hurts small businesses, forces more people to become wage workers, widens the wealth gap, and ultimately leads to a reduction of competition and consumer choice across industries, all of which are bad for the economy and society.
1: Maslow’s Hierarchy of Needs: https://www.simplypsychology.org/maslow.html
2: Definition of Anarchy: https://www.merriam-webster.com/dictionary/anarchy
3: Gross Domestic Product: https://www.investopedia.com/terms/g/gdp.asp
4: Role of Money in Economy: https://www.cliffsnotes.com/study-guides/economics/money-and-banking/functions-of-money
5: Capitalist Economy/Free Market: https://www.intelligenteconomist.com/free-market/
6: Child Labor: https://www.history.com/topics/industrial-revolution/child-labor
8: Capitalism Waste: https://www.unsustainablemagazine.com/capitalism-and-the-advent-of-garbage/
9: Water Supply Contamination: https://www.nrdc.org/stories/flint-water-crisis-everything-you-need-know
10: Capitalism Competition and Monopolies: https://thismatter.com/economics/monopoly-regulation.htm
11: Supply and Demand: https://www.economicshelp.org/blog/160660/economics/explaining-supply-and-demand-2/
13: Predatory Pricing:
14: Corporate Consolidation: https://www.forbes.com/sites/eriksherman/2019/08/29/business-consolidation-economy/?sh=59e242e06c37
15: Vertical Integration: https://www.investopedia.com/terms/v/verticalintegration.asp
16: Collusion: https://www.investopedia.com/terms/c/collusion.asp
17: Capital Investment: https://www.investopedia.com/terms/c/capital-investment.asp
19: Corporate consolidation statistics in the US: https://www.openmarketsinstitute.org/learn/monopoly-by-the-numbers
19: Wealth gap statistics in the US: https://www.statista.com/statistics/299460/distribution-of-wealth-in-the-united-states/
20: Corporate lobbying in the US: https://www.theatlantic.com/business/archive/2015/04/how-corporate-lobbyists-conquered-american-democracy/390822/
21: History of racist US laws: http://www.altoarizona.com/history-of-racist-us-laws.html
23: Definition of socialism: https://www.youtube.com/watch?v=tcAQB3oPzt0
24: History of communism: https://www.history.com/topics/russia/communism-timeline
25: Democratic Socialism: https://www.lifeinnorway.net/scandinavian-socialism/
26: Single-payer healthcare system definition: https://www.thebalance.com/is-single-payer-health-insurance-a-good-deal-how-does-it-work-4175823
27: Single point of failure: https://avinetworks.com/glossary/single-point-of-failure
28: Public Utility Problems: https://www.sightline.org/2020/05/18/playing-monopoly-or-how-utilities-make-money
29: Fascism: https://www.livescience.com/57622-fascism.html
31: Wage worker statistic: https://www.cnbc.com/2018/01/22/heres-how-much-ceo-pay-has-increased-compared-to-yours-over-the-years.html
32: Racial wealth gap: https://www.brookings.edu/blog/up-front/2020/02/27/examining-the-black-white-wealth-gap/
33: Reparation podcast: https://freakonomics.com/podcast/reparations-part-2/
34: Warren Buffet and Bill Gates tax stance: https://www.cnbc.com/2019/02/25/warren-buffett-and-bill-gates-the-rich-should-pay-higher-taxes.html
35: Work incentive with UBI and welfare: https://medium.com/basic-income/would-a-ubi-reduce-work-incentives-some-answers-from-econ-101-7684f172bfbf
37: Startup barrier to entry: https://www.shopify.com/encyclopedia/barrier-to-entry
38: Donut Model Podcast: https://freakonomics.com/podcast/doughnut-economics/
40: History of Antitrust in US: https://hbr.org/2017/12/the-rise-fall-and-rebirth-of-the-u-s-antitrust-movement
41: Corporate Tax Rates: https://americansfortaxfairness.org/tax-fairness-briefing-booklet/fact-sheet-corporate-tax-rates/
42: Natural Monopoly Overview: https://www.investopedia.com/terms/n/natural_monopoly.asp
43: Natural Monopoly Prices: https://www.e-education.psu.edu/ebf483/node/538
44: Concept of insurance: https://www.iii.org/article/insurance-101
45: Problems with private insurance: https://www.forbes.com/sites/johngoodman/2019/10/02/whats-wrong-with-private-health-insurance/?sh=3bc748936c77
46: Healthcare costs: https://www.calhealthreport.org/2011/10/23/ending-the-explosion-in-health-care-costs/
47: College degree stats: https://cew.georgetown.edu/cew-reports/recovery-job-growth-and-education-requirements-through-2020/
48: Tax brackets in the US: https://taxfoundation.org/2021-tax-brackets/
49: Workplace discrimination study: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC6612926/
50: Me and White Supremacy: http://laylafsaad.com/meandwhitesupremacy
51: Costs of College Education: https://www.usnews.com/education/best-colleges/paying-for-college/articles/what-you-need-to-know-about-college-tuition-costs
52: Inequality in education: https://www.epi.org/publication/education-inequalities-at-the-school-starting-gate/
53: Differences in school funding: http://www.ascd.org/publications/educational-leadership/may02/vol59/num08/Unequal-School-Funding-in-the-United-States.aspx
55: Nike sweatshops: https://www.newidea.com.au/nike-sweatshops-the-truth-about-the-nike-factory-scandal
56: Down jacket industry: https://www.peta.org.uk/features/canada-goose-down-jackets/
57: Chiquita Banana: https://www.nytimes.com/2007/03/15/business/worldbusiness/15iht-bananas.4916910.html
58: Nike Sexism: https://www.nytimes.com/2018/04/28/business/nike-women.html
59: Unconscious biases: https://www.sciencenewsforstudents.org/article/think-youre-not-biased-think-again
61: Amazon net worth: https://www.macrotrends.net/stocks/charts/AMZN/amazon/net-worth
62: Tech industry wealth gap: https://www.technologyreview.com/2014/10/21/170679/technology-and-inequality/
63: Means of Production: https://study.com/academy/lesson/means-of-production-in-sociology-definition-lesson-quiz.html
65: Is Amazon a Monopoly: https://cdn.ymaws.com/www.naiba.com/resource/resmgr/handouts_2017_conf/Why_is_Amazon_a_Monopoly.pdf
66: Online shopping covid-19 stats: https://www.statista.com/statistics/1134709/consumers-us-online-purchase-before-after-covid-categories/
69: Amazon impact on environment: https://therising.co/2019/07/19/amazon-prime-is-convenient-but-its-terrible-for-the-environment
70: Amazon Climate Pledge: https://sustainability.aboutamazon.com/
71: Amazon Head Tax: https://www.theatlantic.com/technology/archive/2018/06/how-amazon-helped-kill-a-seattle-tax-on-business/562736/72: Amazon Rainforest: https://freakonomics.com/podcast/amazon-rain-forest/