What’s wrong with the capitalist system?

New Year’s Day saw your editor up a tree. He was pruning pear trees. They have picked up some sort of blight. They’re half dead and probably should be cut down and burned.

Nevertheless, we went out into the cold – pruning shears in hand – and trimmed them.
Why? What was the point? Why invest time in a tree that won’t produce?

Perhaps it was just a habit.

This weekend, we undertake another curious task. We have bought a house down the road. The house was built in the ‘50s. It is a wreck. The smart thing to do would be to tear it down, build a cheap new house and rent it out. The return on investment would be low, but at least it would be positive.

Instead, we are fixing up the house enough to rent it out more or less as it is. Your editor is tearing off the decrepit porch and rebuilding as well as spackling the cracks on the inside and repainting. What for? If he were to calculate the value of his time, the whole enterprise would be unprofitable. But hey, what the hell?

Is the house an investment? What else would it be? We’re not going to live there; we’re going to rent it out. Then why are we not carefully calculating our investment and demanding a return – on time and money – that makes it worthwhile?

Perhaps we are not very good capitalists. Or perhaps capitalism itself is flawed. The latter is the conclusion of an academic paper from the Centre for Economic Policy Research. The paper is entitled “Continued existence of cows disproves the central tenets of capitalism.”

The research took place in rural India. The researchers studied the return on water buffaloes and cows. They discovered that they were bad investments. If you include the value of labour at going rates, the cows lost 64% and the buffaloes 39%. If you put the value of labour at zero, buffaloes then became profitable, at a rate of 13% per year. But even with free labour cows were still unprofitable, losing 6% annually.

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What does this mean? Does it really mean that capitalism is flawed? Or does it mean that people are stupid? Or maybe just people in India are stupid?

The trouble with this kind of analysis is that it is too narrow and artificial. Whoever said that people only care about making money? Whoever said that they had to value their time at market rates? Whoever thought he could define capitalism so that it could be subject to analysis and judgment?

The critics presume that capitalism follows certain rules. People are said to be rational. They are said to want to increase their wealth. They are said to always try to optimise their time and money.

If that were the definition of a real capitalist, I have never met one. Instead, the people we know function in a world of floating ambitions and ambiguous decision-making. People have many different goals in life; making money is just one of them.

Ultimately, people create for themselves their own stories. Then, they play their roles. One wishes to make a lot of money. Another is more concerned with his family. A third finds the pursuit of money vulgar; it’s something else he’s after.

Not knowing what people want, it’s impossible to know whether they pursue their goals rationally or irrationally. The typical person doesn’t know – at least, not consciously – what he wants. He often does things that surprise and puzzle himself as well as the people around him. One day he makes ‘rational, capitalist’ decisions. The next, he ‘invests’ time and money in something that couldn’t possibly pay off.

Capitalism works because it permits people to do what they want – no matter how “flawed” or irrational it may seem to naive researchers.

It doesn’t always take people where they want to go, but capitalism generally helps them end up where they ought to be.

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  • Nick C

    You’ll never get honest capitalism under fractional reserve banking….. or any system that interferes with true honest price discovery………

  • Nick C

    Quote:- Capitalism works because it permits people to do what they want ….

    So, what you’re saying is….. if Mr Bent Banker & his political mates want to interfere with the price discovery mechanism …… That’s capitalism at work? …..
    …… It’s not ….. it’s fraud.

    Fraud & capitalism are not the same.

  • Average joe

    if you want to learn what is wrong with our idea of capitalism watch the short series of videos starting with this one: https://www.youtube.com/watch?v=CA0XvMvfNqY&feature=c4-overview&list=UUICLhy-IVD58jGRsb8leiiw

  • Dave R

    Isn’t there a confusion here between capitalism, the free market and the ‘rational’ model, which although related are not quite the same thing? If there were less confusion on this point perhaps more mainstream commentators might ponder the irony that amidst all the vilification of ‘greedy’ shareholders in the ‘hated’ capitalist system, the capitalists (i.e. the shareholders who provide the capital) have – in many areas of the big blue chips at least – lost control to overpaid, incompetent and sometimes criminally negligent management.
    Think banks, insurance, pharma, oil and however many more you like: countless catastrophic management failures; bungling incompetence; dereliction of fiduciary duty and worse. Then think of the salaries, golden pensions, parachutes and whatever else with which their directors and CEOs are rewarded.
    If an entrepreneur builds a fantastic business and reaps the rewards: hats off to them, the Bill Gates etc of this world. If great managers do a great job running someone else’s business, fair play if they get rewarded appropriately (though you can argue what is fair). It is the a) reward for failure, and b) the apparent incapability of anyone or anything – shareholders, taxpayers, police, courts, government – to hold useless and sometimes criminal top managers to account that is so offensive. And as far as I can see, that has got little to do with capitalism.
    Where did it go so wrong, and why is it so impossible for mainstream press to draw a distinction between capitalism, free market, and what we’ve actually got?

  • Joao Baptista

    Great article! Capitalism is just a sub-set of free market, an important one. Free market is only a sub-set of freedom, an important one. Those (statists, socialists) who must confuse ideas to “win” a debate, oppose those concepts as if they were antagonic. The sin of capitalism is not from capitalism itself but from statism and corruption, in which socialists are masters.
    There can not be modern applied technology without capitalism, at some degree or step, be it for research or for mass production.
    Confusing capitalism and finantial speculation with the protection of the State is the main manouver of communists which are the fifth column of the Wall Street pirates.
    This is nothing new for each libertarien that has the previlege of reading your articles, every day. Thankyou Bill!

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