Is capitalism actually broken?

Summary

This script explores the concept of capitalism as a spectrum with three key dials: ownership of capital, government control over production, and market involvement in price setting. It discusses historical and contemporary issues like the Industrial Revolution's lack of regulation leading to food adulteration, and today's challenges of climate change and rising inequality. It questions whether capitalism, in its current form, is broken and if it can be fixed by adjusting its parameters or if a new economic system is needed.

Takeaways

• 🌍 Each economy is like a machine that turns labor, capital, and natural resources into goods and services, creating value.
• 🔑 The type of economy is determined by three main factors: ownership of capital, government control over production, and the extent of market use in setting prices.
• 🏛️ North Korea is an example of an economy with almost complete government ownership of capital, while the US has a high degree of private capital ownership.
• 🏭 High coordination economies, like the former USSR, had the government dictating what was produced, whereas low coordination economies leave more to the private sector.
• 💸 Capitalism is not a monolithic system but a spectrum of economic models, making it difficult to generalize about its efficacy.
• 🔝 During the Industrial Revolution, minimal regulation led to practices like the addition of embalming fluid in milk, highlighting the need for oversight.
• 🌳 Capitalist economies' drive for growth and cheap energy has significantly contributed to climate change through the burning of fossil fuels.
• 📈 Inequality is rising in some capitalist countries, with the top 1% earners capturing an increasing share of total income over the past 50 years.
• 📉 However, historical data shows that capitalism has also been associated with a decrease in income inequality in certain periods and regions.
• 💰 Capitalism can create wealth, but it often concentrates wealth among a few, potentially leading to the formation of a de facto aristocracy.
• ⚙️ The question of whether contemporary capitalism is broken is complex and depends on the specific settings of each country's economic model.

Q & A

What are the three inputs that every economic system's machine requires?

The three inputs are labor, which represents people's work; capital, which includes all the stuff a business might use, including intangibles like ideas; and natural resources.

How does an economic system's machine create value?

The machine converts the inputs of labor, capital, and natural resources into goods and services, and since people are willing to pay for these products, the machine creates value.

What are the three dials that determine the type of economic system?

The first dial controls who owns the capital, the second dictates how much control the government has over production, and the third controls how extensively markets are used to set prices.

Where does the United States stand in terms of private capital ownership?

The United States is roughly at two-thirds private ownership of capital, indicating a mixed economy with a significant private sector.

What is the historical example given of a problem caused by 'laissez-faire' capitalism?

During the Industrial Revolution, food manufacturers in the United States added cheap and sometimes dangerous adulterants to food to maximize profits, leading to the passing of the Pure Food and Drugs Act in 1906.

How does capitalism contribute to climate change?

Capitalist economies incentivize growth and demand for the cheapest energy, which has historically been fossil fuels. The burning of these fuels drives climate change.

What is the relationship between capitalism and inequality?

Inequality is rising in some countries, with the top 1% of income earners capturing a larger share of total income over the past 50 years. However, the relationship is complex and varies by country.

How did the share of income for the top 5% of earners change in England as capitalism developed?

In England, the share of income for the top 5% peaked at around 40% in 1801, fell to a low of about 17% in 1977 as capitalism took hold, and has since risen to around 26%.

What is the potential consequence of allowing owners to benefit more from the economic machine?

If owners manipulate the system to benefit themselves more, it can create a feedback loop where power and wealth become concentrated within their families, effectively forming an aristocracy.

Is pure 'invisible hand' capitalism considered broken?

Yes, pure 'invisible hand' capitalism is considered broken because it led to negative outcomes like the adulteration of food and has no country practicing it in its pure form.

What is the critical question posed at the end of the script regarding contemporary capitalism?

The critical question is whether contemporary capitalism can be fixed by adjusting its dials or if it needs to be completely dismantled and rebuilt from scratch.

Outlines

00:00

🔧 The Economic Machine and Capitalism's Components

This paragraph introduces the concept of economies as machines that convert labor, capital, and natural resources into goods and services, ultimately creating value. It explains how different economic systems, such as capitalism, socialism, and communism, vary based on who owns capital, government control, and how market prices are set. Using three dials—ownership of capital, government control, and market regulation—countries are categorized along a spectrum from complete government ownership and control (like North Korea) to mostly private ownership (like the U.S.). Capitalism is presented as a flexible system with many variations.

05:03

🏗️ The Evolution of Free Market Capitalism and Its Consequences

This paragraph discusses how capitalism, particularly during the Industrial Revolution, was close to the idea of 'laissez-faire' with minimal government intervention. The belief in the 'invisible hand' of free markets resulted in situations like harmful substances being added to food products for profit. This led to public outcry and government intervention with the Pure Food and Drugs Act of 1906. It emphasizes that while pure free-market capitalism is no longer practiced today, modern threats like climate change and inequality present challenges that may be difficult to solve within the capitalist framework.

🌍 Capitalism’s Impact on Climate Change and Inequality

The focus here is on the environmental and social consequences of capitalist economies. Capitalism's growth incentive has led to a high demand for fossil fuels, accelerating climate change. Additionally, corporations often prioritize profits over addressing these environmental issues, as seen with oil and gas companies downplaying climate science, similar to how tobacco companies denied the link between smoking and cancer. The paragraph also highlights rising inequality, especially in countries like the U.S., U.K., and Australia, where the income share of the top 1% has grown significantly. It notes the complexities of inequality across different countries, with varying degrees of capitalist systems influencing the distribution of wealth.

💰 The Double-Edged Sword of Capitalism

This section emphasizes the dual nature of capitalism. While it generates immense value and raises overall wealth, it also concentrates wealth in the hands of a few. Capitalism’s supporters argue that anyone can rise to wealth through hard work, but the reality is that the owners of successful companies benefit the most, gaining advantages like education, health, and social power. These benefits often stay within wealthy families, creating a feedback loop that can lead to the formation of an aristocracy, where power and wealth remain within the same elite groups over generations.

🤔 Is Capitalism Broken?

The concluding paragraph poses the question of whether pure, 'invisible hand' capitalism is broken. While no country practices pure capitalism today, contemporary capitalism faces significant criticism for contributing to climate change and growing inequality. The paragraph suggests that capitalism may even be creating new aristocracies in some countries. The key question is whether tweaking the system’s controls can fix these issues or if a completely new economic system is needed.

Keywords

💡Economic System

An economic system is a set of mechanisms by which a society allocates resources to satisfy human wants. In the video, each machine represents an economic system of a country, emphasizing the diversity of approaches to resource allocation and production.

💡Inputs

Inputs refer to the resources or factors of production required to produce goods and services. The video mentions labor, capital, and natural resources as the three primary inputs, which are essential for any economic system to function.

💡Labor

Labor is the physical or mental effort of workers in the production of goods and services. The video describes labor as one of the inputs that, along with capital and natural resources, is transformed by the economic 'machine' into value.

💡Capital

Capital encompasses the physical and intangible assets used in the production process, such as machinery, buildings, and ideas. The video highlights the role of capital ownership as a key dial that determines the nature of an economic system.

💡Natural Resources

Natural resources are materials and elements found in nature that are used to produce goods or provide services. The video includes natural resources as one of the essential inputs in the economic system.

💡Value

Value in economics refers to the perceived worth of goods and services. The video explains that the economic 'machine' converts inputs into value, which is what consumers are willing to pay for.

💡Dials

The dials in the video are a metaphor for the variables that define different economic systems, such as ownership of capital, government control over production, and market regulation. They illustrate how economies can vary along a spectrum.

💡Capitalism

Capitalism is an economic system where private individuals or businesses own capital goods and where investments are determined by private decision rather than state control. The video discusses various forms of capitalism and questions whether it is broken in its current form.

💡Regulations

Regulations are rules set by governments to control the behavior of individuals or organizations. The video uses the example of the Pure Food and Drugs Act to illustrate how regulations can correct market failures in a capitalist system.

💡Climate Change

Climate change refers to long-term shifts in temperatures and weather patterns. The video connects capitalist economies' growth incentives to the demand for cheap energy, which has contributed to climate change.

💡Inequality

Inequality refers to the unequal distribution of resources, income, or wealth among a population. The video discusses rising inequality in various countries and how different forms of capitalism might affect it differently.

💡Aristocracy

An aristocracy is a form of government in which power is held by a small, privileged ruling class. The video suggests that if owners manipulate the economic system to benefit themselves, it could lead to a de facto aristocracy.

Highlights

Machines represent economic systems of countries, converting inputs into value.

Three dials determine the type of economy: ownership of capital, government control over production, and market use in setting prices.

The US has roughly two-thirds private ownership of capital.

Economies with high coordination have the government dictating what is produced.

Markets are used to set prices in economies with extensive market use.

Capitalism is a wide range of possible economies, making it difficult to determine if it is broken.

During the Industrial Revolution, capitalism was close to 'laissez-faire' with few regulations.

Pure 'invisible hand' capitalism led to issues like embalming fluid in milk due to lack of regulation.

The Pure Food and Drugs Act of 1906 was a response to public outcry against unsafe food practices.

Capitalist economies incentivize growth, driving demand for cheap energy like fossil fuels, contributing to climate change.

Profit maximization can lead corporations to ignore inconvenient truths, like climate science denial.

Inequality is rising in countries like the US, UK, Canada, Ireland, and Australia.

In England, income inequality decreased as capitalism took hold but has since increased.

Inequality trends vary by country and can be influenced by different versions of capitalism.

Capitalism generates value but also concentrates wealth among a few.

Defenders of capitalism argue that anyone can become wealthy with enough determination.

Wealth generated by successful companies in a capitalist market mostly flows to the owners.

If owners manipulate the system, it can create a feedback loop leading to an aristocracy.

Pure 'invisible hand' capitalism is broken, but no country practices it.

Contemporary capitalism contributes to climate change and rising inequality.

The question is whether we can fix capitalism by adjusting its settings or if a new system is needed.

Transcripts

Each one of these machines represents the economic system of a country.

Every machine has three inputs:

labor, people’s work.

Capital, all the stuff that a business might use,

including intangibles, like ideas.

And natural resources.

The machine converts these inputs into goods and services,

and because we’re willing to pay for the things the machine produces,

what the machine is really creating here is value.

Economies turn inputs into value.

What determines whether the machine is capitalist, communist, socialist,

or something else?

Three dials.

The first dial controls who owns the capital.

Over here, the government owns every bit of capital,

down to the last office paperclip.

North Korea is probably the closest economy to 0%.

On the other end of the spectrum, at 100%, private citizens own all the capital.

The US is about here, at roughly two-thirds private ownership.

The second dial dictates how much control the government has

over what gets produced.

In economies with high coordination, like the old USSR,

the government dictated what the economy could— and would— produce.

In economies with low coordination,

the government might mandate a few things,

but leaves most decision-making up to the private sector.

The third dial controls how extensively markets are used to set prices.

Over here at 0%, we have economies with no markets,

where the government sets all prices, and consumers have no say.

Over here at 100%,

markets are used to set the price of everything,

even things like basic life-saving health care.

You can also think of this dial as controlling the number and extent

of government regulations—

from tariffs on foreign goods to antitrust laws

to regulations on net neutrality.

So, capitalism isn’t just one type of economy—

it’s a wide range of possible economies,

which makes answering the question of whether capitalism is broken, complicated.

But we’re going to try.

At the height of the Industrial Revolution,

the dials were set pretty close to what we now call free market,

or “laissez-faire” capitalism.

There were very few regulations,

and economists of the time believed that capitalism’s “invisible hand”—

basically, individuals acting freely and in their own self-interest—

would produce optimal outcomes, both for the economy and for society.

And that’s how we ended up with embalming fluid in milk.

In the late 1800s in the United States, food manufacturers put all kinds of cheap

(and sometimes dangerous) adulterants in food to maximize profits.

What they were doing was legal, but of course, wrong.

There was a public outcry, and in 1906,

Congress passed the Pure Food and Drugs Act,

setting the stage for the Food and Drug Administration,

which watches over the US’s food supply to this day.

These days, no economy really practices pure “invisible hand” capitalism,

but some people are increasingly worried that today’s threats,

like climate change and rising inequality, can’t be solved by any capitalist system.

Let’s look at climate change first.

Capitalist economies incentivize growth.

That’s created massive demand for the cheapest energy possible,

which, for a long time, was fossil fuels.

Burning all those fossil fuels unquestionably drove—

and continues to drive— climate change.

Not only that, but the desire to maximize profit usually gives corporations

a powerful incentive to ignore inconvenient truths.

Just like tobacco companies denied the link between cigarettes and cancer,

oil and gas companies denied or downplayed climate science for decades.

Next, inequality.

Inequality is complicated enough that we made a whole video about it,

but the simple story is:

in many countries, inequality is rising.

In the US, the UK, Canada, Ireland, and Australia,

the top 1% of income earners have been eating up a larger and larger share

of total income over the past 50 years.

In the UK, the top 1% share doubled from 7% in 1980 to 14% in 2014.

But that's not the whole picture.

In England, the country for which we have the best data before capitalism,

the share of income going to the top 5% of income earners

peaked at around 40% in 1801,

and then, as capitalism took hold, it fell steadily to a low of about 17% in 1977.

These days, it’s back up— hovering around 26%.

And here’s another data point: in many European countries and Japan,

the top 1%’s share of income came down from 20 to 25% in the early 1900s

to 7 to 12% today.

So, is capitalism increasing inequality or not?

It depends.

Remember, there's a wide range of settings that all fall under capitalism,

meaning that one country's version can look very different from another's.

It’s totally possible that inequality could be increasing

in China’s version of capitalism, while it decreases in France’s.

Capitalism, it seems, is a double-edged sword.

On the one hand, it generates a huge amount of value,

which translates to almost everyone having more money than they otherwise would.

On the other hand, it also funnels the biggest chunk of that money

into the wallets of relatively few people.

Capitalism’s staunchest defenders say that with enough grit and determination,

anyone can join the ranks of the wealthy.

Is that really true?

In a free, capitalist market,

the wealth generated by successful companies mostly flows to the owners.

And along with that come other benefits:

education, health, social standing, and power.

If owners tinker with the machine so that it benefits them more than others,

they create a feedback loop where power and everything that flows with it

calcifies within their families.

And then you’ve got, basically, an aristocracy.

So let’s break down the question we started with:

is pure, “invisible hand” capitalism,

with all the dials set to the extremes, broken?

Yeah.

But it’s also kind of irrelevant, since no country uses pure capitalism.

Is contemporary capitalism—

as it’s practiced in much of the world today— broken?

Well, it’s the major driver of climate change

and in many places is contributing to rising inequality.

And it may even be creating a de facto aristocracy in certain countries,

so, not looking good.

The critical question is: can we fix contemporary capitalism

by fiddling with the dials or restricting who can turn them,

or do we need to tear the machine down and build a new one from scratch?