Capitalism Failure?

In a discussion forum, another member posed the question, "Is the phrase 'they don’t make em like this anymore' proof that capitalism no longer works efficiently?" The subsequent discussion explored many aspects of economics, and the apparently simple question is much more complex than it seems at first glance.

First is the problem of defining "capitalism" in the first place. It is popular among those on the "political left" to conflate free markets and government intervention under the umbrella term capitalism in order to use sophistry rather than reason, and cloud discussions with absurd blanket statements. It makes no sense to combine voluntary exchange and private property with systemic coerced exchanges and violation of property. So, for the purposes of this post, "capitalism" will be defined as private property and free trade, not corporate cronyism and political plunder.

Automobiles are an easy starting point for such discussions. Old cars are solid, no doubt about it, and they are usually easier to work on. However, newer cars are far safer, generally more efficient, and typically carry a factory warranty for 100,000 miles. In 1950, cars weren't expected to last 100,000 miles at all. My 1995 Dodge Neon is well over 200,000 miles, and only now does it need major work. And it's a low-rung economy car from two decades ago. So, maybe it's a good thing "they don't make 'em like they used to." I will concede the point that older pre-1980s cars often had more style, though. The 1980s was probably the lowest point in auto design, and many modern designs are better, but there are compromises. And many design compromises are a consequence of arbitrary government mandates rather than auto design trends.

In the conversation, there was an accusation that capitalism rewards inferior products, and one person said, "It's not necessary to have a high quality product to make a profit. Snake oil is an extreme example." This was also cited as evidence that quality decline or bad products are a direct consequence of free markets. However, by merely raising this concern, he proved that there is a market demand for more quality. If it isn't being met, it's time to ponder other influences. If we look deeper at the economy, we see confiscatory taxation, corporate cronyism, arbitrary regulatory hurdles, trade barriers, price controls, and an unstable monetary system all imposed by the government... Yup. Many would like to cite this as proof that capitalism failed. However, this is rooted in the fallacious conflation of free markets and government intervention. Boogeymen are raised by control freaks as excuses to usurp power, the consequences of interventionism are pinned on the market, more intervention is imposed, and the cycle continues.

Let's consider how markets actually work, even in our intervention-riddled economy. Consumers like choice. For example, if quality doesn't matter to consumers, why doesn't Harbor Freight have a monopoly in tools? In reality, there's the Harbor Freight end of the spectrum for those on a budget or those who expect to damage their tools in harsh environments before the quality fails. There's also the Craftsman level for the home handiman who wants good tools. There is also the Snap-On level for pros or dedicated amateurs. And there are stages in between, too. The market doesn't result in only having poor-quality products available, it ensures there are options for people to choose according to their budgets and needs.

Another example of "capitalism failure" cited in this conversation was the phenomenon of stock market crashes. This is also alleged to be proof of "capitalist overproduction." However, this argument is refuted by the Austrian Business Cycle Theory which offers a far better cause-and-effect explanation for the market boom/bust business cycle and stock market crashes. In short, over-production doesn't cause market crashes. In fact, the market punishes over-production harshly because it is misallocation of resources and produces waste. Prices fall when there is a glut, and profits evaporate as the excess needs to be liquidated. On the other hand, governments promote over-production through price controls, subsidies, artificially low interest rates, bailout guarantees, and other distorted market signals in order to provide a false sense of prosperity and support cronies. The crash is a correction by the market in response. The boom is where the problem lies, and the bust is the iron law of the market asserting itself. The longer political machinations hold off the inevitable, the worse it will be when it can no longer be forestalled.

In short, I apologize for the rambling disjointed nature of this essay, and I hope I have offered some insight into sound economic analysis that can better examine shallow statements about capitalism and trade through exploration of consumer demands and government intervention. Critical thinking is a difficult task in our age of yellow journalism, ideological confusion, and political propaganda, but it is rewarding to the diligent.

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