The Paradox of Capitalism

Among the many ingenious inventions in human history, capitalism belongs right at the top. It has allowed us to produce and distribute unsurpassed levels of prosperity. Thanks to capitalism we have liberated more people from poverty in the past two centuries than under any other economic system, throughout all preceding human history. 

Despite its success, capitalism has many critics. As Jesse Russell recently pointed out, some of them are conservatives who blame capitalism for “tremendous existential suffering and sense of meaninglessness” in our time. I do not agree with those critics: as I explained back in June, capitalism is an economic system and has never aspired to be more. If we want more—as we should—we need to bring God into our lives.

It is important to remember that just because capitalism is not intrinsically equipped with soul-nurturing values, does not mean that it is antipathic to such values. Capitalism is neither hostile to God, nor is it nihilistic. A capitalist society is simply a society where man’s economic virtues, including ingenuity and hard work, are given the proper incentives to flourish. 

That said, even if we recognize that we can have both God and the profits of capitalism in our lives, we are still wise to be vigilant and, in measured proportions, critical of capitalism. As much as the system serves us better than any other, it comes with a built-in flaw that its proponents are all too reluctant to recognize. 

This flaw, a paradox, is centered around two concepts: profit and uncertainty. In the tension between them, we find both the seeds of capitalist success and the capitalist forces of self-destruction.

The pursuit of profits

It deserves to be mentioned again: capitalism is neither more, nor less, than an economic system that maximizes the opportunities for entrepreneurs, investors, and individual citizens to pursue profits. However, precisely because the desire to make more money and build prosperity is the lifeblood of capitalism, the system benefits everyone, not just those who happen to be wealthy.

We normally think of the pursuit of profit in business terms, where profit is the surplus an entrepreneur has left in the bank at the end of the day, or as the positive return on an investment. We tend to forget that people who do not own a business but make their living through employment also pursue a form of profit. The same principles that explain entrepreneurial behavior under capitalism can also be appropriately applied to individual workers. Where the entrepreneur seeks to reap the harvest of profit from the strength of his business, the employee wants to pursue the highest possible return on the professional skills and experience he has. 

Entrepreneurs invest physical and financial capital in their pursuit of profits. Workers acquire new skills, assume more responsibilities, and look for better-paying opportunities, all as means to improve their human capital. An education with a recognized college degree, a professional certificate, even documentable experience, are all examples of human capital that we employ in our daily workforce participation. We expect the improvement of human capital to pay off in a similar way to how better entrepreneurship and more skilled investments produce higher profits and returns for entrepreneurs and investors. 

So far, so good. The problems for capitalism emerge when the pursuit of profits becomes two-pronged: the capitalist does not just want more money, but also more predictable money.

It is here, in the pursuit of a more foreseeable future, that the capitalist takes the first steps that spell doom for capitalism. The harder he tries to prosper, the greater the perils for the very system that he benefits from.

Battling uncertainty

By nature, the future is unpredictable until we make it otherwise. There is a long, rich line of literature, primarily in political economy, about how we handle uncertainty in economic decision-making. It is easy to get lost in its intricacies, but the key point is that if we want to make the future less uncertain, we have to put some kind of marker in it that helps us increase the likelihood that tomorrow will be as we want it to be.

One such marker is a contract on economic activity. An employee knows that by his contract with his employer, he is eligible for predictable compensation if he delivers labor of a specific quantity and quality. This contract allows the employee to relax and to plan his life around the well-founded expectation of those future paychecks. He can apply for a mortgage and a car loan, with payments running years into the future, while still being confident that he can meet his obligations to his bank.

At the other end of the contract, the employer has a different problem. While he could sign a lifetime contract with his employee, it would be illogical to do so until he has similarly contracted with his buyers that they will purchase a certain quantity, at a certain price, for life. It is uncommon for businesses to be this lucky with the buyers of their products, which explains the rarity of lifetime contracts for employees.

Nevertheless, entrepreneurs rationally want to find ways to increase their confidence in future earnings. A common way to do so is to take one’s product to a level of quality and affordability where it dominates the market. Henry Ford perfected the assembly line, raising productivity and cutting production costs to the point where his Ford Model T dominated the American automobile market. Ingvar Kamprad was enormously successful with his concept for self-assembly furniture. Sam Walton, the founder of Walmart, did something similar in the retail services industry.

The more market dominance an entrepreneur commands, the more confident he can be in his revenue and profits. The entrepreneur’s dream in this regard is, of course, to be the monopolist; at one point, Microsoft sold about 90% of all operating systems for personal computers—in the world. 

However, when the capitalist’s battle to reduce uncertainty reaches this point, he effectively chokes the engine of capitalism itself. 

Capitalist Self-Destruction

To the individual entrepreneur, his efforts to maximize his profits and secure their long-term predictability is to put the very essence of capitalism to work. Capitalism reaches its epitome when his profits do.

To do so by means of becoming the dominant seller, the entrepreneur will want to eliminate his competition as much as possible. The reason is simple: if, and only if, he becomes the undisputed monopolist, i.e., the only seller of his product, he can be certain about his future profits. 

To capitalism as an economic system, every monopolist is one step closer to its demise. The monopoly of the individual entrepreneur means that he is no longer exposed to the forces of the market that, in the first place, brought out his excellence and encouraged him to strive for more profits.

An entrepreneur without competition is no longer concerned with the means which brought him profits. Doing more with less—the credo of successful entrepreneurship—is no longer a priority. Having secured his profits by means of complete market domination, the entrepreneur becomes complacent. The products that made him his fortune, no longer evolve. Stagnation replaces growth.

At this point, the entrepreneur focuses more on eliminating threats to his position than on the pursuit of entrepreneurial excellence. One of the modern ways of doing this is to use government as leverage against aspiring competition: powerful capitalists use lobby channels to protect their accomplishments behind legislative and regulatory bulwarks. 

Another way to protect a monopoly is to secure the control of supportive industries: an oil company buys up all the refineries and the railroads that ship the oil; the manufacturer of batteries for electric vehicles buys up the mines that produce critical rare earth minerals.

A popular strategy among Japanese businesses, also used by Swedish capitalist family Wallenberg, is to own your own bank. This gives you unmatched financial muscles to fend off competition.

This is all rational behavior from the viewpoint of the individual entrepreneur. The more he does to entrench his monopoly, the less he needs to worry about constantly improving his business and its output. But from the other side of the bulwark, things look different, and increasingly troubling. The more markets and industries that become protected monopolies, the less innovative the economy as a whole. 

With less innovation comes slower economic growth. Stagnation sets in, and not only in product innovation. It spreads to worker compensation, consumer spending, and eventually demand for the products that the monopolist entrepreneur thrives on. 

Industrial prowess gives way to industrial poverty. Capitalism slowly destroys itself from within.

Saving the Capitalist from Himself

The paradox of capitalism is that it is the best economic system we could wish for, yet it comes with its own self-destruct mechanism. What can we do to save it?

It must be saved, for the alternatives are worse. Socialism surpasses capitalism in terms of self destruction, but without offering anyone the chance of prosperity.

The trick, then, is to not throw the capitalist out with the bathwater. Conservative critics of capitalism are correct in that the system lacks higher values, but it would be incorrect to suggest that those values are incompatible with capitalism. On the contrary, the introduction of the right set of higher values can only make capitalism better. These are values that put a leash on self-centeredness and remind the capitalist to accept such restraints that keep him humble. 

Ideally, a society can do this by virtue of moral self-enforcement: men and women who are raised as devout Christians will have a stronger urge to refrain from ‘gaming the system’ in their own favor. The Bible is full of reminders that leadership is a responsibility, not an entitlement, especially from Paul the Apostle. In his Epistle to the Philippians, he explains (Phil. 2:3; Douay-Rheims Version):

Let nothing be done through contention, neither by vain glory; but in humility, let each esteem others better than themselves.

In his first epistle to the Thessalonians (1 Thess. 4:11; ibid.):

And that you use your endeavour to be quiet, and that you do your own business, and work with your own hands, as we commanded you; and that you walk honestly toward them that are without; and that you want nothing from any man’s.

If these values are widely adopted, successful capitalists will know better than to push all the way to the point where the capitalist puts capitalism in jeopardy. Ideally, we could trust ourselves with exercising due diligence and proper moral judgment. However, in reality, this is not recommendable. We as human beings have been equipped with one annoying feature that keeps us from achieving the perfection needed for capitalism to be self-enforced: we are imperfect by design.

This is a classic case of prisoners’ dilemma. Two individuals are in police custody for having committed a crime together. If neither talks to the police, both will go free. However, if one talks and tells on the other, the one who kept his mouth shut will take full blame while the other one walks. In the case of morally self-enforcing capitalists, they all benefit from complying with Christian ethics, but the profits they earn are less than what each one of them could make if he were the only one to break with said ethics.

For the sole purpose of preserving capitalism, we need to amend it with ethically sound legislative sideboards. These can take the form of antitrust legislation and bans on cartels and collusion. It is a delicate matter to give government such ethical enforcement tools, as the powers vested therein appeal to another kind of human temptation: the corruption of policymaking and law enforcement. This should not stop us from putting an ethical overcoat on capitalism—but it is a reminder that if we want to harness the superior forces of prosperity that are intrinsic to capitalism, we need to exercise moral vigilance everywhere in our public life.