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Our Model of Capitalism is Faulty | Here’s How We Fix It
You may have read some of my previous posts and become somewhat angry with the capitalist system. By no means am I suggesting that communism is a better alternative to what we have in the western world today. The problem isn’t capitalism itself – more so, our model of capitalism is more to blame.
Capitalism Can Be Very Effective
Profit Motive
The profit motive is the incentive mechanism that drives businesses to make money. Without the motive of making profit, there is a lack of innovation. Would we have amazing inventions like the 747 jumbo jet if it were not for the profit motive? Would we have Microsoft Windows installed on every computer if it were not for the notion of making a profit?
Resource Allocation
Another great thing about the free market system is its ability in managing economic resources. It is far more efficient than a central planner could be in many ways.
When markets are booming, people respond to the signals and direct their labour and capital to those markets. When markets are in decline, people respond to this and invest less into these markets.
Without the market allocating resources, we may have imbalances in supply and demand. For example, the economy may be in short supply of electricians, but instead we get too many bricklayers. This would mean we have the resources to build houses, but what’s a house without electrical wiring? In a free market system, the lack of supply of electricians would lead to greater rewards being paid to those with this skill. Naturally, more labour would then gravitate to these markets, as that’s where the demand is. This all done automatically in the free market system, so it doesn’t require any work or planning!
But Capitalism Can Remain Dangerous
Without regulation, capitalism can be very dangerous. There is no such things as a perfect thing, with no faults. The Sun is the heart of our solar system and we’d all be dead without it. But, if we go out sunbathing too much, we increase our chances of skin cancer. You could buy the best car in the world, for example, a Roll Royce. It’s a supremely powerful and comfortable machine. However, without safety features, you’d inevitably increase your chances of dying in a crash.
The point is, we must have balance in the capitalist system if we want our economies to be prosperous. The current system is quite unregulated in many ways, and that’s what leads to market failure and a lack of welfare. The ideal is to move away from this sort of capitalism towards a better, fairer and safer economic system.
Bounded Rationality
One way we could improve the system is by applying the idea of bounded rationality. What this means is that we are able to make better decisions if we have a limited range of options. Remember that individuals are limited by the information they have, so many people lack the ability to make good decisions. Rationality is bounded because there are limits to our thinking capacity, available information, and time (Simon, 1982).
So we can apply bounded rationality a little more throughout society, we must really give more power to governments. This can be quite frightening, but with the right democratic system in place, it probably does or more good than bad. One thing governments could do is to remove much of the reward people get when making bad choices. For example, taking away a banker’s ability to make risky investment choices with their clients’ money.
I’m sure this would allow society to make better, more informed choices, with public safety and welfare in mind.
Simon, H. A. (1982). Models of bounded rationality. Cambridge, MA: MIT Press.
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