3 Flaws of Capitalism and Why Socialism is Gaining Popularity

This is unfortunately a divisive topic. There’s a good chance you already have strong beliefs in favor of or against capitalism. And some recent polls show that more people are shifting towards socialism. 

Most all of us have different life experiences that push us to think one way or the other. But in reality, there are pros and cons to each system. And I’m about to shed some light on both. 

For you to get the most use out of my research today, please try to keep an open mind. It’s not easy to do… but this approach will lead to a better understanding of capitalism vs. socialism.

What is Capitalism, or more so, Free Market Capitalism?

Instead of giving you a boring textbook definition, I’ll do one better. Let’s use Apple to see the core of free market capitalism. And this applies to any business, no matter how small or large… 

The only way Apple has grown and continues to survive is by providing value to others. No one has to buy its products and services. Governments aren’t forcing you or millions of people around the world to buy iPhones. 

People who buy iPhones ultimately choose to do so. They decide they want smartphones and prefer iPhones over the alternatives. And this same concept applies to many products and services you buy… 

With free market capitalism, you can get whatever you want if you provide enough of what other people want in return. And of course, money is almost always involved in a transaction. But it’s just a measuring stick of value that we use to make trading easier. 

So free market capitalism aligns with having more freedom. Although, that’s upfront freedom… if this system goes without any centralized control, it can actually lead to less freedom for many people. This brings me to my first big flaw of capitalism… 

1. True Free-Market Capitalism Leads to Monopolies 

Without antitrust laws, big companies would squash their competition. Individual companies would dominate markets – even more so than today. This would lead to uncompetitive pricing. That’d be great for the profitability of companies… but it wouldn’t be good for you and me. 

On a fundamental level, competition is great for consumers and pushing human innovation further. Companies are fighting for our business. They do so by trying to create better products at lower costs than their competitors. But with completely free markets, companies would gain bigger economies of scale and squeeze out any healthy competition. 

2. Tragedy of the Commons 

When we have limited shared resources, like fish in the sea, who’s to stop the overfishing? If that happens, everyone will lose next year with lower catches overall. And this can go to extremes by completely wiping out the resource. 

At the crux of tragedy of the commons is prisoner’s dilemma. If companies would work together to limit their use of natural resources, that would lead to a more sustainable outcome for all. Although, out of self-interest and with lack of trust, we know that doesn’t usually happen. 

So, to prevent tragedy of the commons, some centralized control is useful. It helps prevent unsustainable uses of resources. 

3. Concentration of Wealth 

Unlike the past industrial revolution, new technology is replacing jobs at a faster rate than we can create and fill them. I’ve done a deep dive on this topic over the last 10 years and have found compelling evidence to support that claim. 

I’ve shared research on this topic in one of my favorite articles which I titled Universal Basic Income. I’m not going into detail on it here so feel free to check that out. 

Now, there has always been a divide between the wealthy and the less wealthy… but it’s gotten worse over the last few decades. The Occupy Wall Street movement does have some merit behind it. 

As technology continues to improve at an exponential rate, this divide will get worse without intervention. We’re entering a new economic paradigm and already the government has drastically increased the welfare state. The U.S. has created over 80 means-tested welfare programs. 

But unfortunately, there’s a lot of bureaucracy and inefficiency with those programs. And that’s usually the case when it comes to government. There’s an old joke… what’s the closest thing you can get to everlasting life? … a government program. 

Capitalism vs. Socialism

Overall, capitalism has been one of the most productive systems for pushing humanity forward. Of course, it has flaws but I wouldn’t want to throw the baby out with the bathwater. 

One of the biggest issues going forward is increasing wealth concentration. This leads to unequal opportunity for hundreds of millions of people starting out in the world. Although, to solve this issue I want to be clear that I’m a huge fan of early life opportunities… please don’t confuse equal opportunity with equal outcome. 

One of my favorite sayings that I’ve run into over the last few years is… It’s not that I could and others could not, it’s that I did and others did not. 

I’ve thought a lot about this thought-provoking statement. And if you know its source, please let me know down in the comments below. 

Overall, I think it’s an empowering saying. The one caveat I have to it though is that not everyone starts out with similar educational opportunities. And this compounds throughout life. 

That’s why there needs to be some balance between capitalism and socialism. And with our political theater, the pendulum will keep on swinging back and forth. 

Feel free to drop any comments or questions down below.

Invest mindfully,

Brian Kehm

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