In one of my college classes
that focused on the interaction between business, society and government, we
discussed a set of principles that was referred to as “the 5 assumptions of
capitalism”. Here's a link to the powerpoint document from the class just to
prove I'm not making this up (it's the 16th slide).
www.suu.edu/faculty/johnsonr/4200/CLASS2.PPT
Capitalism is touted as the
most efficient economic system.
Theoretically, when one or more of these 5 elements are missing or are
interfered with, the economic system reaches a lower level of efficiency, and
becomes something less than pure, unadulterated capitalism. I'll be addressing
only four of the assumptions – I've been out of school for several years, and I
don't recall much about the fifth assumption, which was referred to as “Institutions
Functioning as Designed”.
On face value, these are
common sense assumptions, but when you consider them carefully, I think they
raise some interesting questions as to whether common practices, policies, and
ways of thinking that we tend to accept as part of a free market concept are in
fact taking us further away from capitalism.
Also, the explanations of
these four assumptions are my own words according to my own understanding, so
please take the following with a grain of salt, and feel free to tell me where
I've erred.
Assumption #1- The
rational consumer. The inherent assumption here is that consumers will
act in their own best interest, will not pay more than they need to for a
product or service, will prioritize necessities above frivolous or unnecessary
purchases, etc.
Assumption #2 - Full
and accurate information. Buyers and sellers will both have access to
basic, important information relevant to the transaction at hand. This is
closely related to the first assumption, because how can a consumer make
rational decisions if they are unaware of important information pertaining to
the product or service they are considering?
Assumption #3 - Costs
and benefits are fully contained within the transaction. Whenever the
costs of a transaction are borne by someone other than the buyer and the
seller, and whenever the benefits of a transaction are enjoyed by those who are
not party to the transaction or the intended recipients of the benefits of the
transaction, then the transaction results in a less efficient allocation of resources.
In its most simplistic form, this assumption states that theft will decrease
the efficiency of capitalism.
Assumption #4 – Income
is distributed fairly. The income any person receives is a direct
result of the value of they have created. Thus the wealth any one of us
accumulates (or fails to accumulate) should be basically a reflection of our
own choices, the career path we choose to pursue, the level of effort we put
forth, the risks we are willing to take, etc.
Now that I've briefly
explained these four assumptions of capitalism, I'll cite a few examples of how
our society fails to meet these basic requirements, resulting in a less than
optimum economic system than would be attainable under true capitalism.
Marketing/Advertising/Sales
In theory, advertising fulfills an important function – making full and
accurate information available to potential buyers. In practice, advertising tends
to focus heavily on the positive aspects of a product or service, while
downplaying or even failing to address the negative aspects.
A prime example would be the
pharmaceutical commercials that spend the first 30 seconds telling you how the
new drug will cure your depression or restore your balding hair, and showing
you images of happy, beautiful people. And then they cram ten different
disclaimers in the last ten seconds about how possible side effects include
sudden onset of schizophrenia, nasal spasms, and PTRF (Premature Termination of
Respiratory Functions).
This is actually a good
example of how government intervention can play an essential role in
maintaining capitalist ideals. Without government regulation, would
advertisements even include any of those disclaimers? Would there be any chance that consumers of
such prescription drugs would be making rational decisions based on accurate
information?
Looking at other examples,
it's apparent that the purpose of advertising is often not to present the all
the facts, but to only present some of the facts from a skewed perspective.
A commercial can tout a
small car as having the government's highest crash test rating, but omit the
fact that there are five comparable small cars built by other companies, all
five of which also have the highest crash test rating, are less expensive, get better
mileage and have better warranties.
Celebrity endorsements,
humor and special effects are used to make commercials more appealing.
Companies spend hundreds of millions of dollars each year on these strategies,
but these strategies don’t add any value to the products and services being
touted, nor do they lead to better informed consumers. And these strategies
work. Sometimes they are alarmingly effective, leading to very irrational purchasing
behavior, like people living in abject poverty who buy $120 shoes endorsed by
the all-star basketball players.
Inheritance Taxes
If I were asked to define
“royalty” in the most simple, basic terms, I'd say it is “people who come into
a position of extreme wealth and power by virtue of the fact that they were
born to extremely wealthy and powerful parents.”
Is there anything less
American than the notion of a monarchy? If we allocate wealth to people based
on lineage, rather than what they themselves have done to earn it, is that
compatible with capitalism? Yet, that is what we allow to happen on a regular
basis.
I'll refer to a study that
was conducted in 1997 that analyzed how the 400 wealthiest individuals and 50
wealthiest families on the Forbes 400 list made their fortunes. The study
concluded:
·
42% were “born on home plate”, meaning their
inheritances alone would have put them on the Forbes 400 list.
·
6% were “born on third base”, meaning they
inherited substantial wealth in excess of $50 million or a large and prosperous
company, and grew their initial fortune into membership in the Forbes 400.
·
7% were “born on second base”, meaning they
inherited a medium-sized business or wealth of more than $1million, or received
substantial start-up capital for a business from a family member.
·
14% were “born on first base”, meaning they came
from an upper class background, and received substantial inheritance or
start-up capital from family worth less than $1 million. (Due to the
conservative nature of the rankings, it is probable that some of the people in
this category should have actually been assigned to 2nd or 3rd
base).
·
31% were “born in the batter's box”, meaning
their parents did not have great wealth or own a business with more than a few
employees.
The conclusion of the study
is, “The data, then, do not support the assumption that the United States is
a true meritocracy where the most able rise to their rightful positions. Nor do
they defend the contention that the United States is structured so that
authentic equality of opportunity prevails. Inheritances undermine the
achievement-reward equation.”
I'll leave it at that for
now, but I'd like to know what you guys think. Do you agree or disagree with
the “four assumptions of capitalism” as I've presented them here? Are any of my
conclusions somehow flawed? If you agree with assumption #3, then wouldn't you
at least agree that “cap-and-trade” proposals are based upon solid capitalist
principles? Do those four principles bring to mind any other flaws in the way
we do things?
