Where Capitalism gets things wrong

Whether you love it or hate it, Capitalism is the main socio-political system around the world, with the exception of China, North Korea Cuba and Vietnam. It has become the system of choice after the communist and socialist systems that followed the feudal systems that came before it had failed, and/or were overthrown in favor of capitalism. There are some countries, such as the Nordic ones that sit left of the defacto capitalist system by offering improved social services, and less inequality. 

By incentivizing mass production and consumption, capitalism encourages innovation, which is a major positive, but at the same time it also increases stress in society, especially at the lower tiers, as well as causing major pollution for the Earth's ecosystems. It increases the over quality of life for the people that live within it, but by in large mainly benefits those that sit at the top of the totem-pole, the corporate executives.

Capitalism's main mantra is growth, and that growth is through innovation, or it can be through mergers and acquisitions, but a company that stays static without continuously updating it's products, or making its processes more efficient, will quickly see itself taken over by another company that follows those principles.

In the recent past Capitalism has suffered multiple crises, the Great Depression at the end of the First World War, the  Global Financial Crisis of 2008 and is currently smack dab in the middle of a Housing Crisis. 

Before we get into where Capitalism goes wrong, let's make sure we touch on what it gets right. It provides a system that gives incentive to inventors, visionaries and those with enterprising, organisational skills to bring them together to produce a successful product. These products in turn improve healthcare, all manners of industries, efficiency and collectively make life better for the population. 

That is if all products and companies focused on quality over quantity, employee welfare over investor profits, reusability/repairability over disposability, and the environment over convenience. While this hints at where capitalism takes a wrong turn, there's a key underlying factor why these wrongdoings are not only possible, but rampant in the current system.

People on the left and right of the political spectrum tend to be polarized over the advantages and disadvantages of Capitalism. Those on the right treat it almost as gospel, insisting that laissez-faire is utterly preferably over government intervention in the market, that capitalism offers with it freedom, and that almost anyone can rise to the meteoric levels of wealth that billionaires have attained with the right attitude and determination. 

Those on the left, seeing the enormous gaps between rich and poor, say that some government intervention is indeed necessary so that nobody on the lower tiers goes without food or housing. Or that safeguards need to be put in place, so the constant growth and consumption model, doesn't overwhelm the Earth.

So we've found a happy operationally somewhat-stable compromise that goes along quite happily, but still continues to favor the rich in its operation. So much so that we're now that the top 26 richest people own as much as the poorest ~4 billion people(https://www.businessinsider.com/worlds-richest-billionaires-net-worth-2017-6?r=AU&IR=T), which almost takes us back to feudal times, where a few select kings/czars owned almost everything, leaving the rest in poverty. 

So what does capitalism get wrong? It's simple:  A product's price is determined by demand, rather than it's true worth. So you can have a product that costs very little to copy/reproduce, but that is heavily advertised, or has a big brand name so can be sold over and over, especially in today's industrial/tech world. That product can be of low quality which means it wears out quickly and creates the need for the consumer to buy it more often, than the equivalent quality item. Capitalism has also taken advantage of people's tendency to hero-worship, so a product endorsed by a popular celebrity is valued at a much higher value than it is actually worth.

What are some examples? Well how about airline tickets?  A ticket in the same class(eg economy) can cost twice as much from one day to the next. Both airlines and hotels tend to increase their prices during school holidays, without any cost increases to themselves, or without offering better service, thereby putting families with children at a major disadvantage. Some ski areas have started doing this in the US at least. Imagine if all businesses started doing this, and the train or bus at peak times would cost double, or gas during holiday periods could double! It would quickly result in only the rich being able to afford any type of recreation.

But how do we determine "true worth" if not by demand? Well all products and services have a cost associated with them. This includes things like the cost of acquiring the raw material, the cost of turning that raw material into something desirable, the cost of tools used , and the cost of packaging and bringing it to market, and of course taxes levied on labour and materials.

It may also include more obscure things such as the cost of R&D, which can be huge for a newly developed product, the cost of licensing and permits, the cost of patents, and of course often the largest,  the cost of employees and executives. So then, how should the end product be priced, keeping in mind that the owner of a particular business has the right to make a profit on his investment, and without which these same enterprising sorts will often move countries if they're not able to make the profit margins they'd like? What about for essential services, like healthcare and food providers?

I'd say a person brave enough to put the initial amount of cash and work into an idea they believe in, then they have every right to not only recover the costs they've put in, but to make a decent profit. The idea of a decent profit should be quantified however, and capped at something reasonable. The value may be arbitrary, but it needs to strike a balance between keeping the original inventor/visionary/entrepreneur happy, but not ripping people off. Why? Because otherwise you get into a situation, where essential service prices keep going higher and higher,  and wages stagnate, until those at the lower end of the scale simply cannot afford them, leading them into poverty. 

So what should that magic value be? I'd say a 15% profit margin on any given item is not only decent, but sustainable as well. Costs can raise because of shortages and that's fair, but profits should not remain boundless. Otherwise you're selling partially hot air, that's been created by clever advertising,  and that hot air will eventually reveal itself in the form of a financial crisis. This is especially evident for houses, that are currently rising worldwide without an end in sight. The houses have not improved, and the land hasn't either, but because of high demand, the prices are going so high, that even those earning a median wage will struggle in the next generation to buy one.

The hardliners on the right, who support Adam Smith's laissez faire economic theory will argue that if you limit profits, you'll limit growth of a business, and therefore it's ability to get products to their customers. That may well be true, that it will slow things down, but at the same time it will avoid it from falling over. Those same people may argue about the value of 15% I've picked, and say why not 10% or 25%. I don't have an answer for that, except to say that with most complex items, we start by identifying and quantifying aspects of it. And some of those initial quantifications may be arbitrary(eg: why is a meter exactly the length that it is?!), but it helps to produce a working stable system.

And stability of a system ensure it's sustainability over time, and profit stability is a key component of a successful business that's respected by its customers. Similarly on the macro scale, it provides stability to society, without taking away the incentive for people to innovate.