Why Free Market Capitalism Fails

In this essay, I expose the flaws in the two mechanisms that are supposed to power the free market: Adam Smith's invisible hand and trickle down economics.  The notion of the invisible hand holds that in a free marketplace, the buyer's self-interest will tend to drive the price down, while the seller's self-interest will tend to drive the price up, so that both parties' self-interest will naturally cause the price to settle on an amount that both find reasonable.  Trickle-down economics maintains that the rich are the ones who start and expand businesses and hire employees, so the laws should favor them increasing their wealth as much as possible so they can hire more people, thus growing the economy.

These concepts look good on paper, but the best way to evaluate any idea is to see how it works in practice.  Let's start by analyzing national trends.

Graphs:

Minimum wage
Tax rates for the top tax bracket (factoring in the percentage of taxable income)
Income levels (by quintile)
Income levels (bottom 90% vs. top 1% vs. top 0.1%)
Unemployment

Notice the real buying power of minimum wage has been declining since the late 1960s (from an adjusted $10.04/hr), the tax rates for the top tax bracket have been falling dramatically, and the income of the wealthy have been skyrocketing, yet unemployment hasn't declined accordingly; in fact it has only risen.  This video, which graphically analyzes the growing disparity between the top and bottom income levels and its connection to economic downturn, is even more telling.

The conservative philosophy that allowing the wealth to accumulate at the top unchecked benefits society as a whole is already incredibly hard to justify.  Once you understand why the unemployment trend is the exact opposite of what a conservative would expect based on the other trends, you'll see how untenable their position really is.

Trickle Down Economics

According to trickle down economics, if the rich have more money, they'll invest more in their businesses and employ more people.  The core problem with that idea is that they'll only invest if they're confident that they'll be able to sell enough to make money on the investment.  This is unlikely if the common people are too poor to afford to patronize these businesses, in which case the rich would doubt the potential for profit in additional businesses, and instead opt to hoard their wealth where it has little chance to circulate.  This results in a stagnant economy with excessively uneven wealth distribution.  (This video explains the concept in more detail, starting at 20:32.)

Henry Ford was one of the few businessmen wise enough to understand this.  He paid his assembly line workers $5 per day (2.5 times their market value at the time) and helped to create a middle class that could afford his product.  Note that contrary to what proponents of trickle down would have you believe, Ford didn't have to raise product prices or lay off employees to accommodate high wages; the profit margins were plenty wide enough to allow generous salaries without such sacrifices.

Still, we have politicians speaking out against this established wisdom, such as Milton Friedman in this speech.  He insists that McDonald's would be able to hire more workers if the minimum wage were reduced or eliminated.

However, having worked in a McDonald's, I can tell you from experience that they already hire as many people as they need, so there would be no reason for them to hire more workers regardless of the change in the price of labor.  I've also done the math (described in detail in a footnote in this essay), and they could easily afford to pay TWICE the current wage without raising product prices or making any other sacrifices, and still reap stratospheric profits.  If they were allowed to pay less than the minimum wage, one could only expect them to laugh all the way to the bank and do nothing with their windfall to benefit society.

Despite the philosophy they profess, you can bet that Friedman and his ilk already know better; they just really hope you don't.

The Invisible Hand

The invisible hand doesn't work either, because it fails to take into account the fact that one side almost has leverage over the other.  This is where we get the terms "buyer's market" and "seller's market".  I'll start with a hypothetical example.

Let's say I have a ring that cost me $100 retail, but there's someone who'll pay a lot more because it has sentimental value.  If I were to take advantage of the situation and sell it to that person for $1000, that would be unethical, wouldn't it?  It's no different when a corporation sells a product for staggering profits just because people will pay an artificially high price.

Perhaps the most familiar and obvious example of such coercion is the gasoline market.  You know, for an absolute fact, that you're paying at least twice what you should at the pump.  You know that the oil companies could still make huge profits if the gas prices were cut back down to the pre-hyperinflation prices, and that the additional profits won't affect the lifestyles of those in the oil industry.  (The owners and executives are already rich enough to afford anything they could conceivably want, and they won't use their additional windfall to pay their employees any more.)

The most important example is the price of labor.  If you think it would be hard for you to go without petrol to fight for a lower price, imagine what it would be like for a worker to try to survive without an income to hold out for a reasonable wage.  Their labor is essentially a forced sale; even if they know they're being grossly underpaid, there isn't much they can do about it.  This is how wage slavery and corporate exploitation come to be.

The invisible hand simply doesn't work.  It's so unreliable at setting reasonable prices, it really only works in special cases in which the transaction is nonessential to both parties.  This truth is widely recognized, which is why we have laws setting a minimum wage and preventing price gouging and other dodgy practices.

Antisocialist Behavior

To get a sampling of what economic structures can work in practice, let's look at the countries with the highest quality of life to see if there's a common thread among them.  It turns out that America's quality of life only comes it at #9 in terms of the human development index.  The eight countries ahead of America are:

1. Norway
2. Australia
3. Sweden
4. The Netherlands
5. Germany
6. Switzerland
7. Ireland
8. Canada (Yes, even Canada has it better than we do.)

The links all lead to relevant articles, and I especially recommend the New York Times article about The Netherlands, in which the American writer describes his experiences with their socioeconomic system.  In total, their taxes aren't much higher than ours, but there are many government programs to ensure that every citizen's needs are met.  This is a "welfare state", but contrary to what many politicians would have you picture, it doesn't mean that a disproportionate percentage of the population is idly collecting welfare; instead, it ensures that everyone who works and contributes to the society gets what they need to live comfortably and advance their education and career.  It's a noble and effective system.

Notice that 7 out of these 8 countries operate on strictly controlled capitalism with strong socialist influences, and the only one without an influential socialist party (Sweden) still has well-developed labor unions and social programs to protect the working class.  NONE of them rely on the allegedly self-correcting mechanisms described in my opening paragraph, and they all have a moderate degree of wealth redistribution.  This is unsurprising given the many links that have been established between wealth inequity and problems related to social status.  Whenever the rich cry, "THAT'S SOCIALISM!!!" in response to any government act that works in your favor, this what they hope you won't notice.

Now let's look at the other end of the spectrum.  I could easily write about the notorious sweatshop countries like Malaysia, Thailand, Vietnam, and Mexico, linking to articles like this one and this one and this one.  I go on to talk about the many American corporations which outsource to those countries to circumvent US wage and labor laws and exploit the indigenous labor force.  Then, I could point out that the workers' labor conditions and compensation are so poor BECAUSE those countries have the unregulated capitalism that the right wing politicians want so badly.  However, I think it'd hit closer to home to discuss America during the time of the industrial revolution, when corporations were new and regulations hadn't yet been established.

Unsurprisingly, life was harsh for factory workers.  They were paid slave wages comparable to those of third world sweatshop workers today.  They commonly worked 16 hour days in factories with no safety standards, and child labor was the norm.  In addition to the dangerous working conditions, asking for any kind of health care would have been tantamount to requesting a private helicopter ride to and from work.

The system was terribly broken, which is why the government stepped in in the first place.  They had to twist the business tycoons' arms behind their backs and force them to treat their employees like human beings rather than faceless, voiceless cogs in their machinery.  It stands to reason that if the government never got involved, and instead relied on Adam Smith's invisible hand to sort it out, things wouldn't have changed.  And based on the examples set by the eight countries listed earlier, things would most likely be even better if the government regulated businesses even more strictly.

So it turns out that a system based on every-man-for-himself anarchy doesn't work out so well for society in general.  Imagine that.  Still, despite a literal world full of contrary evidence, conservatives insist that feeding the rich will benefit society as whole.  This isn't just a little misguided or dishonest; it requires the brazen willful ignorance of a young Earth creationist or a Holocaust denier.  While I feel I've soundly debunked the ideas I set out to refute, there is one more concept I want to address…

The Best Motivation (Money Can't Buy)

A seemingly reasonable contention in favor of large wealth discrepancies is the notion that large monetary rewards are necessary to motivate one to succeed.  However, contrary to conventional business wisdom, the carrot-and-stick approach has been empirically proven ineffective.  The experiments are explained in this video lecture by Daniel Pink.

For tasks that require an even rudimentary level of conscious problem solving, study participants who were promised a reward for completing the task quickly performed more poorly than those who were not incentivized.  The larger the reward, the more performance was hindered.  It turns out that the incentive kept participants myopically focused on what they wanted to win rather than the problem at hand, which inhibited their problem-solving skills.  (Apparently, "keep your eyes on the prize" isn't such good advice after all.)

Conversely, for manual tasks that require very little thought, the incentive actually did improve performance.  That's all the more reason to focus on increasing laborer class wages.

I realize that some people will never be convinced.  Some will always value the ability for a privileged few to amass such unnecessary amounts of wealth that it's essentially racking up a high score, more than building a good country in which to live and work.  It's because of a romantic ideal that rugged individualists have sold the American public: the dream that with a bright idea and a nominal risk, you can amass more money than a small country with virtually zero effort.  You may be working in a factory for next to nothing today, but tomorrow somebody else can be working in your factory for next to nothing.  So when you think about taxing the rich, you imagine your future mogul self losing money from your imaginary empire – and that's exactly what they want you to be thinking about when you go to the polls.

Conclusion

By studying the economies other countries and America's own history, we can safely conclude that the best way to optimize the quality of life for the working people is by more aggressive wealth redistribution, whether it's by stricter regulations on business (especially regarding wages), a steeper progressive tax curve, a more exhaustive set of social programs, or some combination thereof.  (Even 68% of the rich agree, including Warren Buffet and Bill Gates.)  Just as importantly, we can safely discard the conservative notions of trickle down economics and Adam Smith's invisible hand.

I encourage you to listen to the GOP politicians, Fox News pundits, and even YouTube conservatives like Lee Doren, Steven Crowder, Jacob Spinney, and Liberty Pen as they defend their economic philosophies.  Pay close attention to the sorts of reasons they offer.  Notice how they tend to cling to abstract arguments like the ones I outlined in my opening paragraph and avoid real-world data.  They often parrot buzzwords like "create jobs", "job creator", "less government", "welfare state", "socialism", etc. like they have political Tourette's.  (That's no accident; it's actually a propaganda technique pioneered by the Nazis, as explained by this video starting at 44:07.)

Rich conservatives also guard their own wallets by stigmatizing socialism and government in general.  They want you to associate less government with more freedom – but rather than your individual freedom, it's their freedom to buy politicians, dodge taxes, grossly underpay/overcharge you, and generally rig the system at your expense.  They want you to assume that any social program or market regulation will cripple capitalism, and is therefore un-American, so you'll vote against your own economic interest.  But they're the ones who care more about their own greed than what's best for the American people – and that seems pretty damn un-American to me.