23 Things They Don't Tell You about Capitalism

1. Free markets are a myth: All markets have rules and boundaries

"The free market doesn't exist. Every market has some rules and boundaries that restrict freedom of choice."

Markets are inherently political. What we perceive as a "free market" is actually a complex system of rules and regulations that define the boundaries of economic activity. These rules are not natural or inevitable, but rather the result of political decisions and power dynamics. For example:

• Labor markets are heavily regulated through immigration controls, minimum wage laws, and workplace safety standards
• Financial markets have rules about insider trading, disclosure requirements, and capital reserves
• Consumer markets have product safety regulations, truth in advertising laws, and intellectual property protections

The notion of a completely "free" market is a rhetorical device used to advocate for particular policy positions, rather than an accurate description of how markets actually function. Recognizing this allows us to have more productive debates about what kinds of market rules and boundaries best serve society's needs.

2. The washing machine has changed the world more than the internet

"The washing machine has changed the world more than the internet has."

Household technologies enabled women's liberation. While the internet has had a massive impact on how we communicate and access information, earlier technologies like the washing machine, vacuum cleaner, and microwave oven have had an even more profound effect on society by dramatically reducing the time required for household labor. This technological revolution:

• Freed up enormous amounts of time, especially for women
• Enabled much greater female participation in the paid workforce
• Contributed to changing gender roles and family dynamics
• Had ripple effects throughout the economy and society

We often overestimate the impact of recent technologies while underestimating the transformative power of older innovations. A more balanced historical perspective can lead to better decision-making about technological priorities and economic development strategies.

3. Education alone doesn't make countries rich: Economic organization matters more

"What really matters in the determination of national prosperity is not the educational levels of individuals but the nation's ability to organize individuals into enterprises with high productivity."

Collective capabilities trump individual skills. While education is important, the economic success of nations depends more on their ability to organize production effectively. This involves:

• Developing institutions that support long-term investment and innovation
• Creating and managing complex supply chains
• Fostering cooperation between firms, workers, and the government
• Building infrastructure and support systems for key industries

Countries like Switzerland have achieved high productivity and living standards with relatively low rates of university education. Conversely, some nations with high educational attainment struggle economically due to weak economic organization. This suggests that developing countries should focus as much on building effective economic institutions and organizations as on expanding education.

4. US managers are overpriced compared to their global counterparts

"US managers are over-priced in more than one sense."

Executive compensation in the US is excessive. American CEOs are paid far more than their counterparts in other developed countries, often hundreds of times what average workers earn. This is problematic for several reasons:

• It's not justified by superior performance: US companies don't consistently outperform their international rivals
• It contributes to rising inequality and social tensions
• It can lead to short-term thinking and excessive risk-taking
• It diverts resources from investment, R&D, and worker wages

The high pay of US executives is more a result of structural factors and power dynamics within corporations than a reflection of their unique talents or contributions. Reforming corporate governance and executive compensation practices could lead to more equitable and sustainable economic outcomes.

5. Financial markets need to become less, not more, efficient

"The problem with financial markets today is that they are too efficient."

Slowing down finance can benefit the real economy. While financial efficiency is often touted as a virtue, the rapid pace of modern financial markets can be destabilizing and harmful to long-term economic growth. Problems include:

• Short-term thinking that discourages patient capital and long-term investments
• Complex financial instruments that increase systemic risk
• Rapid capital flows that can destabilize economies
• A growing disconnect between finance and the real economy

Potential solutions to slow down financial markets:

• Transaction taxes to discourage high-frequency trading
• Stronger capital requirements for financial institutions
• Limits on certain types of financial derivatives
• Encouraging longer-term shareholding through tax incentives

The goal should be to create a financial system that supports stable, long-term economic growth rather than short-term profits and excessive speculation.

6. Big government can make people more open to change

"We can drive our cars fast only because we have brakes."

Social safety nets encourage economic dynamism. Contrary to the belief that big government stifles innovation and risk-taking, a robust welfare state can actually make people more willing to embrace economic change. This is because:

• Workers are more willing to switch jobs or industries if they have a safety net
• Entrepreneurs are more likely to take risks if failure doesn't mean destitution
• Companies can more easily restructure if workers have support during transitions
• Society as a whole becomes more adaptable to technological and economic shifts

Examples of how this works in practice:

• Nordic countries combine high levels of social protection with economic flexibility
• Retraining programs and unemployment insurance facilitate labor market mobility
• Universal healthcare reduces the risk of starting a business or changing jobs

By providing security, big government can paradoxically increase economic dynamism and adaptability.

7. Equality of opportunity is not enough: Some equality of outcome is necessary

"Unless we create an environment where everyone is guaranteed some minimum capabilities through some guarantee of minimum income, education and healthcare, we cannot say that we have fair competition."

True meritocracy requires a foundation of equity. While equality of opportunity is a widely accepted ideal, it's insufficient without some degree of equality in outcomes. This is because:

• Initial advantages and disadvantages compound over time
• Poverty and deprivation can limit one's ability to take advantage of opportunities
• Extreme inequality can lead to social instability and reduced economic mobility

To create genuinely fair competition and maximize human potential, society needs to ensure:

• Access to quality education for all
• Universal healthcare
• A social safety net that prevents extreme poverty
• Progressive taxation to limit the intergenerational transfer of extreme wealth

By providing a more level playing field, some equality of outcome actually enhances true meritocracy and social mobility.

8. Good economic policy doesn't require economists: Different perspectives can lead to success

"Economists were in fact conspicuous by their absence in the governments of the East Asian miracle economies."

Diverse expertise can improve economic policymaking. Many of the most successful economic development stories, particularly in East Asia, were led by policymakers with backgrounds in law, engineering, and other fields rather than economics. This suggests that:

• Practical problem-solving skills can be more valuable than theoretical economic knowledge
• Diverse perspectives can lead to more innovative and effective policies
• An overly narrow focus on mainstream economics can limit policy options

Examples of non-economist policymakers:

• Japan's economic bureaucrats were mostly lawyers
• South Korea's industrialization was led by engineers
• China's economic planners often have backgrounds in science and engineering

While economic expertise is valuable, it should be balanced with other forms of knowledge and real-world experience to create effective policies. This calls for a more interdisciplinary approach to economic policymaking and development strategies.

Last updated: August 9, 2024