The Fallacies About Capitalism and Why They Matter

So, I’m late again with my post. This weekend I was busy at a kick-off event for the multinational I work for. Thousands of people crammed up inside a theatre listening to tired old speeches about beating the market. I was not impressed. It is sad to acknowledge the deep problems of coherence many organizations seem to suffer from. As I think I’ve told you before, I don’t believe in the Left-Right Political Spectrum in today’s world. I made an XL table a while back listing a few political parties in the Western world and what they believe in (I write about it here). I ended up identifying the most with the American Democratic Party, even though that would make me left-wing in the US and right-wing in most of Europe. But even this identification with a kind of liberalism is vague and somewhat incoherent as well: the great struggles of our day are not between Left and Right anymore. They happen in two different arenas: in the first we see the geopolitical fight of the Liberals, defending the ideals of the American Constitution (the Rule of Law, Freedom of Expression, Freedom of Religion, Democratic Values, etc.), against the National-Traditionalists, defending a return to a more divided, nationalistic, religious-based kind of world. This struggle is the most urgent and scary, as defeat can take us back to the environment that gave us two disastrous World Wars – actually, three, if you count the Napoleonic Wars – and would also leave us helpless against such global threats as Climate Change.

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The other arena is a deeper and less obvious struggle. Along with the rise of Liberalism we saw in the last 200 years the rise of modern Capitalism. True capitalism, no matter what some people may say, has been here for millennia. In the ancient world, some landowners would ‘lend’ their properties and cattle for others to work them, getting back most of the ‘profits’ of that deal. Ancient Roman Empire, as recent studies show (it seems there were more stores found in Pompeii than actual homes), was based on an intricate system of international trade. Ancient Chinese Emperors had to ban interest-taking for the massive impact it was having on the unregulated economy. And some authors suggest that the Magna Carta would have never been possible in England if it was not for the rising merchants emboldened by some liberalization of financing.

GettyImages-748344213-5bca50f646e0fb0026e39d63Still, modern capitalism with its limited liability companies, public shares, banking system and innovative drive is a considerably more sophisticated animal. This animal has accompanied Liberalism through its journey, inspiring an economic rise of Humanity that was unthinkable not long ago. It has also been blamed for much of the misery going on in the world. Left and Right political stands have been judged by the way they viewed Capitalism. For some, the ‘capitalistic spirit’, or work ethic is too opportunistic, materialistic and egotistical. For others, it is called ‘The American Dream’ and is almost synonymous with happiness. In my opinion, both these views are based on actual fallacies, undermining the true value of Capitalism and blinding us to what actually are the illnesses of our society. Let me speak a little bit about these.

  1. The Fallacy of Competition – it is said that Capitalism is based in competition and that this is prejudicial to most people. That is not true: Capitalism survives just as well in economies dominated by monopolies or oligopolies – meaning: with little or no competition. In truth, at the center of Capitalism we have collaboration. Before the 18th century, the chairs we sat on, the pens we wrote with, other tools we used, the shoes we walked with, they were all made by one professional or a small group of artisans with their helpers. After the Industrial Revolution and the advent of Modern Capitalism, a simple pen demands the work of thousands of workers around the world: the ones that designed it, the ones who made the plastic, the ones who worked the factory, the ones that did the advertising, the ones that transported them to the shops, the ones who sold them at the shops, etc. Maybe the main virtue of Capitalism is actually its ability to instill collaboration in the workers of the world. The fallacy of competition, however, suggests that dangerous competition is the cause and/or justification for all kinds of unfair disloyal cruel and inhuman practices. All in favor of profit. But profit as a need is itself a fallacy.nationalism-carving-up-the-earth
  2. The Fallacy of Profit – a very common fallacy is that the function of all companies is to create profit. That is a lie. Management theoreticians have known for decades it is not so. Peter Drucker, father of modern management said it: the function of companies is to satisfy the needs of their customers. Profit is the function of capitalists – it is what they aim for. But workers work for their salaries, customers want their products, suppliers want their pay – the profit of the company doesn’t really interest them much. The economy does not live on profits, no matter what people say. If today all the companies in the world awoke without a cent of profit the economy would still thrive for a long time, or at least solidly survive for a long time, as long as those companies didn’t have a cent of loss either. A ‘break-even’ world would still be a functioning capitalistic society – Buffet’s Berkshire Hathaway, for instance, is famous for never paying dividends, investors only earn with the valuation of their investments. Just as most countries in the world survive with deficits, many companies also survive and keep the economy going even though they do not have profits. And the fabric of our society, small or very small companies, often just pay the owners their salaries, not depending on profit for success. What is important is the health of the company. If the company is healthy, profit is a natural fruit and reward. This leads us to a third fallacy.
  3. The Fallacy of Growth – the owners of companies believe that if these do not grow they will perish. But, as with profit, growth happens when a company is working well, not the other way around. There are studied cases of companies that haven’t grown for centuries and still remain healthy and profitable – they are even legendary in their own markets. But the capitalist buying shares on the stock market wants to profit from the growth of the company after a few months, selling it again, without regard for the health of the company itself, jobs, customer satisfaction, strategic investment, etc. The pure capitalist will remain immune if the company falls apart after he departs – even if no one else will.
  4. And then there’s the Fallacy of Private Sphere against the Public Sphere – as if they are actually different and independent fields, putting in check one another and balancing the corruption of the system. I’ll speak of this last fallacy another time: it is the basis of the Left-Right Fallacy. Looking at successfully integrated societies as the Nordic European countries, we wonder if we haven’t really cracked the macroeconomic enigmas already, overcoming this fallacy.

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Only when we understand that on the left and on the right we have been misunderstanding Capitalism for centuries will we be able to leave behind our blindness and be able to tackle what’s actually wrong with our societies: the debris of aristocratic thinking that plagues most organizations (more about it here). We need sustainable systems, not greedy sociopathic ones. But ‘Small moves, Ellie, small moves.’ See you around the next campfire, fellow warriors.

2 thoughts on “The Fallacies About Capitalism and Why They Matter

  1. Pingback: Coen’s ‘Hudsucker Proxy’ and Capitalistic Aristocracy | Hyperjumping

  2. Pingback: Coen’s ‘Hudsucker Proxy’ in Praise of Capitalism | Hyperjumping

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