Capitalism the Best - letter to the New Unionist from a reader

A letter from a reader, and a reply
From the New Unionist, November 1995


Capitalism the Best

I read with interest Erik Parcels' October, 1995 article on how highly-paid CEOs hurt society. The contents of the article were to me indicative of a complete misunderstanding of the workings of a capitalist system. Let me explain:

Though he did not explicitly so state, Mr. Parsels is operating under the presumption that our economic system is a zero-sum system. That is, the gains of certain entities (individuals, corporations, whatever) are mirrored by equal losses by other entities. Were this the case, his arguments would have some validity. Gains by Coke would be at Pepsi's expense, etc.

In fact, our capitalistic economic system, at least 90+% of the time, is actually a positive-sum system. That is, the economic "pie" is generally growing. In such a system, there is an increasing amount of wealth to be shared. CEOs, when doing things such as increasing operational efficiency, can actually create wealth! Admittedly, they keep a substantial portion of this wealth, but some of it will get spread amongst many people. Also, keep in mind that should a CEO's compensation be excessive, he risks non-competitiveness for his company in the capitalistic market you so despise.

The computer industry provides a graphic example of what I am trying to explain. Microcomputer company CEOs, most of whom we can assume are highly paid, have overseen the ongoing development and evolution of a computer market wherein even your beloved "workers" can afford to purchase computational power which was not available to anyone at any cost 20 years ago!

I believe if you people understood capitalism better, you might like it. I'll admit it can be somewhat cold-hearted, but it promotes efficiency and economic growth. It is the best economic system of which I am aware.

-- Stephen G. Hauser, Eagan MN




Mr. Hauser claims that I assume capitalism to be a zero-sum system. I make no such presumption. That the total of goods and services in our society is growing is obvious.

However, is that increase in GDP due to the competition among companies or in spite of that competition? And would Mr. Hauser argue that gains by Pepsico and ATT are not made at Coke's and MCI's expense? Just look at their advertising. If they could just expand the market by pulling in new customers who never used long-distance phone service or never drank pop before, they wouldn't need to be trying to run down their competition so badly.

Hauser states that 90+% of the time capitalism is a positive-sum system, and that this growing system creates an increasing amount of wealth to be shared. But let's look at just how this increased wealth is being "shared."

The October, 1995 issue of the Binghamton, NY Labor-Community Reporter reports on a study by the Labor Institute which shows that "the nation's wealth increased by $2.68 trillion between 1983 and 1989. Of the 66 million families in the United States, the richest one-half of 1%, 330,000 families, gobbled up 54% of the $2.68 trillion. The next 9.5% of the wealthiest Americans, 6,270,000 families, took 36% of the increased wealth. The poorest 90%, nearly 60 million families, got only 10%."

Not only is the relative position of the great majority falling as opposed to the tiny ultrarich minority, the absolute real wages of the bottom 80% are falling, resulting in a declining standard of living for the average worker.

Anyone wanting to defend capitalism could have made some sort of case if the economic pie were shrinking. But for poverty and homelessness to be growing at a time when we have more real wealth in goods and services than ever before indicts capitalism as a criminal, or at best, a criminally-inefficient system.

Mr. Hauser claims that CEOs "increase operational efficiency" and thus "actually create wealth." Once again, it is Mr. Hauser who is making assumptions. He is conflating the creation of wealth with the creation of profit. These "increases in operational efficiency" he mentions are generally made by automating, speeding up, or otherwise reducing the amount of labor time spent on each article produced. Then the company can lower its price to take markets from the competition, forcing the competition to lower its costs in the same way or face going out of business.

When the labor component of unit cost is reduced, it means the price can be brought down, which is good for the consumer. But most consumers are also workers. Achieving greater operational efficiency by eliminating jobs and lowering wages means we have less ability to buy, even at the lower prices. So workers are right back behind the eight ball. Who cares if it's a zero-sum system or a positive-sum system if we can't enjoy all this great abundance?

Mr. Hauser brings up the example of the computer industry, which has brought the price of computers down to where even our "beloved workers" can afford them.

Once again, Hauser is confused. The cost of those computers is coming down, true. The price is being driven down by competition, true. But what has made that reduction in price possible? Improved technology. If the breakthroughs that have been made by engineers, technicians and other workers had not been made, the computer would remain beyond reach for everyone, competition or no competition. Those improvements in design could just as well be made by those engineering and technical workers if the CEO didn't exist at all: it is the workers who are actually creating the wealth.

Finally, while Mr. Hauser admits the cold-heartedness of capitalism, he claims the system is nevertheless the best because it is efficient.

The claim of efficiency for capitalism is pure nonsense. Market capitalism has given us traffic jams rather than efficient mass-transit systems; a high percentage of our potential industrial output standing idle; the incredible waste of planned obsolescence and duplicated effort; dependence on oil instead of renewable resources; the destruction of our nation's topsoil and aquifers; depletion of wildlife and fish stocks; the burning of the rainforests; the massive production and use of weapons which destroy wealth rather than create it. The list could be extended almost indefinitely.

If Mr. Hauser believes capitalism is the best we can do, I think he should take another look. If he understood capitalism better, he just might learn to hate it.

-- Erik Parsels