Inequalities of Capitalism

Capitalism, as an economic system, has emerged as the dominant model across the globe, characterised by lack of government intervention, free markets, and the pursuit of profit from the firms. According to Friedrich August von Hayek, an Austrian-British economist and philosopher, the emblem of every capitalist society is the existence of markets able to set prices freely. He also underlines how social progress originates in markets, and not in government actions, by taking the example of European societies in the twelfth century, whose economy was based on the feudal system, and Islamic societies which had capitalist- based economy. In fact European merchants, in order to trade with Islamic ones, had to change their society, they needed to have a strong currency, create banks and be regulated by policies. They ended up creating all of the required infrastructures in less than one hundred years. We would call this a process of civilisation and we would think that Europeans did it well following the example of Islamics, but in Marx's opinion it was another step to the destruction of the system as he writes in The Communist Manifesto: ‘It compels all nations, on pain of extinction, to adopt the bourgeois mode of production; it compels them to introduce what it calls civilisation into their midst, i.e., to become bourgeois themselves. In one word, it creates a world after his own image.’ (Karl Marx 1848)

In our world, as well as in our history we can identify many forms of capitalism based on Accumulation Governance Structures and Property Rights Regimes. The basic form, from the which the more complex ones generate, is described by the Classical Capitalism model. Its pillar is the existence of a goods markets governance structure combined with a concentrated private property regime. In this system, employees works for an employer in return for a wage. Thus, since employees are working for the employer, but do not receive any quote of the business makes wealth being out of their reach and concentrates it in the hands of a class that invests the profits to be wealthier. In this way efficient entrepreneurs expand their markets and are rewarded with more and more profits because the laws of competition encourage capital accumulation in efficient companies whilst proletarians are not able to increase their savings. Consequently, Karl Marx developed a theory in which he condemn employers and define them as exploiters of workers. Fifty years later, neoclassical economists will respond to Marx's with an answer as simple as abstract. In 1899, the economist John Bates Clark wrote that the attitude of the labouring classes toward other classes does not depend on the question and the amount they get should be related to what they produce. In this way, Clark started theorising his own wage theory under three premises. The first one is that the employees will be guided by the marginal productivity of a factor in order to establish the relationship between the factor's return and its employment; secondly Clark imagines a system with perfect competition; and thirdly all free markets tend toward equilibrium in the long run. Given these three premises, with a fixed supply of labour in the market, the wages will have to be determined by the marginal product of labour (i.e. a company's increase in total production when one additional employee is added and all other factors remain fixed). The biggest fallacy in his theory is the assumption of perfect competition. Under perfect competition prices always reflect supply and demand, market share have no influence on price, firms are price takers and earn the absolute essentials to stay in business (if they earned more, other companies would enter the market to adjust the profits). In perfect competition there are a large number of producers and consumers competing and everybody has full and perfect information. Furthermore, banks are not taken into account, in fact also transaction costs are not considered. Other problems come up when we think about underdeveloped countries without strong economies and where centralised finance is not working properly. In these countries there may also be high interest rates and the value of the local currency may be exceedingly variable, therefore small firms will never be able to enter the international market and compete with giant companies. Thus, Decentralised finance might help not only small firms but also independent workers and employees to enter the market and create a more democratic system.

In conclusion, since we live in a market ruled by imperfect competition, neoclassical economic theory cannot be taken as true. Inequalities will always be present in a capitalist system, because our market is not perfectly homogenous and informations are not available to everybody. Moreover, our capitalist system is making rich people also richer (Figure 1 and Table 1). The graphic shows the average Gini coefficient which measures the personal income distribution in OECD (Organisation for Economic Cooperation and Development) countries and it is evident how many disparities there are between rich and poor. Another problem of laissez-faire market is that the less the government can interfere in the economy, the less green policies will be respected, and since firms always want to earn more, they will do the possible to increase their profits despite of caring the environment. However the problem will not be solved just by being anti-capitalistic, real solutions will come from a democratic governance of free markets, technological innovation, and from making the most from powers of capitalism.

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