In ideal market capitalism, the equilibrium outputs are efficient. Efficiency
is important, but there are some criticisms even of ideal capitalism.
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Most fundamentally, the prices in the marketplace reflect consumer preferences. Thus, in ideal market capitalism, production is directed by consumer preferences. It is not clear that production should be directed by consumer preference, though. To say that production ought to be directed by consumer preferences (called "consumer sovereignty") is a value judgement, not a law of nature, and some people may disagree with it. Consumer preferences may be determined by addiction and persuasive advertising. Some may feel that esthetic and cultural values, or national traditions, should have a bigger role than the market gives them. These ideas are not by any means limited to those on the left. Traditionalist conservatives might want to stress traditional values rather than the tawdry vanities of the marketplace. Middle-of-the-roaders might want to put more weight on things that consumers evidently don't prefer, objective benefits such as reducing fat and calories and heart attacks, and increasing vaccinations to reduce infection.
- Even in ideal capitalism, the distribution of property and income could be very unequal. Ultimately, the benefits and costs reflect the subjective preferences of consumers who have money to spend. One might want to put more weight on the preferences of people who cannot spend, that is, on the welfare of the poor.
So even an ideal capitalism might have some shortcomings, depending on one's value judgements. But any real capitalism will fall short of the ideal, and real capitalisms have fallen short in several predictable ways:
- Monopoly and restricted competition may cause prices and output to deviate from the efficient ones, and they are likely also to increase inequality, especially if competition for labor is limited.
- Markets may not respond efficiently to cases where costs and benefits are "external," and public goods may not be produced in efficient quantities.
- Real-world markets may not move toward an equilibrium of supply and demand. Perhaps for some of the reasons discussed by Keynesian economics, or for other reasons, markets may settle into stable conditions quite unlike the equilibrium of supply and demand, and quite inefficient and non-optimal.
One response to these criticisms is that government can step in and correct the failure of the market to provide the desired and (in some cases) efficient outcome. Governments can subsidize the poor and can subsidize or provide the goods and services that ought to be, but are not demanded by consumers, and the government can finance this out of taxes, including taxes on those goods that consumers demand although they ought not. Monopoly can be regulated and to some extent prevented through antitrust legislation. Regulation, taxes, and subsidies can be used to promote efficient outcomes in cases of public goods and external costs and benefits. Deliberate government spending, tax reductions, and interest rate manipulation may move the market system toward market equilibrium if it falls short for the reasons Keynesian economics envisions.
But this is rather a long list of jobs for government, and if government does any large fraction of them, we no longer have market capitalism but government-managed capitalism. Free-market conservatives will point this out, and will point out that, however imperfect markets may be, government too is imperfect. Just as markets will sometimes fail to deliver the outcomes we want, government too often fails to do the jobs we set for it. What it means in this context is that some of these failings of real-world capitalism cannot be remedied without risking a greater evil in government failure, and some cannot be remedied at all. Real systems are not ideal but imperfect systems, and real capitalist systems will fall short of our hopes on at least several scores. And that has been no secret for two hundred years.
Challenges to Capitalism Copyright