Chapter 7: Capitalism

Capitalism is the best means for organizing human activity that we have found - so far. Since capitalism’s  emergence in the 18th century along with the industrial revolution, it has recorded many remarkable feats. The growth in human population and wealth shown in the earlier charts corresponds with the emergence of capitalism. It is estimated that billions have been lifted out of poverty via the work of markets, individual property rights, and capital accumulation and investment.

Why is capitalism a superior model? Because it is the application of the scientific method for the creation and distribution of goods and services. As a result, it is the best economic system for creating knowledge of which products and services raise standards of living, generate happiness, and contribute to even more knowledge creation. 

Consider the creation of a new product. This is a hypothesis by the entrepreneur or the company that a certain group of humanity needs this product to make their lives better. The product is researched, created, and then released. The consumer can then make a choice about whether to accept or reject the product and confirm or deny the hypothesis. While science is the discovery and creation of new ideas, capitalism is the process of making those ideas into reality and then allowing the end users (the market) to ultimately decide on the usefulness of the ideas and the product. Knowledge is created as all parts of this chain gain information - the product developer learns that there is a real need and can continue to develop the product and the consumer realizes that there is a new product that fits that need. Products that are rejected go away as no one purchases them and they fail the market test. These tests are happening across millions of different products and services every day and the system has a capacity to grow almost infinitely.

Now, contrast that to how a communist or socialist economy works. Scientific ideas and theories are tightly controlled. A bunch of bureaucrats, rather than those with real knowledge of the development, decide which ones are good enough to proceed to the next step and inform products. Another group of bureaucrats determine what types of products will be made. They are produced according to the whims of the bureaucrats. They are released to the citizenry and produced according to the plans of these government officials. How people will respond to the product and how they do respond to the product are secondary considerations. There is no knowledge creation because this was never a real test. The government knows best and can pick what products and services “they know” are right for the people.The wisdom of the market is replaced by the “wisdom” of a few select people who take it upon themselves to plan and administer the way the flow of goods and services should work. The number of products that can be reviewed is limited by the number of bureaucrats and cannot grow and scale. Think of Soviet Russia with its limited number and supply of products. Or Communist China, before market reforms were instituted, where people could choose a bicycle, as long as it was the one type of bicycle sanctioned by the state.

The test has been conducted and non-capitalist systems have failed. And yet, despite these results, it has continued to be en vogue by some over the last fifty years to try to discredit capitalism and promote socialism and communism as better economic systems. Critics claim that capitalism is exploiting the planet’s finite resources, degrading the environment, leaving many mired in structural poverty, and aiming for continued growth that will choke the planet and humanity. This is wrong on so many levels. Let’s take these arguments apart one by one.

First, what is capitalism? It is the belief that everyone should be able to own their property, save and invest their own money, buy whatever they want, make whatever they want, and profit from the fruits of their labor, eventually saving up enough money to reinvest and generate additional income. It is the third major stool of knowledge creation, which is comprised of capitalism, the Constitution, and the scientific method. The scientific method proposes a way of generating and testing theories that allow humanity to quickly gain knowledge which can be used to improve any facet of life.The Constitution enshrines people’s rights to live freely and provides a framework for harnessing the scientific method to create a stable but dynamic government. And capitalism allows people to actualize and make real the knowledge and insights developed through the scientific method. 

Like knowledge accumulation, capitalism never stops. Its goal is to efficiently convert knowledge  into goods and services which can be sold to mankind in order to generate wealth.  Would it make sense to say that humanity should stop acquiring wealth? No. In the same way, it makes no sense to say that humanity should stop producing better and better products and services to make mankind’s existence better and more comfortable and more productive and to help increase knowledge production. 

Does capitalism really generate wealth and lift humanity out of poverty? We have a very recent and stark example of this. China. Forty years ago China was an impoverished nation with hundreds of millions of citizens living a destitute life, struggling with food insecurity and abject poverty. China had just emerged from the radical communism of Mao Zedong, who initiated a Great Leap Forward. The program was designed to restore pure communism and root out any liberal or capitalist ideas from China. The result: about two hundred million people in the countryside suffered from chronic malnutrition because the economy had been crippled, up to twenty million people were uprooted and sent to the countryside, and up to one and a half million were  executed or driven to suicide. Between 1958 and 1962, 45 million people starved to death in China.

Take an already poor country, make it communist and do you get paradise? No. You get two hundred million people suffering from chronic malnutrition and tens of millions of deaths. Misery on an almost unimaginable scale. 

Now, contrast that to what happened to China after the Cultural Revolution. Immediately following Chairman Mao’s death, China began to open up its economy to the world and institute market reforms, otherwise known as the injection of capitalism into its economy. These reforms continued through the 1970s, 1980s, and 1990s, so that by the end of the 1990s, China was considered to have a market driven economy. This reached its apex in 2001 with its membership in the World Trade Organization, the premier capitalist trading organization in the world.

And what has been the impact of China becoming a market driven economy over the past 40 years? Has China become poorer? Have its citizens become more miserable?

According to the World Bank, the percent of people living in poverty in China went from 88.3% in 1981 to 0.7% in 2015. The number of poor people in China fell from 878 million to less than 10 million. There has never been a starker improvement in the material security and comfort of so many people as what happened in China after it injected the free market into its economy. As material comfort improved, knowledge creation exploded. Literacy increased from 57% in 1959 to almost 100% today. Patents created by Chinese inventors and scientists grew from 25,000 in 2000 to 416,000 in 2011. By any objective measure, China’s knowledge creation blasted off. 

China now sits at a crossroads as it decides if it wants to continue down the path of liberalization and knowledge creation or revert back to a more closed authoritarian model that will blunt its potential.

So, all experiments conducted over the last fifty years have shown that capitalism and free markets do indeed increase wealth and deliver large segments of the population from poverty. Other economic systems like communism have shown the exact opposite.

Capitalism and income inequality

By nature, capitalism does create wealth inequality. Some members of society are better at foregoing benefits today to save and generate greater benefits in the future. Others are simply better equipped to generate capital while some have more access to capital. Others are just lucky. The creation of knowledge is increasing this inequality because not everyone has the desire or means to reorient themselves for a changing economy. A unit of muscle power is worth less today than it was one hundred years ago, while a unit of brainpower is worth more. That is a trend that is going to accelerate. 

There will always be those who have more capital. More capital usually translates into more wealth. But when too much capital is concentrated in the hands of those at the top, it chokes off the economy and reduces spending. For example, there is only so much one billionaire can buy. The vast majority of his or her funds are not spent on goods but are instead left in the bank or invested. This might keep the financial system liquid but it doesn’t help the many industries and workers that rely on the purchase of their goods and services to thrive. If one thousand middle-income people had an extra ten thousand dollars, it would be spent on clothes, cars, college. The money would circulate in the economy instead of being locked away. 

This is not to demonize billionaires or those who have achieved success and accumulated wealth. Most of them have done so through hard work or the hard work of prior generations. But it is in the best interest of society to ensure that wealth doesn’t get too concentrated. So, what’s the best way to do this?

The best way to do this is by uplifting everyone. First, we must be honest with our population that jobs that once employed large swaths of the population at good wages are disappearing. There is no stopping that. Agriculture and manufacturing today require far less muscle power per unit of output than they did in the past. False promises to return to the past will not work and delay the proper remedy. The wealthy also need to invest some of their gains into the system to create the conditions where all who want to can succeed and become knowledge generators. What is required to do this? If we go back to Maslow’s hierarchy, we see that there are some basic needs that must be met before someone can become a learner and knowledge generator. At a bare minimum, an individual must have a roof over their head, food on the table, and access to medical care. For those who cannot provide for themselves, the roof doesn’t need to be luxurious, the food opulent, or the medical care boutique. These basic needs have to be adequate enough so that an individual can focus their time and attention on learning. Some families and individuals can raise themselves out of poverty on their own. These success stories have become mythologized in the United States and people who have done it are worthy of praise. They should be examples, but the reality is that not everyone has the strength, tenacity, or luck to take the same path. Government can and should invest in the bare minimum resources to create a learning environment.

But there must also be a deal. People can receive this assistance if they show they are working on bettering themselves - if they are attending school, getting training, or employed in jobs that have future momentum. For young people and families, this minimally viable lifestyle should be a starting point.

Education is the other function that the government is obligated to provide. It is probably the single most important factor for someone becoming a knowledge generator and a capital accumulator. Education leads to better paying jobs and opportunities. Will they be the next Bill Gates or Elon Musk? Most likely not. But almost everyone has the potential to earn a satisfying living and be a knowledge creator, contributing to humanity’s expanding destiny.

The wealthy have an obligation to invest funds to make  this happen. Some of this can be done via taxation, so the government can provide a minimally viable standard of living. If taxes are presented in this way, I believe most of the wealthy would be more likely to help foot the bill. After all, many have pledged to give the bulk of their fortunes to charity when they pass away. They understand that they have an obligation to help future generations improve their knowledge creation. But many do not think that the government has the competence or capability to implement the necessary changes. That’s why government should remain focused on some narrow objectives - ensuring everyone has food, shelter, medical care, and education. 

What most politicians don’t talk about with wealth inequality is that the market is continuously eroding the value of large family fortunes. It may seem like the wealthy are a static class always above everyone else, but data shows that is not the case. In fact, 70% of family fortunes disappear in the second generation, and 90% disappear by the third generation. It is extraordinarily difficult to maintain a large fortune over time. Why? Taxes are one reason. Another reason is that future generations don’t have the same entrepreneurial spirit or luck that generated the fortune in the first place. Families fight and squabble. Fortunes are dissipated across multiple descendants. So, for those of you who look in envy at the large fortunes others have accumulated, realize it is also a burden and that wealthy people are always fighting against the entropy of the universe to take back the money that has been accumulated. While there will always be those people at the top of the pile, the list is constantly changing and with education, savvy, and knowledge, you and your descendents have just as much a chance as the currently wealthy. In fact, you may have an even better chance.

Capitalism and the earth’s resources

Many will concede that capitalism does indeed result in short term gain, but at the expense of destroying the planet. In their words, capitalism is a “rapacious” system that prioritizes economic growth over equity and the health of the planet. But this theory has already been tested. Communist Russia and China were and still are some of the most polluted nations in the world. As a socialist site, The Socalist Alliance states:

“On this basis, let me agree with Adam that the damage done to the environment by the Soviet regime and its successor doesn’t remotely bear comparison with that in the West. It was, and remains, catastrophically worse. Particular countries elsewhere, especially in the developing world, have suffered one or another ecological disaster, sometimes of mind-bending dimensions. The USSR managed something in just about every sector of heavy industry to match the worst of them. “

The reason for this is also explained in the article:

“There’s no point in trying to dress up the Soviet bureaucracy as anything except what it was: a grossly irresponsible clique that pursued its corporate advantage with little regard for damage to nature or to the health of the population. Capitalists, to be sure, do the same when they can get away with it, but most of the time they can’t; the human rights and elements of democracy that working people have often forced capitalism to impose certain constraints.”

Just like the massacre of sparrows in China.

The bureaucracy in autocratic, top-down run governments don’t answer or care about the people. There is no mechanism for citizens to respond to these transgressions via a free press or elections or anything other than a revolution and regime change.

Democratic, capitalist systems do have these mechanisms. It’s why by many objective measures, the environment in the Western world has improved significantly over the past 100 years even while the material wealth of the people in these countries has improved beyond belief. 

According to the United States EPA: “From 1970 to 2017, aggregate national emissions of the six common pollutants alone dropped an average of 73 percent while gross domestic product grew by 324 percent. This progress reflects efforts by state, local and tribal governments; EPA; private sector companies; environmental groups and others.”

Also: The emissions reductions have led to dramatic improvements in the quality of the air that we breathe. Between 1990 and 2017, national concentrations of air pollutants improved 80 percent for lead, 77 percent for carbon monoxide, 88 percent for sulfur dioxide (1-hour), 56 percent for nitrogen dioxide (annual), and 22 percent for ozone. Fine particle concentrations (24-hour) improved 40 percent and coarse particle concentrations (24-hour) improved 34 percent between 2000, when trends data begins for fine particles, and 2015. (For more trends information, see EPA's Air Trends site.)

Climate change is one of the key problems of this age and anti-capitalists point to it as another example of how capitalism has failed. And yet, the Western World has taken steps to address this very real problem.

As the chart shows, emissions from the United States and Europe have been declining for the last twenty years. Emissions from rapidly developing countries are responsible for the bulk of the growth. But new knowledge in the form of electric vehicles, fuel cells, nuclear power, and fusion represent the long-term solution. As countries emerge from poverty and their people gain wealth and knowledge, there is a stage they go through that is very taxing on the earth’s resources. But it is necessary to bring Ascendance to billions of people. We have seen time and time again that knowledge is the path to remediating the planet and making humans healthier, happier, and closer to their goal of saving the planet. 

In the movie Avatar, a technologically advanced society is seen as the bogeyman versus an indigigous people that are close to the land and work to protect and be the steward of it. Technology is not to blame. The primitive state the aliens live in, while nice on film, is not a viable long-term solution for mankind. Many environmentalists would like us to return the earth to its native, unspoiled state. But they fail to consider what that means. As we have discussed, the earth in its native state was not a hospitable place for humankind. 

Before the industrial revolution there were no greenhouse gases and the planet was far more pristine than it is now. Is this the path humanity should take? An unspoiled earth where humans must struggle to survive? Just so it can all be blown up by an asteroid or the sun when it expands?

Ascendance believes that the earth’s resources must be wisely used. Capitalism, so far, has shown itself to be the best system to promote growth and responsibly steward the planet’s biosphere and resources.

A better capitalism

Across the world, countries are experimenting with their own brand of capitalism to find the strain that best fits their populations and results in the highest level of knowledge creation and human well-being. Every growing or wealthy country in the world has some type of free market or capitalist economy. What differs is the percent of the economy that is used to support the less fortunate in society and how these funds are distributed. For example, the vast majority of capitalist countries in Europe and North America have some form of government sponsored healthcare. This ranges from the pseudo-government controlled/private sector controlled system in the United States to the single payer system used in Canada to the Beveridge model used in Scandinavia and the UK (in the Beveridge model, healthcare is run by the local government as opposed to the federal government). Over the past 30 years, the debate in the United States is which model is right for the country.

Ascendance would say that the healthcare model that provides the greatest opportunity for innovation and knowledge accumulation is the preferred option. It’s hard to see how a government controlled system could fit that model. Markets work best when there is transparency on prices, outcomes, and options. Thus, the debate between a government sponsored program versus an employee centered plan misses the point. Neither of these options matches the criteria of being a knowledge producing system. 

Do you know how much your last x-ray cost? Or how about how much it costs to deliver a baby? Or to have your blood drawn and tested? How can we possibly operate a system efficiently when we don’t know even these simple, basic facts? 

We need a system where individuals can compare costs, understand their options, and choose the doctors and other healthcare providers who offer the best service at the best price. Where individuals are incentivized to take care of their own health so that they don’t need to visit the doctor or need medical services as often. When structured correctly and with transparency, markets can work magic in transforming inefficient systems into ones that provide better service at a cheaper price. 

This change to our healthcare system will not be easy. And it will still require safety nets for catastrophic problems. But as we’ve found over the past three hundred years, the market can be a powerful force for wringing out cost and inefficiency. And it is critical. Going back to Maslow’’s hierarchy, knowledge cannot be created in the midst of sickness and misery. We need a population that is healthy and energized to tackle the big problems of the day. 

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Society has made observations, created hypotheses, and conducted experiments. Only capitalism has proven to materially improve the living standards of the human race over time. Communism and other non-capitalist models have failed. There is no need to spend any more time on those failures. That does not mean, though, that capitalism is the end state and that it can’t be improved. As more experiments are performed, and more knowledge is gathered, society needs to use that information to continue to improve and evolve the capitalist system to further increase the pace of knowledge creation - and the health and wealth of every citizen.