“Billionaires wouldn’t be this rich if you didn’t want to buy stuff and use their services.”
Let me stop you right there.
Capitalism is the reason why I can order 50lbs of sand with Amazon Prime and in 2 days I can have it on my front porch to fill my punching bag. It’s fantastic. But capitalism is also a driving factor behind 10% of the world living on less than $1.90/day, or extreme poverty. The global COVID-19 crisis has exposed the growing disparity between the rich and the poor. How can millions of people be out of jobs trying to make ends meet every day while the stock market is at a record high (50% increase from March)?
So how did this happen? And why does modern capitalism seem to suck?
Let’s start at the beginning.
Capitalism: The Concept
In the simplest terms, capitalism is the economic and political system where trade is controlled by private owners for profit rather than the state.
The key here is profit. Trade has been a staple in human history. In most cases, when a trade occurs, both parties have agreed on its value. For example, trading one cow for ten chickens. But that equal exchange concept of trade would soon change during the 18th century. The main drivers behind this were the Scottish economist Adam Smith, aka “The Father of Capitalism,” and the Dutch.
Adam Smith famously wrote The Wealth of Nations, in which he declared that through self-interest, free markets and competition, the “invisible hand” of capitalism will guide us through a positive output. Which in theory makes very good sense. Competition and market conditions drive people and organizations to innovate, creating better or cheaper products/services. Unfortunately, Smith grossly underestimated the reckoning of self-interest.
The Dutch are credited with having the first stock market in the world. You might recognize the first publicly traded company, The Dutch East India Company. It was essentially a monopoly backed by the government and investors with stock ownership, resultantly amassing immense political power. This drove many surrounding European countries to financially back their own public companies to dominate trade with the Indies. Have we said hello to colonialism yet?
While today’s companies are less (forthrightly) monopolistic, they still command immense power and influence in their nations. The main motivation is still profit, but the main driver is the stock market. Idealistically, capitalism and competition create the positive output Adam Smith theorized and lead to societal advancements we all benefit from. But that’s not always the case. Much of the self-interest he has so discussed is really just greed. Capitalism’s hunger for more, to have excess is what gave way to the first publicly traded companies, the concept of the stock market and now, much of modern society’s problems.
Excess is not a bad thing. Surplus is not a bad thing. Even profit is not a bad thing. Surpluses from the early days of agriculture gave new life, roles and meaning to different people in a civilization. It paved the way for people to study nature, advance scientific discovery and create art because not everyone was required to farm or hunt to survive. They could explore and live. But with the flaws of the modern capitalistic system, more people are surviving and not living. The Greeks had it figured out with the quote “Meden Agan (μηδὲν ἄγαν)” translating to “Nothing in excess.” Moderation is a good principle of life.
But modern capitalism is far from moderate.
Modern Capitalism’s Culprits: Stocks & Buybacks
Remember the concept of trade earlier? I’ll trade you one cow for ten chickens because that’s what we agreed the value to be. Currency made it easier for us to arbitrarily assign value without having to carry around chickens to trade. This exchange is made on the main market. The stock market on the other hand is what’s considered a secondary market.
In the simplest sense, this secondary market is comprised of people not directly involved with the trade, but who want to capitalize on the fluctuations of the market’s value. For example, you put $10 ($1/chicken) into the chicken/cow trade market today and believe the value of chickens will rise by $1 next month. You get a stock certificate from the accredited chicken/cow stock exchange. If the value of chickens does indeed go up by $1, congrats, you’re one chicken richer. You can then either hold on to that certificate if you believe it’s going to go up in value or sell it to someone else and make $1 profit. Those are the basics — and the foundation of the problem.
The main market trades on the real value of the product/service, while the secondary market trades on the expected value. That’s why you’ve probably seen such a disconnect between the economy and the stock market. How can the US economy drop over 30%, but the stock market climb over 40% since the initial impact of COVID? Growth, valuation and future expectancy are important to a business, an economy and its people. Today’s investment can power much of the growth and innovation for tomorrow.
On paper this is great; we’re sacrificing money today for a better tomorrow. The organization comes out with better products/services, which makes them more money so they can pay employees better (surprise, they don’t) and investors get some return on their investments. Everyone wins. Except, we forgot to mention executive compensation. It’s the reason why Jeff Bezos can accumulate $200B even during a pandemic, but his front line workers are struggling to make ends meet with $15/hour.
Since 1978, executive compensation has grown over 940% while typical workers’ compensation has grown only 12%. Almost every company ties executive compensation to stock performance. Now, instead of the company actually doing well (selling good products/providing good services), the execs have to make people believe they’re doing well too. If people believe the company will do better tomorrow rather than today, they’ll invest, increasing the stock price and executives’ bonuses. The problem is that it’s too easy to cheat that system. It’s called buybacks.
Let’s take the chicken example again. I’m disappointed my chicken stocks didn’t go up to $2 like I wanted. So instead, I give $2 to the chicken stock exchange to buy back that stock. This does two things. I decrease supply of chicken stocks, so basic economic theory implies that demand and price will go up. I also artificially set the price of chicken stock on the market to $2. Now, people that don’t want to miss out on this “limited” and “growing” opportunity will rush to throw their money straight to the executives’ compensation package and contribute to the modern capitalist problem.
Buybacks are a huge problem because they can instantaneously transfer wealth to the wealthy and decimate economies. From 2009 to 2018, $4.3 trillion from the top 500 companies’ treasuries was spent on buybacks. Increasing stock price is one of the quickest ways to “grow” a company’s valuation, but it’s dangerous for people at the bottom. This cash injection doesn’t always go to the companies to help them improve, it goes to the executives and investors. That means there’s no actual cash going into the business that can be used to increase workers’ compensation/conditions or improving products/services for its customers.
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This practice is what led to the collapse of the dot-com bubble in 2000, housing marketing in 2008 and Bitcoin in 2018. At some point, the people who held stocks on these internet companies, bonds to mortgages and wallets to cryptocurrencies realized their expected value is much less than their actual value. But they don’t want to be the suckers that lose their money. So they inflate the price to get other investors to cash them out, selling them a story of even higher growth in the future. Only to find out the story has long ended and they’re the ones to suffer the wrath of modern capitalism.
Economies and the health of their people do not benefit from the design of modern capitalism. Its short-term nature benefits those at the very top but teters the livelihoods of those at the bottom. Once people realize that the companies aren’t even close to their inflated valuations and lack more real potential to grow, investors pull out. Overnight these companies can collapse and remove tens of thousands of people from the workforce. This can then impact suppliers and other key relations, removing more workers from the workforce, reducing spending in the economy, removing even more workers — causing a chain reaction. Eventually this endangers the economy and can spiral it into a depression. All of this happens because modern capitalism was designed to suck and we couldn’t be content trading one cow for ten chickens.
What YOU Can Do To Make It Not Suck
This article is grim and probably makes you feel hopeless about the reality of the situation. However, the really good news is you can actually adjust some of your behaviors to make an impact.
- Support local: the best way to actually support the economy is to support your local economy through small businesses. Small businesses make up 50% of the GDP and are responsible for 77 million jobs — 65% of all new jobs in the past 17 years. Money spent in the local economy tends to stay in the economy, allowing communities to thrive and flourish for years to come, even without the stock market.
- Vote: since it’s close to the election, I’m obliged to tell you how important it is to vote. Exercise this right and vote on policies that support small businesses, reduce tax incentives/protection for corporations and increase rights for workers to have liveable standards.
- Change: If you’re in a position of power to make changes to the modern capitalist system, do what you can. Small, subtle adjustments you make today can really impact millions of people tomorrow and make modern capitalism suck a lot less.
Is Capitalism still the way forward?
Hell yeah I just bought 3 Bitcoin ready to cash out at $100k 🤑
Full socialism only comrade