23 Things They Don’t Tell You About Capitalism

23 Things They Don’t Tell You About Capitalism Plot Summary

Introduction

Free-market economics has dominated global policy for the past few decades, reshaping our understanding of how capitalism should function. The prevailing narrative suggests that markets work best when left alone, that government intervention inevitably leads to inefficiency, and that the pursuit of individual self-interest naturally produces the best outcomes for society. This worldview has profoundly influenced everything from financial regulation to welfare policy, from labor markets to international trade. Yet many of these assumptions rest on shaky foundations. Through careful examination of economic evidence, historical patterns, and real-world outcomes, we can see that markets are never truly "free" but always operate within socially constructed boundaries. Understanding these boundaries and how they shape economic outcomes allows us to recognize that many conventional economic "truths" are actually political choices in disguise. By challenging these myths—about government's role in innovation, the actual living standards in market-driven economies, and the nature of financial markets—we gain a more nuanced and accurate picture of how modern capitalism actually functions, and how it might be reformed to better serve human flourishing.

Chapter 1: The Free Market Illusion: How Markets Are Always Regulated

The notion of a completely free market is perhaps the most pervasive myth in modern economics. We're often told that markets function optimally when governments stay out of the way, allowing the invisible hand to guide resources to their most efficient use. According to this view, any regulation or government interference distorts market outcomes and reduces economic efficiency. However, this perspective fundamentally misunderstands the nature of markets. Every market, without exception, operates within boundaries that restrict freedom of choice. These boundaries aren't natural or objective—they're social constructions reflecting political choices and value judgments. Consider labor markets: until the late 19th century, many respectable economists opposed child labor regulations as interfering with the "free market." Today, few would argue that children should work in factories in the name of market freedom. The boundaries of markets are constantly contested and evolve over time. In the 19th century, many things that are now banned from market exchange—human beings (slavery), government jobs, votes—were routinely bought and sold. Conversely, intellectual property rights, now considered essential for market functioning, were once seen by some countries as monopolistic restrictions on free trade. The Netherlands and Switzerland, for instance, refused to adopt patent laws until the early 20th century. When we accept certain market regulations as normal while objecting to others, we're making value judgments, not objective economic assessments. Environmental regulations aren't opposed because they're inefficient, but because they prioritize ecological health over certain economic activities. The current debate about "free trade" versus "fair trade" similarly reflects competing values about what constitutes acceptable working conditions and wages. These examples reveal that markets aren't natural phenomena but social institutions shaped by politics. When someone argues against a new regulation as restricting market freedom, they're expressing a political preference for the existing distribution of rights. They're saying the status quo, however unjust from some perspectives, should remain unchanged. Understanding this helps us see that economics isn't a science like physics but a political exercise where different values and interests compete to define market boundaries. By recognizing that all markets are regulated—just in different ways reflecting different values—we can have more honest conversations about what kind of economy we want. The question isn't whether to regulate markets, but how and in whose interest.

Chapter 2: Corporate Priorities: Challenging Shareholder Primacy

For the past few decades, a powerful idea has dominated corporate governance: companies should be run primarily to maximize shareholder value. This doctrine holds that since shareholders own companies and bear unique risks, their interests should take precedence over all other stakeholders. Corporate leaders who embrace this philosophy often focus intensely on short-term stock prices, quarterly earnings reports, and delivering maximum dividends. However, this shareholder-first approach represents a relatively recent and problematic shift in corporate purpose. Historically, limited liability—the legal innovation that shields investors from losing more than their initial investment—was viewed with suspicion. Adam Smith himself opposed limited liability companies, fearing that managers spending "other people's money" would be careless stewards. Yet this innovation proved crucial for mobilizing capital for large industrial ventures, as even Karl Marx recognized. The corporate landscape transformed dramatically throughout the 20th century. By the 1930s, professional managers had largely replaced entrepreneurial owner-operators in major companies. This separation of ownership from control created tensions about corporate purpose. During the post-WWII period through the 1970s, major corporations balanced multiple stakeholder interests—employees, communities, customers, and shareholders. Then in the 1980s, the shareholder value doctrine took hold, advocated by figures like Jack Welch of General Electric. This shift had profound consequences. Corporate profits as a share of national income, which had trended downward since the 1960s, rose sharply from the mid-1980s onward. Distributed profits—dividends and share buybacks—increased from 35-45% of corporate profits in the mid-20th century to around 60% today. Meanwhile, corporations slashed workforces, suppressed wages, squeezed suppliers, and reduced long-term investments. Share buybacks, once less than 5% of corporate profits, reached a staggering 90% in 2007 and 280% in 2008. The shareholder primacy model has undermined long-term corporate viability. Cutting jobs may boost short-term productivity but eventually damages product quality and erodes company-specific skills. Reducing investment in favor of dividends leaves companies technologically backward over time. Most fundamentally, shareholders, despite being legal owners, are often the stakeholders least committed to a company's long-term success because they can exit most easily by selling their shares. Countries that have maintained alternative corporate governance models—like Germany with worker representation on boards, Japan with cross-shareholding among friendly companies, or Sweden with differential voting rights preserving family ownership—have often produced more sustainable companies. These models recognize that corporations serve multiple purposes beyond enriching shareholders. Jack Welch, once shareholder value's most famous advocate, eventually called it "the dumbest idea in the world." Creating genuinely sustainable prosperity requires corporations to balance the interests of all stakeholders, not just short-term investors.

Chapter 3: Global Inequality: How Immigration Controls Drive Wage Gaps

The conventional economic narrative suggests that income differences across countries primarily reflect productivity differences. Workers in rich countries supposedly earn more because they produce more, thanks to better education, superior skills, and harder work. This explanation frames global inequality as largely reflecting individual merit. This narrative, however, overlooks a crucial factor driving international wage differentials: immigration restrictions. Consider a striking example: a bus driver in Stockholm earns approximately fifty times more than his counterpart in New Delhi. Can we seriously believe the Swedish driver is fifty times more productive? In fact, the Indian driver likely possesses superior skills—navigating crowded streets with bullock carts and rickshaws requires more talent than driving straight down organized European roads. Human capital differences don't explain this wage gap either. The Swedish driver's additional years of education contribute little to his driving ability. The primary explanation for this enormous disparity is immigration control. Without border restrictions, many workers from developing countries could readily replace those in rich nations, often performing jobs equally well or better at a fraction of the cost. Immigration controls effectively function as a form of protectionism that shields workers in wealthy countries from competition. This is rarely acknowledged in discussions about free markets. Free-market economists who denounce minimum wage laws and trade barriers as interferences with market efficiency remain conspicuously silent about immigration restrictions—the most significant labor market regulation of all. This perspective reveals something crucial about global inequality: poor countries aren't poor primarily because of their poor people, who could often successfully compete with workers from rich countries. Rather, they're poor because of limitations in their collective economic organization—their institutions, infrastructure, and technology. Even their talented citizens cannot fully realize their potential within these constraints. Even for those citizens of rich countries who genuinely possess higher productivity than their developing-world counterparts, their productivity stems largely from the socioeconomic systems they operate within, not just individual merit. Warren Buffett acknowledged this when he said, "Society is responsible for a very significant percentage of what I've earned. If you stick me down in the middle of Bangladesh or Peru, you'll find out how much this talent is going to produce in the wrong kind of soil." Understanding these dynamics challenges the simplistic notion that people are paid according to their intrinsic worth in free markets. In reality, wages reflect not just individual productivity but political choices about who can participate in which labor markets. Recognizing this truth is essential for creating more just economic arrangements both within and between nations.

Chapter 4: Government's Role: Planning in Modern Capitalist Economies

Despite widespread belief that centralized economic planning died with the Soviet Union, planning remains deeply embedded in capitalist economies. The collapse of communism demonstrated the failures of total central planning, but this hasn't meant the triumph of completely unplanned markets. Rather, modern capitalism features various levels and types of planning that are crucial to its functioning. Governments in market economies engage in substantial economic planning. Many successful capitalist countries have used indicative planning—setting broad targets for key economic variables and working with the private sector to achieve them. France employed this approach effectively in the 1950s and 60s, transforming its economy and overtaking Britain as Europe's second industrial power. Finland, Norway, Austria, Japan, South Korea, and Taiwan also successfully used indicative planning during their periods of rapid growth. Even without comprehensive planning, governments in capitalist economies plan significant portions of economic activity. They shape key industries through sectoral industrial policy, fund a high proportion (20-50%) of research and development, and plan the activities of state-owned enterprises. Interestingly, the supposedly free-market United States has historically funded a higher percentage of R&D (47-65% between the 1950s and 1980s) than Japan, Korea, and several European countries. This government-funded innovation underlies American leadership in computers, semiconductors, aircraft, pharmaceuticals, and biotechnology. Perhaps most surprisingly, large-scale planning occurs primarily in the private sector. Modern corporations are essentially planned economies unto themselves. If corporate CEOs announced they would abandon strategic planning and let internal markets determine everything, they'd be fired immediately. Instead, corporations carefully plan their activities—often years in advance—allocating resources according to strategic priorities rather than moment-to-moment market signals. As Nobel laureate Herbert Simon observed, if a Martian observed Earth's economy, they wouldn't see a market economy but an "organizational economy" where most economic activities are coordinated within firm boundaries rather than through market transactions. Simon suggested if firms were represented by green areas and markets by red lines, the Martian would see "large green areas interconnected by red lines" rather than "a network of red lines connecting green spots." The extent of planning in modern economies has important implications. First, rich countries are actually more planned than poor countries due to the greater prevalence of large corporations and sophisticated government institutions. Second, the question isn't whether to plan or not, but what the appropriate levels and forms of planning should be for different activities. Markets are essential for coordinating complex economic activities, but they operate alongside, not instead of, various forms of planning. Understanding this reality allows us to move beyond ideological debates about "planning versus markets" toward more practical questions about how different coordination mechanisms can complement each other. The most successful economies don't minimize planning—they integrate different forms of planning with market mechanisms to harness the strengths of each.

Chapter 5: Finance and Growth: Why Financial Markets Need Restraint

The conventional wisdom holds that liberalized, efficient financial markets are essential for economic growth. By rapidly allocating and reallocating resources, modern finance supposedly allows economies to respond quickly to changing opportunities. The recent financial crisis, in this view, represents an unfortunate aberration in an otherwise sound system—a once-in-a-century event that no one could have predicted. However, a more careful examination suggests the opposite problem: financial markets have become too efficient rather than not efficient enough. The dramatic expansion and acceleration of finance over recent decades has prioritized short-term gains over sustainable economic development. The ratio of financial assets to world output rose from 1.2 to 4.4 between 1980 and 2007, creating an increasingly unstable tower of financial claims built upon a relatively smaller base of real economic activity. This expansion manifested most dramatically in the creation of complex derivatives and structured financial products. In the mortgage market, for example, relatively simple home loans were transformed into mortgage-backed securities, then packaged into collateralized debt obligations (CDOs), then into CDOs-squared and CDOs-cubed—creating multiple layers of financial assets derived from the same underlying real assets. This financial engineering increased profit opportunities for financial institutions but made the system increasingly fragile and opaque, as even financial experts struggled to understand these instruments. The fundamental problem lies in the speed gap between finance and the real economy. Financial assets can be moved and rearranged in seconds, while building factories, developing technologies, and building organizations takes months, years, or decades. This mismatch creates tremendous pressure on businesses to deliver short-term results at the expense of long-term investments. The financial sector itself has become increasingly profitable relative to non-financial businesses—with profit rates ranging between 4-12% compared to 2-5% for non-financial firms in the US since the 1980s. This profitability has drawn resources away from productive investment, leading even manufacturing giants like GE, GM, and Ford to transform themselves essentially into financial companies. The consequences have been profound. Despite financial "deepening," economic growth has actually slowed in recent decades. Financial crises have become more frequent and severe. The 2008 global meltdown revealed how excessive financial efficiency can threaten the entire economic system. As Warren Buffett presciently warned years before the crisis, complex financial derivatives had become "weapons of financial mass destruction." This doesn't mean finance is inherently harmful. Financial intermediation plays a crucial role in economic development by making illiquid assets (like factories and machines) more liquid through loans and shares. But finance needs appropriate restraint to fulfill its proper role. As Nobel laureate James Tobin suggested, we need to "throw some sand in the wheels of our excessively efficient international money markets" through measures like financial transaction taxes, restrictions on short-selling, higher margin requirements, or limitations on cross-border capital movements. The challenge isn't to eliminate financial markets but to redesign them to better serve long-term economic development. We need a financial system that encourages patient capital—allowing firms to make the long-term investments in physical capital, human skills, and organizations that ultimately drive sustainable growth.

Chapter 6: Development Myths: How Poor Countries Actually Prosper

A persistent narrative in development economics holds that poor countries should adopt free-market policies to achieve prosperity. According to this view, countries become rich by embracing free trade, minimizing government intervention, welcoming foreign investment without restrictions, and letting their comparative advantages determine their economic activities. When developing countries fail to prosper, this failure is often attributed to structural handicaps—poor geography, excessive natural resources that create dependency, ethnic divisions, or cultural deficiencies. The historical record tells a dramatically different story. Virtually all of today's rich countries actively used government intervention to develop their economies. The United States, often portrayed as the archetype of free-market success, was actually the world's most protectionist country during its period of rapid industrialization from the 1830s through the 1940s. Abraham Lincoln, Alexander Hamilton, and even George Washington were strong advocates of industrial protection. Britain similarly employed extensive protectionism, subsidies, and other interventionist policies during its rise to industrial leadership before adopting free trade only in the 1860s, after establishing industrial dominance. This pattern holds across the developed world. Countries like France, Finland, Norway, Austria, and Singapore used state-owned enterprises to promote key industries. Japan, South Korea, and Taiwan employed strategic trade policies, subsidized credit, and other forms of industrial policy to build competitive manufacturing sectors. Even countries seen as historical free-trade exemplars, like the Netherlands and Switzerland, violated current free-trade orthodoxy by refusing to protect patents until the early 20th century. What explains this disconnect between development history and current policy prescriptions? The most compelling explanation lies in the effectiveness of government intervention at different stages of development. In earlier development stages, markets don't function well due to poor infrastructure, information flows, and institutional frameworks. Government coordination can overcome these limitations by nurturing infant industries, shifting resources toward more productive sectors, and providing public goods that markets undersupply. The most damning evidence against the free-market development model comes from comparing economic performance before and after its widespread adoption. During the 1960s and 70s, when many developing countries pursued state-led industrialization, Sub-Saharan Africa grew at 1.6% per capita annually and Latin America at 3.1%. After implementing free-market reforms in the 1980s under pressure from international financial institutions, growth collapsed. Between 1980 and 2009, Sub-Saharan Africa grew at just 0.2% per capita, while Latin America's growth rate fell to 1.1%. The supposed structural obstacles to development—climate, geography, natural resources, ethnic diversity—also fail to explain development outcomes. Many successful countries overcame similar challenges. Switzerland and Austria thrived despite being landlocked. The US, Canada, and Australia prospered with abundant natural resources. Ethnic diversity hasn't prevented development in many European nations. These factors only appear deterministic when countries lack the institutional capacity, technologies, and organizational skills to overcome them. The real development tragedy isn't that poor countries are destined to remain poor, but that they've been pressured to abandon strategies that worked historically in favor of policies that serve external interests. Economic development requires strategic government intervention tailored to each country's specific circumstances and development stage—not a one-size-fits-all prescription of market liberalization.

Chapter 7: Welfare and Economic Dynamism: The Protection-Innovation Link

Conventional economic wisdom suggests that large welfare states harm economic dynamism. By providing generous benefits and strong worker protections, welfare states supposedly reduce incentives to work, invest, and adapt to changing market conditions. Individuals with safety nets, the argument goes, become complacent and resistant to necessary economic changes. This narrative has been used to justify welfare state retrenchment across many developed economies since the 1980s. However, the evidence reveals a more complex—and often contradictory—relationship between social protection and economic dynamism. Rather than making economies rigid, well-designed welfare states can actually encourage flexibility, risk-taking, and innovation. The key insight is that security often enables rather than inhibits change. Consider how job insecurity affects career choices and economic adaptation. In countries with minimal safety nets like the United States, workers desperately cling to existing jobs because losing them means potential catastrophe—loss of healthcare, housing insecurity, and minimal retraining support. This creates powerful resistance to necessary industrial restructuring. In contrast, workers in countries with strong welfare states like Denmark or Sweden can more readily accept job changes because unemployment doesn't threaten their basic security. They receive substantial unemployment benefits, continued health coverage, housing support, and government-funded retraining programs. This explains why European countries, despite stronger labor protections, often face less resistance to trade liberalization than the United States. American workers fight fiercely against policies that might eliminate their jobs because the personal consequences are so severe, while European workers can more readily transition to new sectors with government support. The welfare state functions for workers much like bankruptcy law does for entrepreneurs. Modern bankruptcy laws, introduced in the mid-19th century, gave entrepreneurs a second chance after business failure. This significantly increased risk-taking and innovation by limiting the downside of entrepreneurial ventures. Similarly, welfare states give workers "second chances" through income support, healthcare, and retraining—encouraging them to accept economic changes rather than resist them. Comparative economic performance contradicts the notion that welfare states inevitably stifle growth. Between 1990 and 2008, the fastest-growing economies in the developed world included Finland (2.6% per capita growth) and Norway (2.5%)—both with large welfare states. Sweden, with literally the world's largest welfare state as a percentage of GDP, grew at 1.8%, matching the US rate despite having welfare spending nearly twice as large. During the 2000s specifically, Sweden (2.4%) and Finland (2.8%) significantly outperformed the US (1.8%). The relationship between government size and economic performance depends crucially on policy design. Universalistic welfare states that focus on providing second chances and enhancing capabilities—rather than just providing passive support—can promote rather than hinder economic dynamism. By reducing the catastrophic personal consequences of job loss or career change, these systems make workers more willing to embrace new technologies, industries, and work arrangements. As with driving a car, economic speed depends on good brakes. People drive faster with reliable brakes because they feel secure taking risks. Similarly, economies can adapt more quickly when individuals know that change won't destroy their lives. The challenge isn't whether to have a welfare state, but how to design one that enhances rather than diminishes economic adaptability.

Summary

At its core, this exploration of capitalism's foundational myths reveals that the dominant economic narratives of our time rest on profoundly mistaken assumptions about how economies actually function. Rather than existing as natural, objective mechanisms that operate best when left alone, markets are always and everywhere political constructions whose boundaries reflect social values and power relationships. The supposed dichotomies between government and market, planning and competition, security and dynamism prove false upon careful examination of economic history and evidence. The implications extend far beyond academic debate. If we continue to structure our economies around flawed understandings of economic forces, we will perpetuate systems that generate inequality, instability, and underperformance. A more accurate understanding recognizes that different varieties of capitalism can exist, with varying roles for government planning, financial regulation, welfare provision, and corporate governance. Countries can make choices about these arrangements based on democratic values rather than submitting to a singular economic orthodoxy justified by pseudoscientific claims. Creating more prosperous, stable and equitable economies requires first liberating ourselves from the intellectual constraints of free-market mythology and recognizing the full range of institutional possibilities that history and comparative analysis reveal.

About Author

Loading...

Ha-Joon Chang

Read more