Economic Update: What's Wrong With Capitalism?

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The year 2022 produced a daunting, long list of serious problems associated with the economy (inflation, rising interest rates, stock market decline, deterioration of the environment, war, labor uprising, etc.). More than ever, the victims and critics of the problems of 2022 identified them as symptoms of a systemic problem, namely the capitalist system. On the one hand, capitalism is working as it always has, but that is now a problem. At its center capitalism prioritizes profit and profit maximization and we show how they are the core causes of the system's dysfunction now for all but a tiny minority at its top.


Transcript has been edited for clarity

Welcome friends to another edition of Economic Update, a weekly program devoted to the economic dimensions of our lives and those of our children. I'm your host Richard Wolff. Today's program is a little bit different. It's got a title 'What's Wrong With Capitalism and What is the Cure?' And I want to talk about that because of what has happened over this last year just behind us. 2022 saw many economic problems emerge or become much more serious, even as most of our leaders continue to practice the denial of them or the denial of their seriousness or of the fact that the U.S empire is now clearly in decline. I'm going to give you a partial list. Bear with me as I look down occasionally, because there are many items and I don't want to miss them, because I want you to see with me how many there really are.

We went through a year of a rampant inflation: prices rising eight, nine, ten percent depending a little bit on how you count. A terrible blow to a population that had just come through two years of the worst public health crisis in a century plus an economic collapse. As if to make matters worse the last year also saw raising interest rates - a decision by the Federal Reserve system in this country. You know the people hurt most by an inflation are middle-income and low-income people. People with a lot of money pay the higher prices, no big deal. Raising interest rates is the same thing. It hurts most those who have the least amount of money to pay the higher interest rates. So, notice the problem hurts middle and poor income people the most. And the solution found by our government has the same odd quality, especially when you remember the rich among us are a very small minority and the middle and the bottom is the vast majority.

But I'm just beginning. The year was characterized by a war, a terrible, terrible war in the Ukraine. And this war stimulated the decision of the United States and its European partners to hit Russia with sanctions. And the Russians pushed back with counter-sanctions. And when the dust cleared the idea was this economic warfare between the United States and Russia would bring to a quick end the military war when Russia invaded Ukraine. It did no such thing. Turns out that the Russians were able to push back on that economic war. And in fact one of the results of this Ukraine war has been to reorient the Russian economy away from Europe, to whom they used to sell the bulk of their oil and gas and so forth - being part of Europe - and reoriented Russia to be much closer than it was before with China and India, the two largest countries on the face of the Earth. Who are now in a tight alliance with Russia, in a way that will make historians look back and wonder why a country would go to war in this way when it had these consequences. And since the Russians didn't send oil and gas to Europe, who relies on it, the price of oil and gas in Europe became very high, stimulating even worse inflation over there than we had in the United States. Which impacts the middle and lower income people there, producing tensions and conflicts in Europe, that are beginning to spill over into conflicts between Europe and the United States. The United States didn't rely on Russian oil and gas. Europe did. And therefore the impact of a sanctions war that didn't work out is worse for Europe, causing tensions with the United States. These are enormous problems that are beginning to play themselves out in ways that should worry you.

It was a very bad year for the stock market, [it] dropped about 20 percent. That's a very serious problem. Not only did we not make progress on controlling global warming and the climate crisis, it got worse. In Europe they're now burning coal in greater amounts to compensate for the oil and gas they're not getting from Russia. And the coal is polluting the air. The situation is getting worse, not better. And we were in an alarming situation before we even did that.

Then there's a recession promised in 2023, the new year. The overwhelming majority of economists, in the United States and out, predict a recession, with unemployment and all. More trouble coming and we haven't even gotten out of the trouble now. And we have a Congress that has declared that the last president before Mr Biden, namely Mr Trump, is a criminal and is going to be prosecuted, or at least the suggestion has been made, as a criminal who's broken at least four different kinds of laws. The labor movement is in upheaval in the United States, there are more strikes than there have been for years. There are more efforts at building unions and more of them are successful than we've seen in a long time. And I don't mean to frighten people but we are arguably closer to nuclear war than we have been in decades. This has not been a good year, and that's the politest way I can say what this list suggests.

But I want to point to something else. More than ever before in my lifetime, and I was born many years ago in Ohio here in the United States and I've lived and worked here all my life... More than ever in my life I've noticed more and more people looking at one or another of the items on this list and saying the problem isn't this or that (the war in Ukraine, the inflation, the Federal Reserve, the labor movement, whatever.) They're beginning to say these are all parts of a system, there's something wrong with a system that produces this many problems, makes them this much worse, all in a year's time. We have to begin to ask whether these are not, all of them, symptoms of something more basic. It's like a doctor who sees you for a pain over here and an irritation over there but after a certain point, after a certain number of these over a short period of time he begins to say "I'm going to give you some other tests because we've got to make sure there isn't something more basic that we have to address." I'm going to play the role, for a moment, of the doctor. I am not a medical doctor but I'm going to play the role. What I just gave you as a list, which isn't complete, is a sign of symptoms of a system that isn't working for the vast majority of people. And that system has a name. It's called capitalism. And that's why this program is entitled 'What's Wrong With Capitalism and What's the Cure?'

So let me turn to what I've promised you: what's wrong with capitalism?, the first question. Well, on one level, and this may strike you as a bit contradictory, nothing's wrong with it. And what do I mean? I mean that it's working the way it always has. It is pursuing profits. The people who own and operate the businesses of the United States - the factories, the offices, the stores - are looking to make a buck. They're looking to save on their costs, expand their revenues, find new customers, increase the prices so they get more revenues from their customers. They're doing business the way they always have. And the people benefiting the most? Yeah, it's the same ones that always do in capitalism - the people at the top, the people with the big bulk of shares, the share owners, the people those share owners put in the top positions in companies (the CEO, the CIO, the board of directors, the major executives at the top.) They're the ones with the big bucks, taking them home. They're the ones we read about living in those nice parts of town, in those mansions, enjoying those vacations and all the rest. And, you know, when they can make a buck a bit easier they take the steps needed to do that. For example they bring in the machines, the computers, the robots, the artificial intelligence to make more money. If that loses millions of people their job it's not the problem of the business community. It's the problem of the people who've lost the job. They're also the ones who move abroad if they can pay workers less in China, in India, and Brazil or wherever. They're the ones who push to have immigrants come in so they can pay them less than they had to pay native Americans before. Yeah, all of that is business as usual. So when I say "what's wrong with capitalism?" I want you to understand I'm not saying it's wrong in how it works. I'm saying there's something wrong when it works as it's supposed to, when it works in exactly the way it was set up.

Now, of course, occasionally people like me and others have been critical of capitalism, more so this year, as I said, than I have seen in my lifetime. And that has led some of the leaders of our capitalist enterprises to put on a kind of show. I hope I'm not being unfair, but then again who knows? Here's what I mean by putting on a show: they come up with ideas; that they're going to now run their businesses in a new way. And here's the words we get like this: we're going to have soulful corporations, we're going to have conscious capitalism, we're going to develop a new kind of corporation - a 'B corporation' that can be interested and concerned about society as well as making a profit, we're going to have stakeholder capitalism and on and on. They promised this capitalism will be more humane, it won't destroy the environment the way it has, it won't disregard the needs of its workers the way it has, it won't evade it's tax responsibilities the way they keep doing. There are lots of promises, lots of words, lots of brochures, lots of glitzy advertisement. But has anything fundamental changed? Not at all. The same people are in charge, the same people are making all the basic business decisions. And guess what? The problems that I listed at the beginning are the product of what these businesses have been doing with the same old leadership organized in the same old way. Reforming capitalism, making it more sensitive. It's been a good advertising pitch, it has changed nothing. Reformed capitalism is the same old story in a slightly prettified package. The basic story hasn't changed.

And that's what we're going to talk about when I come back in the second half of today's program. We've come to the end of the first part of today's show. Please stay with us, we really will be right back. For those of you who may not know, Economic Update is produced by Democracy at Work. It is an institution that is celebrating 10 years of critical system analysis and visions of a more equitable and democratic world. For example, Cities After is a show about the future of cities, grounded in our daily urban struggles and designed to spark civic imagination into action. The third season of Cities After begins the new year in an all new video format. You can find it on our YouTube channel as well as on our website democracyatwork.info. There you can also learn more about other work we produce, sign up for our mailing list, follow us on social media and discover ways to support the work we do. Please stay with us, we will be right back.

Welcome back friends to the second half of today's Economic Update. So, what is wrong with capitalism? That's what I want to talk to you about in this second half.

I'm going to begin by talking about Adam Smith, arguably the founder of modern economics, writing around the time of the American Revolution that gave us our independence from the British Empire. And I'm going to compare him with a modern economist who often quoted Adam Smith too - the very conservative Milton Friedman. Now there's an interpretation of Adam Smith very widespread, believed by many. I don't happen to agree with it, but that's not the point. It's a very famous remark. And the remark Adam Smith made is that we don't need to organize an economy, we should just let every individual pursue his or her self-interest and if everyone just goes after what's good for number one - me - it'll all work out for the best for everybody. And he used that famous line 'each of us pursuing our own self-interest will be led as if by an invisible hand to the best outcome for everybody.' And of course the invisible hand is a reference to God, that if we all pursue our self-interest we can kind of leave it to God to make sure it all works out for the best. It was really with that idea in mind that Milton Friedman centuries later said the job of every corporation is to make the most money for it's shareholders. That's all, don't worry about the environment, don't worry about the workers, don't worry about the larger society. Go in there, your job is to make money for the company that hired you. Again, the implicit notion it'll all work out for the best.

Well, I'd like to leave you with a simple thought: that that's wrong. It's wrong if you understand Adam Smith that way. And it's wrong if you follow Milton Friedman that way. What these ideas are are pretty thin disguises for a celebration of what used to be called selfishness; I take care of me, I don't have to take care of anyone. And unless you have some guilt - and there are people who do - you might indulge the belief that you don't have to worry about the community, you don't have to worry about your brother or your sister and you certainly don't have to be a keeper for them, a caretaker for [them.] No, no, no, not necessary, you pursue your own self-interest, it'll all work out. Keep that in mind because that's what's wrong with capitalism, as I'll now try to explain.

There are three participants in every capitalist business. There's the capitalists - the people who own and run the business. There's the vast army of workers. And then there's the environment: the community, nature, all the things that make any business work. For a business to work there has to be air and there has to be water. Those are provided by the larger community or by nature itself. And then there's all the work: brains and muscle and sweat and all that to make the things happen. And then there's the directing and the control. Capitalists contribute the functions they perform, workers contribute the functions they perform and the larger community provides a lot of the support that makes it all possible, what we nowadays call infrastructure - you know, the roads and the air and the grass and the water and all
the rest of it.

All right, if these are the three partners in the capitalist economic system - the capitalist, the worker and the surrounding community - then it would make sense that you run the business for the benefit of all of those who contribute. In other words, the job of the business is to reward in a fair way all of the contributors. It's important to provide a reward to the capitalist, we call that profit. It's appropriate to reward the workers, we call those wages and salaries. And it's important to reward the larger community so it continues to provide clean air, clean water, an environment, infrastructure and so on. And therefore the logic of a capitalist system would be that it needs to run its businesses to serve all three of the components who contribute to it. But that's not how capitalism works. Capitalism, and I've taught this subject in many American universities all my life, has a number one priority: profit. Profit is the bottom line. Profit is what we maximize. Profit is what we're in business for. Profit is what the business school teaches young men and women is their job to maximize.

Wait a minute. But that's only part of the story. Why are we not busy maximizing the wages and salaries? Why are we not busy maximizing what we can give back to the community so we can continue to give what it needs to give to get production to be done? Why this prioritizing of profit? Especially when you realize that profit is a part of the revenue from business that goes to the smallest number of people, the folks at the top. In fact, that's why they're at the top. Because they take the lion's share, because of what? Because they made the business prioritize profit, prioritize what they get out of the business. In fact, they feel great if they can raise the profit at the expense of giving workers less of a wage. That's why capitalists fight against every effort of workers to raise their wages. They don't want the enterprise to reward the workers the way they want it to reward them. The priority on profit, which is a foundational commitment of capitalism, is the problem. That's why we have inequality, that's why we can't change it, that's why we can't overcome it. We allow people in the business world - a tiny minority, the employers - to make the decision to maximize profit, to run the business so it gets the most into the hands of - who? - the shareholders, the major executives, the people who gather the profit. The business is never in business to maximize the well-being of the workers, even though they're the majority.

That's because capitalism is organized in a certain way. It's not that the capitalists are greedy. It's that you've set up the business. You've taught everybody in the business. Even working men and women believe, if they've taken courses in economics in high school and in the university, that it's somehow appropriate or necessary or somehow built in that you have to maximize somebody else's income - the profit income receivers rather than your own. You've taught people to subordinate themselves. And they become complicit in a system that isn't working for them. And then they wonder "gee, why isn't it working for me?"

If you want the system to serve the people you've got to put the people in charge. You can't have businesses run by a tiny minority and then be surprised that they give the bulk of the income to themselves as profit, as dividends to shareholders. They've set the business up like that. They've taught it to their children. They proclaim it as if it were some kind of logical necessity like technology. It's none of those things. It's a political decision that was made long ago and then surrounded with pretty sounding phrases like what Adam Smith and Milton Friedman told us.

You know, there are historical similarities here and I want to draw them out for you. Once upon a time we had kings. And you know what the kings said in the systems we call monarchy? The king said "I know what's best and if I make the decision about what happens it's the best for everybody. I'm everybody's king and I make decisions that are best for everybody." Never mind that nobody lived like the king; the king lived in palaces, we visit those palaces today as tourists, marveling at a building with 84 bedrooms in it and a moat around it and all of this wealth and finery. People kind of knew but that was what was said. And that's what everybody repeated: the king knows best. And what's good for the king, what the king decides to do. It's best for us that he lives in a palace and we live in a hut. Wow! If they could convince people of that then why are we surprised that we have convinced people in capitalism that a profit-making business is what we want. We don't, that's not what we want. That's good for a very small part of our population. And it's the reason why so many of us are discovering, as I began this program, the long list of problems that get worse and worse, that are harder and harder to solve.

You know, let me take the example of the inflation. I'm struck as an economist, why are we responding to an inflation, which itself is a bad sign about capitalism, by raising interest rates? The Federal Reserve acts, that President Biden acts, the leading Republicans act as if raising interest rates is the necessary, obvious thing to do. But it isn't. The last time we had an inflation like this - early 1970s - we didn't solve it by raising interest rates. President Nixon on the 15th of August 1971 imposed a wage/price freeze. He went on radio and television and said tomorrow morning any business in America that raises a price, any union that raises a wage we will come, we will arrest you and we'll throw you in jail. It's against the law. Guess what? Inflation stopped on a dime right away. Bingo! No raising of interest rates. And, you know, it hit everybody the same. Workers couldn't raise their wages, businesses couldn't raise their prices, wage/price freeze its called. That was not a discrimination against working people. Raising interest rates is discriminatory against middle and lower income people because a higher interest rate is a much more burdensome economic reality than for rich people. The Federal Reserve is serving rich people by choosing to solve the problem of capitalism called inflation by adding another burden to the average person.

That's a system that works for some of us - the same some of us - and not for the rest of us. And that's why something has to be done. But calling it soulful, saying you're concerned about the other people that are being hurt won't cut it anymore. You really got to do something. And the question is what do you do? And here's the answer, it goes back to what I said before. You put people in charge. You convert businesses from the top-down, hierarchical institutions they are now into democratic worker-run cooperatives. That's right, everybody in the workplace gets together - one person/one vote - and they decide together what's going to happen in the enterprise. They don't prioritize profits, they prioritize all of the people who helped to make a business go, not just those who are in a position of organizing or running or having authority, all the workers, the larger community. They divide up the fruits of the business to respect and to reproduce all those. That's how you overcome inequality. That's how you overcome the immense list of problems that capitalism keeps shoving into our faces. There is a solution. Worker co-ops have figured it out for hundreds of years. Let's not let them sit at the edges the way they have. Let's see them as the future. Because capitalism doesn't cut it anymore. And the more of us realize it the more of us can explain to our fellow workers that's the direction to go so we aren't taken down with a capitalism in decline.

Thank you all for your attention and, as always, I look forward to speaking with you again next week.

Transcript by Brendan Tait

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Showing 2 comments

  • James McGillivray
    commented 2023-01-12 11:52:22 -0500
    I would like to hear a discussion about the origin and control of the MONEY SUPPLY. As I understand it, the Government/Central Banks of various countries generate about 3% of the money Supply and the remaining 97%, is generated by the Comercial Banks in the coarse of their lending of ‘money’, or ‘Bank Credit’, or ChequeBook money’.. That is to say that 97%of the the money supply is produced by private corporations and only if they think that they will get interest [profit] from the deal. They do not deal with the poor except for ‘window decoration’.
    I am most familiar with Canada but Britain has the same system and the USA is not different in any material way.
    The rich are getting richer and the rest of the events will follow the pattern set by the French in 1789 and the Russians in 1917. The time is the only doubtful in the events.
    My definition of Capitalism is "An economic system wherein the Rich generate the Money Supply and thus get most of the Benefits and Control.
    The definition of the Canadian Money Supply is “Cash in the hands of the General Public plus Deposits in the Chartered Banks”. The Chartered Banks can, and do, create Deposits in the process of lending. That means they create the Money Supply. They do that all over the world.
    WHY do the Central Bankers, all over the world, all make the same mistake at the same time? I thought that they were supposed to be the " Best and the Brightest?
    [email protected]
  • Edward Dodson
    commented 2023-01-11 13:07:46 -0500
    I wish Professor Wolff would address the direct correlation between general price increases (i.e., inflation) and the increase in the asking price of land and other natural assets with an inelastic supply. All one need look at is the median price of an existing residential property since the end of the Second World War. Property appraisals during this period would show an increase in the land-to-total value ratio rising year after year after year. In many “high-cost” portions of the nation, this ratio is as high as 50 to 80 percent. The only way builders can overcome land acquisition costs is to build up or gain permission for high density attached housing units. These measures are often opposed by existing property owners.
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