How the Capitalistic Market is supposed to and actually works?

Discussing capitalism involves various economic concepts, and I tend to agree that "the economy is too important to be left to economists alone, not sociologists." Capitalism is characterized by three principal conditions: 1. Production organized for the market; 2. Private ownership of production means; 3. Employment of workers through a labor market.

The argument for capitalism encompasses both moral and pragmatic aspects. Morally, the fundamental notion is that the capitalistic market can enhance individual freedom, a paramount social value. This freedom is primarily negative freedom, meaning an individual is not coerced into actions. In this system, buyers and sellers engage in voluntary exchanges, and people are permitted to spend money as long as they do not infringe on others' property rights. Therefore, minimally regulated capitalism is seen as the economic organization form that best aligns with moral principles.

Pragmatically, the argument for capitalism includes two points: 1. It is the most effective way to coordinate economic systems; 2. It fosters innovation. Economic activities can be coordinated either through planning and command or decentralized markets. The former, exemplified by corporate hierarchies and the Soviet Union, has proven problematic in large and complex systems, often violating individual freedom values. Therefore, decentralized markets, as illustrated by Adam Smith's "invisible hand" theory, are seen as an alternative. This theory posits that price movements, shaped by supply and demand, lead to allocative efficiency and consumer sovereignty. Under this system, free exchange eventually reaches Pareto Optimality, where no further improvements can be made without disadvantaging someone.

Capitalistic markets are also credited for promoting innovation and creation. This dynamic is driven by three factors: 1. Financial rewards for producing desirable, affordable goods; 2. Opportunities for risk-taking; 3. Intensified competition. In America, the value placed on risk-taking aligns with market operations. However, this contrasts with the Chinese education system, which emphasizes rote learning over creativity.

Critiques of capitalism often focus on state incompetence and malevolence. I wonder why defenders of capitalism, often beneficiaries of the system, criticize the state despite benefiting from state protections like subsidies and regulations. This contradiction raises questions about the true dynamics between the state and powerful market actors.

Capitalism's defenders present convincing arguments, but how valid and persuasive are they in reality?

Regarding the moral argument for capitalism and freedom, Erik points out that capitalist markets only endorse a limited notion of freedom. In firms, power dynamics restrict employee autonomy. Defenders might argue that workers can quit, but without access to production means or basic necessities, they are compelled to forfeit autonomy. Additionally, capitalism inherently generates large disparities in resources and income, limiting freedom for many.

On the pragmatic side, Erik argues that capitalism often reduces efficiency and prosperity. Misinformation, for instance, is a common tactic to maximize interests, leading to exaggerated or hidden information, exemplified by false advertising. In a truly free market, information quality depends on customer preferences and affordability, exacerbating inequality and lowering overall information quality.

Concentrated economic power is another issue. Large corporations, like Microsoft or Walmart, can exert significant influence over markets and politics, often moving operations globally to maximize profits and evade regulations.

Negative externalities, like pollution, are a further problem, where corporations offload costs onto others. Additionally, short-term focus in competitive markets can lead to neglect of long-term considerations like energy conservation.

Public goods provision is also hindered by the free market system. For instance, without subsidies, many children would lack access to education. The free-rider problem, especially prevalent in China, exacerbates this, as individuals avoid contributing to collective goods, leading to societal issues.

Capitalism not only fails to enhance freedom or promote real efficiency and prosperity but also erodes other social values. It fosters greed and individualism, undermining community. The competitive nature of capitalism breeds mistrust and reinforces inequality, making issues like free-riding more challenging to address.

Commercialization further erodes moral aspects of life, turning democratic rights and artistic value into commodities.

Finally, market systems influence our problem-solving strategies, favoring exit (withdrawal) over voice (negotiation). Interestingly, while conservatives criticize state regulations (a form of voicing concerns), they uphold the sanctity of marriage, a contradiction given the market-like nature of spouse selection. Erik finds this irony noteworthy, questioning the consistency of conservative beliefs in the context of market dynamics and social institutions.