by: Michael Hsiung

Something to consider when hiring a consultant is that a good consultant deploys the right tools for the right problem.

Capitalism is Just a Tool We Can Use

If a consultant can only use a hammer, every problem will seem like a nail. In a similar way, I feel like capitalism as a tool is quite a good hammer, but it can’t solve all of the world’s problems.

Many ask, “Is capitalism sustainable in a modern society?” I think a more appropriate question would be: “What can capitalism do, and what is it bad at doing?” Like all tools, capitalism is designed to do one thing well, and the philosophy is unsuitable for other tasks. The only way to truly build a sustainable and impactful economy is to look at capitalism and all the other tools available.

Capitalism is really good at a couple things. It gets products and services to those most willing to pay for it. It incentivizes people to invest in education, create new technology, and create new knowledge. In a society that values innovation and growth, capitalism usually encourages investment and rewards good solutions. Through inequality in performance, those who perform better receive the greater reward.

Capitalism is a Tool with Bugs

However, capitalism’s main feature is also prone to many bugs. First of all, an individual’s current success determines future successes. While variation in performance and reward should be expected and encouraged, variation on things that individuals have little power to change or affect creates great inequality.

Race, family circumstances, geographic mobility, and many more factors create competitive “disadvantages” for many regardless of their efforts. In addition, those with advantages can both accumulate and pass down these advantages to those within their social circles. As a result, this creates a society in which those with advantage acquire more advantage over time, multiplying over generations.

The second weakness in capitalism is that it does not account for externalities. When one individual performs an economic activity, it is likely to harm or benefit people, whether or not they have an incentive to care. In a laissez-faire capitalist society, factories will continue to poison the water, never enough people are willing to take a vaccine, and people will drive too much.

While capitalism is not adept at addressing inequality and externality, it still has its merits. We just need to be more open to using multiple tools and modularity while addressing specific issues. Neither 100% laissez-faire capitalism nor 100% government-owned businesses in their purity solve all the problems and create a just and happy society.

In my opinion, we need to treat capitalism as the tool that it is. It shouldn’t be a religion or a philosophy to live by. The better way is to use capitalism to do what it’s good at and support the weaknesses with other tools and modalities to encourage equal opportunity and accountability in a just society.

I hope to answer this question in future articles about stakeholder capitalism.