Save capitalism from the capitalists

The femme fatale of the political economy

Jacobs says that capitalism is the so-called femme fatale of the political economy. Every modern economy has fallen for it. All western countries, including the Netherlands, have organised their economies around the concept of private property and free markets. All former communist countries have become hardcore capitalist after the fall of the wall. Even China, which can only be called communist by name. The beauty of capitalism is that everyone can pursue their own interests while unintentionally serving the interests of society, which is explained by Adam Smith’s invisible hand.

Jacobs uses the example of the production of a pencil to illustrate how thousands of people work independently, without a central planner, to produce this pencil and make sure the pencil ends up in the shop. Friedrich von Hayek (1899-1992), a Nobel Prize winner in economics in 1974 and the main figure from the Austrian school, therefore argued that the market mechanism is an amazing communication system. Prices communicate crucial information between consumers and producers, employees and employers and savers and borrowers about how scarce goods, services and factors of production are. About the willingness to save or accept risk. How many people want to work or pay for a particular good and how high the production costs are to make something. This is precisely where the fatal weakness of communism lies: the inability to gather the necessary information to organise the economy effectively.

Capitalism as the main driver of efficiency

The great promise of capitalism is that free competition and labour specialization bring out the very best in people. Capitalism rewards hard work, entrepreneurship and risk-taking, while laziness, risk aversion and conservatism are punished by the discipline of the free market. The most efficient companies will drive the inefficient ones out of the market with their so-called creative destruction, a concept by Joseph Schumpeter. Division of labour and competition lead to innovation and technological improvements and are thus the engines of long-term economic development.

Ayn Rand (1905-1982) argued that capitalism is ultimately the only correct organisation of society, not only economically but also morally. Capitalism is the main driving force behind the emancipation of individuals. Those who work hard are rewarded with prosperity, and those who eat out bear the consequences of poverty themselves. After all, no one in the market looks at race, religion or origin, only at their wallet or their own happiness. Therefore, the role of the state should be limited to protecting and enforcing private property through the legal system, the police and the military.

Market freedom in the Netherlands

According to Jacobs, based on all these ideas, over the course of the twentieth century, the idea was conceived that capitalism provides the best possible economic outcome for the individual and society, both economically and morally.

This trend was also noticeable in the Netherlands. Social benefits were reduced and taxes on income, wealth and inheritance were being lowered. At the same time, the market was given free rein. Trade unions gradually became weaker and weaker, also because labour markets were made extremely flexible by temporary contracts, on-call workers, part-time workers and payrollers. Trade barriers and tariffs have been reduced through the establishment of the EU internal market and trade agreements the European Union has concluded with the rest of the world. The government has given free rein to companies and individuals. Therefore, if there would be one period in which the fruits of the free market should have been reaped, it would have been since the beginning of the 1980s. But has that actually happened?

A confrontation with reality

Data of economic growth and productivity over the past decades from Statistics Netherlands (CBS) show that the capitalist dream was nothing more than that: a dream. The data shows that the average annual growth rate of gross domestic product (GDP) has been lower almost every decade since the 1960s than in the previous decade, except for the 1990s, when women entered the labour market and temporarily boosted growth. This supports the conclusion that capitalism does not cause the economic growth and higher productivity it once promised.

And the downsides of capitalism are becoming increasingly visible. None of the protagonists of capitalism, nor economic science, has ever claimed that an efficient economy also leads to an equal distribution of income or wealth. On the contrary, many have downplayed income inequality as the inevitable price society has to pay for having the right financial incentives to work, do business and accept risk.

False promises

The promise of capitalism has not been kept. Since the 1980s, the government has followed all the recipes of the capitalist booklet: lower taxes, less redistribution, smaller government, liberalisation and flexibilisation of the labour market, financial sector and capital movement, and more international free trade. But GDP growth and labour productivity have only declined since that period.

Capitalism does no longer lead to efficiency and growth, but to free-rider behaviour, the shift of business and financial risk, monopolies, the over-exploitation of nature, inequality and wealthy people who pay less and less tax.