Guest Post: Capitalism Explored
This post is by guest blogger Dr. Sarah Ali.
As I bought my groceries today in an affluent neighborhood outside of Washington D.C., it was entertaining and surprising to see some people bring in their shopping cloth bags, driving energy efficient cars, sporting clothing attire that screams ‘Green lives on’, and then shopping at Whole Foods, a corporation—it just screams contradiction! How can you oppose capitalism and then shop at a corporation? Why is Whole Foods okay, but not Wal-Mart? Let’s explore this further.
There’s nothing wrong with capitalism. Opponents of capitalism argue that it marginalizes people resulting in the inequitable distribution of wealth. But as economists we know that there will always be a tradeoff between equity and efficiency, tracing this back to the concept of opportunity costs. Opportunity costs are the cost of giving up something in order to obtain something else.
Many opponents of capitalism argue that all economics is evil. It is a simplistic argument that fails to present any rationale, and instead relies on the emotional state of people. These same individuals also argue that big box retailers such as Wal-Mart are blood-sucking, evil corporations.
The reason why big box retailers like Wal-Mart are successful is due to many factors, but the phenomena of economies of scale plays a big role in the company’s success. Over time, Wal-Mart’s long run average costs have declined with increased production, which allows it to price many of its goods at lower prices than its competitors. Although small, local stores face competition when retailers like Wal-Mart have a cost advantage, an efficient firm will take advantage of marketing and brand itself different than a big box retailer. Competition forces firms to distinguish themselves on a particular attribute, such as price, brand, or other attributes.
People have choices in determining which firm to buy their goods from, however completely eliminating Wal-Mart from the market because it upsets some people is not economically healthy. Wal-Mart has contributed to commerce through its supply chain network, and brought employment to local towns. People can be selective about how they perceive big corporations like Wal-Mart, however people do not raise hell about Wal-Mart’s competitor, Target (or Whole Foods for that matter). This big box retailer has experienced economies of scale, and has given local businesses more competition, but consumer perception is different for this retailer than Wal-Mart.
Target has marketed itself as the ‘cool’ place to shop for the yuppie population, and people have convinced themselves that for some moral reason they will feel better if they shop at Target rather than Wal-Mart. Target is a corporation like Wal-Mart. And they’re in business for profit. People will continue shopping at big box retailers since they are cheaper; people choose consumption patterns based on their income and the price of the goods or services they purchase, essentially the classic consumption function.
Another growing trend is to support community supported agriculture (CSA). Essentially people are supporting a single or many local agricultural producers by purchasing a share of produce from the agricultural producer. One could argue that a CSA is a type of local monopoly. According to many opponents of capitalism, it is fundamentally wrong for a monopoly to exist, however a CSA could service one geographic area, thus exerting significant market control, so this might harm other local producers who are not a part of the CSA. U.S. agricultural production is heavily subsidized by the federal government, however people will likely complain if they see a rise in food prices if agricultural producers did not receive subsidies.
What these examples illustrate is that there is an obvious double standard when it comes to supporting the tenants of capitalism. As consumers we enjoy the variety of goods and services offered by firms, and the competition leads to lower prices – yet at the same time we want producers to benefit from capitalism, despite the fact that some are inefficient. This is what the example of CSA shows, and it is an undercurrent also in the choice to shop at Whole Foods. The image these institutions have in consumers’ minds is what affects their consumption – and their support. But image is a very shallow basis for assessing the moral or economic “worth” of a corporation.
The poultry market is a specific example controlled by a few large corporations that pay agricultural producers to raise poultry in a certain way according to a set industry standard. But is this industry standard established for the welfare of the animals, for the welfare of producers, for the welfare of consumers – or the welfare of corporations? Or is it a means to lower costs in poultry production overall, which benefits all of us? (Do Americans ever think about the source of their food?)
Before criticizing capitalism, it is incumbent upon people to understand they are benefiting from its application, otherwise it is pure hypocritical. Our high standard of living is thanks to the products and innovations supplied by the corporations it has become fashionable to “hate.” The same corporations employ thousands at salaries they would otherwise not be able to earn, while lowering the costs of living for all of us.
Capitalism is a win-win game. There is always a tradeoff between equity and efficiency, and it leads to a pareto optimal situation.
Structured, rational thinking about community, cooperation, and the market