Five faults of capitalism: market failure

By Makai McClintock

401(K) 2013/Flickr

As an economic system, capitalism is prone to market failure due to the inefficiency of the market to allocate certain goods and resources. Invariably, the freedom of individuals and firms to use any means to pursue their own self-interest leads to apocryphal results for society as a whole. Free market economic systems allow goods to be sold to the highest bidder, which results in economic inefficiency as goods are distributed on the basis of who can afford them rather than being distributed on the basis of who needs and values them most.

The result is the duality of capitalism: a “sacrosanct” economic system favored due to its simplicity, yet devoid of moral conscience or direction.

Since resources are allocated strictly on the basis of consumers’ availability and willingness to pay, free markets result in imperfect information distribution and imperfect competition. Consequently, free market capitalism leads to comparative advantages for the rich over the poor; the rich can afford better food, education, housing and transportation than the poor. Prices serve as the sole determinant of who can afford which goods and services, regardless of the ethical implications of the rich’s comparative economic advantage.

Agents in a free market can acquire market power, owning the majority of the market for a certain good or service. This allows these individuals and firms to prevent mutually beneficial trades from occurring as their high control of the market allows them to use their leverage to gain a comparative advantage. Ultimately, this leads to market inefficiency through forms of imperfect competition such as monopolies or monopolistic competition. The monopolistic power gained by these firms allows them to restrict output in order to artificially raise prices and profit.

One example of how capitalism leads to market failure can be seen by looking at the state of the health care system in the United States. As Douglas Smith noted in a recent blog post for Naked Capitalism called “Profiting From Market Failure: How Today’s Capitalists Bring Bad Things in Life: “Instead of taking Joe Wilson-style risks on innovation, too many captains of the healthcare industry and the capitalists who fund them choose to perpetuate market failures and enrich themselves in the process. They ‘just say no’ to the risks inherent in searching for new life-saving drugs and treatments. Ditto to opportunities to dramatically expand access to those who currently cannot afford them. For these well-off incumbents, there is simply too much profit to be made by raising prices, manipulating intellectual property protections, bribing doctors, misleading the public, cutting costs, and choking distribution.” Wilson was the founder of the Xerox Corporation.

The health care market, instead of perpetuating and supporting the development and dissipation of life-saving drugs, supports profit maximization though underhanded methods, thereby restricting access to only the wealthiest citizens.

Similar phenomena can be seen in the health insurance industry, as Smith further explains: “Those with power avoid risking capital on innovative solutions that might expand insurance to the tens of millions of Americans without it. The same high priests of capitalism erect ever more complex, unreadable insurance policies supported by ever more withering and costly administrative procedures that, when combined, perpetuate a huge market failure: only a small percentage of premium dollars actually going to pay for care. Insurance markets go to war with customers in ways that increase, not diminish, the odds that folks who think they have coverage actually don’t.”

This phenomenon Smith speaks of is the result of a largely private insurance system whose profit-maximizing objectives are misaligned with patients’ needs. Insurance providers have a distinct financial incentive to deny services to the ill, turning away those who need medical coverage most in the name of maximizing profit.

Unfortunately, this means that the private insurance industry’s financial incentives actually entail providing coverage to those who need it least, and withholding coverage from those who need it most.

As illustrated by the health care and insurance industries in the United States, the free market, although efficient at distributing certain goods, is inefficient when it comes to distributing goods and services that are not most efficiently distributed to those who can best afford them.

This market failure exemplifies the necessity to develop alternative methods for distributing these types of goods and services, supporting the notion that although the free market can fairly and efficiently distribute most goods and services, markets are not the best means for distributing all goods and services.

Capitalism is simple; this I do not dispute. Efficient? Equitable? I respectfully disagree.

Makai McClintock is a Collegian columnist. He can be reached at [email protected]