Friday, September 16, 2016

Capitalism and Marxism Fail To Deal Adequately With Ethical Considerations

This article raises a question that should be asked about an economy.  It argues that we should ask what kind of social organizations are most ethically desirable.  According to this analysis both capitalism and the Marxist critique of capitalism are derived from an extremely narrow theory of how an economy really works.  Consequently, they both suppress the discussion ethical issues in the real economy.

The basic assumption in capitalism is that the things that we desire are allocated by a market mechanism.  If we examine the real economy we find that economic practices are better described as a system of transferring things that we desire within and outside of a market system in which they are bought and sold.  Several examples of non-market transfers are provided which show how extensive they are in the real world.  For example,  families operate to provide valuable services to family members that are outside of the market mechanism.

The basic assumption in capitalism is the concept of price equilibrium.  That is, supply and demand for desirable commodities determine a market price that is efficient.  Allocation by the market mechanism is considered to be Pareto Optimal.  Nobody could be made better off without making someone else worse off.  Therefore, we should leave the allocation of things we desire to the market and we should eliminate government interventions in the market.  There are lots of issues with the ideal of Pareto Optimality.  For example, the goal of most firms is to maximize profit and to minimize price competition in its markets.  The degree of Pareto Optimality is a function of the level of price competition in markets.  Any deviation, from perfect competition in markets, which are considerable, defeats the notion of Pareto Optimality.  More importantly, if we assume that markets are inherently good, there is no need for ethical discussion in a market economy.

Marxism suffers from a different problem.  It holds that the central mechanism of capitalism is the extraction of surplus value from wage labor.  Ethics devolves into the central issue of the exploitation of labor.  Economic theory side steps this issue by assuming that wages are determined by each persons contribution to output but that is beside the point.  Ethical considerations are not central in capitalism or in Marxism according to this analysis.  If we look at the distribution of income and wealth in society it does not take a lot of sophistication to determine that the absence of ethical analysis is a real problem which has been excluded from economic theory and from the dominant critique of capitalism.

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