23 Things They Don’t Tell You About Capitalism

Most people don’t even realize there are alternatives to free market economics – but understanding these choices could reshape our world.

1. Economics Is Not a Hard Science

Economics often parades itself as a precise, objective science like physics or chemistry, but this is misleading. Unlike physical sciences, economics deals with human behavior, which is neither entirely predictable nor consistent. Economists have overestimated their ability to predict and control markets, leading to a sense of misplaced confidence in their explanations.

The 2008 global financial crisis revealed the limits of this so-called scientific approach. Professionals, relying on neoclassical theories, failed to see the risks building up in the system. These models assumed perfect rationality and neglected the unpredictable, messy nature of human decisions. Their misplaced overconfidence came crashing down as economies around the globe faltered.

Economics, then, is not a matter of absolute laws, but perspectives. At its heart, it’s based largely on common sense. Much like knowing you’d avoid putting all your savings in a risky bet, economic principles rely more on understanding behaviors and values than on mastering complex equations.

Examples

• The failure of Wall Street predictions during the 2008 crisis.
• Economists ignoring alternative theories and critiques from scholars outside their field.
• Comparisons to everyday intuition, such as avoiding risky investments.

2. Rational Decision-Making Is a Myth

Free market economics assumes that human beings behave perfectly rationally while making economic choices. In theory, we weigh every bit of information and make logical decisions. However, in reality, humans are prone to errors and incomplete information, leading to less-than-perfect decisions.

Two Nobel-winning economists, Robert Merton and Myron Scholes, believed in rational decision-making so deeply that they applied the idea to create financial companies. Yet, their firms went bankrupt twice, showcasing how this assumption falters in the real world. Humans strive to act rationally, but their decisions are bounded by limited intellectual and informational capacity.

The solution isn’t to expect individuals to become perfectly rational but to limit the choices available within markets. Governments already restrict harmful products in other sectors, such as disallowing unsafe drugs or cars. Extending this idea to finance could foster better economic decisions across society.

Examples

• Merton and Scholes' bankruptcies despite their theories.
• Investments where people fail to account for all risks.
• Government restrictions on unsafe goods as a working analogy.

3. Humans Aren’t Purely Selfish

The belief that humans act purely out of self-interest is a cornerstone of free market theory. According to this, every decision is made for personal gain. However, this fails to explain behaviors like honesty or generosity, where people prioritize fairness.

For instance, when people pay their cab fare instead of running off, it’s not just about avoiding long-term repercussions like being blacklisted. Often, the act comes from values like integrity or a sense of duty. Altruism and social considerations play a much bigger role in decision-making than free market models account for.

Economies built solely on selfish behaviors would quickly collapse. Even simple systems, like taxi services, require trust among participants. The cab driver doesn’t track down absconding passengers for tiny fares because he wants to help others in the system – evidence that economies rely on collaboration, not just selfish gain.

Examples

• Paying a taxi fare without the threat of immediate consequence.
• Instances of charity and donations that lack personal benefit.
• Societies built on trust versus theft and mistrust.

4. Wages Aren’t Fairly Earned

Contrary to the idea of meritocracy, most people don’t earn according to their efforts or abilities. Instead, wages are influenced by social, geographic, and government factors that warp the market. Especially in wealthier nations, governments often shield workers from cheaper labor overseas by restricting immigration.

Consider someone doing the same factory job in a richer versus poorer nation. Workers in wealthy countries are paid significantly higher wages, although the work may be identical. This protectionism has historically inflated wages regardless of productivity.

Within these same societies, inequities persist. Executives may earn exponentially more than workers, even if their productivity hasn’t grown proportionally. This disproves the myth that wages are deserved strictly based on effort or output.

Examples

• Immigration laws keeping lower-cost labor out of richer countries.
• CEOs earning 400 times more than average workers despite similar productivity levels.
• Wage disparities between developed and developing countries for equivalent jobs.

5. Manufacturing Drives Growth

While service and tech industries get a lot of attention, manufacturing remains the backbone of economic growth. Many mistakenly believe that shrinking factory jobs mean manufacturing is dying. In reality, industries are simply becoming more efficient, not disappearing.

Policy suggestions to shift focus to service economies have costs. Service sectors often struggle to boost productivity without sacrificing quality, like doctors rushing checkups or rushed performances of Shakespeare. Meanwhile, manufacturing improvements lead to tangible economic advances.

Historically, manufacturing has powered growth in developing and developed economies alike. It remains a primary driver for job creation and wealth generation, despite the allure of alternative sectors like IT or finance.

Examples

• Manufacturing productivity improving globally even with fewer workers.
• Services being harder to scale compared to industrial output growth.
• Historical evidence of industrialization building modern advanced economies.

6. The 2008 Crisis Stemmed From Risky Systems

The global financial meltdown wasn’t an accident; it was the result of deliberate risk-taking. Complex derivatives built on shaky foundations magnified systemic dangers. Financial institutions layered products upon products in pursuit of short-term profits, ignoring long-term fragility.

Think of it like building a rickety skyscraper. Each additional story made things wobblier until the entire structure buckled. This recklessness hurt economies with the least regulated markets, such as Ireland and Latvia, the most.

The crisis serves as a warning about the dangers of unfettered markets. Without checks and balances, the system becomes vulnerable to collapse.

Examples

• Financial institutions creating derivative products stacked on bad debts.
• Dramatic GDP drops in countries like Ireland (7.5%) after liberalization.
• Lack of safety measures equivalent to neglecting brakes in a car.

7. Governments Already Plan Economies

Free market enthusiasts argue against government interference, warning it can plunge economies into chaos. But examples like South Korea and the US show that strategic planning often leads to robust growth rather than disaster.

South Korea’s government actively steered companies like LG toward electronics rather than textiles, leading to their global success. Similarly, early internet and biotech industries in the US thrived on government support. The difference between effective and failing government involvement is in setting guidelines rather than over-controlling every aspect.

The state thus acts more like a guide, ensuring industries thrive without micromanaging every detail – a stark contrast to the rigidity of Soviet-style economies.

Examples

• South Korea’s government steering LG into electronics.
• US funding for developing and scaling the early internet industry.
• Soviet vs. South Korean planning outcomes.

8. Social Welfare Drives Growth

Critics of generous welfare argue it creates laziness, but evidence suggests it actually supports economic innovation. When people have a safety net, they take more risks, such as starting businesses or pursuing unorthodox ideas.

For example, countries that protect workers during unemployment often see higher growth than those without such measures. Without welfare, workers cling to safe jobs in fear, stifling dynamism and entrepreneurship.

The “trickle-down” theory has also fallen short of expectations. Reducing welfare benefits in favor of tax cuts for the rich hasn’t worked, as seen in stagnating economies of the 1980s in the US and UK. Instead of reinvesting, the wealthy hoarded income, choking the economy further.

Examples

• Welfare programs leading to higher business creation rates.
• Welfare-supported economies outpacing others in growth.
• Income inequality increases after adopting trickle-down measures.

9. Free Markets Hurt Developing Nations

Developing countries don’t lack entrepreneurial talent or suffer inherently from geography. In fact, poor countries often have dynamic, self-driven workforces. What hinders them are free market policies imposed by richer nations.

African nations in the mid-20th century grew when they protected domestic industries. But Western-imposed free trade in the 1980s led these markets to collapse under competition from cheaper foreign goods. Protectionist policies, like those historically used by Western nations themselves, would help them achieve better economic growth.

Letting poor nations grow by their own terms could be a better path to prosperity than undermining their industries with globalized free trade policies.

Examples

• Rising African economies in the mid-1900s under protected markets.
• Western tariffs preventing competition in their rise to wealth.
• Self-employment rates higher among poorer nations than wealthier ones.

Takeaways

1. Question economic policies that depend solely on market forces; instead, explore systems involving government guidance or regulation.
2. Support leaders advocating for fair wages, protective labor laws, and global equity in economic competition.
3. Pay attention to how proposed tax cuts or deregulations might harm innovation, public services, or market stability in the long term.