What’s wrong with capitalism?

by David Purdy

Interviewed in a recent television documentary, Paul Tucker, Deputy-Governor of the Bank of England, condemned a system in which banks amass profits during a boom, but are bailed out by taxpayers when they go bust, as a “flaw at the heart of capitalism”.1 His views about how to remove this flaw were not recorded, but it is more likely that he was finding fault with the kind of capitalism that has evolved in Britain and the US than that he was criticising capitalism as such.

The distinction between genus and species is central to what follows. Since the collapse of state socialist alternatives to capitalism, the very idea of a post-capitalist civilisation has been banished to the realms of speculation and theory. For practical purposes, we now take it for granted that the only issue worth discussing is what form of capitalism is best or will prevail. Indeed prior to the financial crash of 2007-8, it was widely believed that even this question was on the way to being settled as the Anglo-American, neo-liberal model of capitalism appeared to outperform its rivals. After 1990 Japan sank into protracted stagnation and although the EU escaped from the doldrums of the 1980s and embarked on three major projects – completing the “single market”, building monetary union and absorbing the former Soviet bloc states of Eastern Europe – it signally failed to resolve its internal crisis of popular legitimacy and governance, and far from stemming the neo-liberal tide, got caught up in it.

In the immediate aftermath of the crash, from the autumn of 2008 to the summer of 2009, there was a brief window of opportunity for radical economic reform. The opportunity was lost. Temporarily thrown off balance, the political and business elite were hardly going to embrace the state-capitalist models of development favoured by the world’s rising powers – China, India, Russia and Brazil – and in Europe (though not in the US) they soon rallied behind the banner of fiscal conservatism, spreading alarm about the state of the public finances and setting out to restore “business as usual” by dint of fiscal retrenchment. This is a high-risk strategy at a time when recovery from recession is far from assured and little has been done either to reform global finance or to tackle imbalances in international trade and capital flows, but in the absence of a systemic alternative to the neo-liberal model that combines intellectual cogency with political appeal, our rulers evidently judge the risk worth taking. In that sense, what has transpired over the past three years is a crisis in neo-liberal capitalism, not a crisis of neo-liberal capitalism.

The elements of capitalism

So will capitalism, in some form, be with us forever? And however that may be, is there an alternative to the neo-liberal model, which is not only desirable, but also viable and achievable? Good questions both, but impossible to answer without posing two others: What exactly do we mean by “capitalism”? And what, in general, is wrong with it?

Three clusters of institutions are fundamental to capitalism, concerned respectively with markets, production and money. Economic activity is co-ordinated by impersonal market forces, a mechanism that Adam Smith famously likened to an “invisible hand”. There are markets for money and money capital (that is, money employed to make more money – through lending at interest, speculative trading or productive investment); for labour power; for produced commodities, whether to serve as means of production or for use in final consumption; and for physical and financial assets of various kinds, from land and buildings to stocks and shares. These markets form an interrelated system. Views differ about how well it works.

Production is organised by privately owned, profit-seeking enterprises, which employ wage labour to produce marketable commodities and are separate from households, communities and the state. All means of production are the property of the enterprise and constitute its physical capital. Co-ordination within the enterprise is based not on the invisible hand, but on the subordination of employees to the authority of its owners or managers appointed by them.

Both market co-ordination and generalised commodity production require a viable monetary system. Buyers and sellers rely on price signals, and prices are expressed in terms of money, the “universal equivalent”, which also serves to facilitate exchange and make payments. Enterprises too need a standard of account to calculate costs of production and net profits. And both production and speculation are financed by means of credit money created by banking enterprises, which make profits from lending at interest and may also play the markets on their own account.

Taken together, these institutions form what we now call the “economy”, a term that comes from the ancient Greek word for household management, but is now used in almost the opposite sense to refer to a realm of society set apart from supposedly “non-economic” institutions such as the state and the family. Those who study this realm, “economists” as they started to call themselves in the late nineteenth century, dropping the older term “political economy”, routinely abstract from politics and culture in order to focus exclusively on markets, commodity production and money, or indeed, simply on markets alone. This change of usage marks the historic transformation wrought by the forcible creation of a “self-regulating” market system in the early part of the nineteenth century, when as Polanyi (1944) put it, the activities of production, distribution and exchange were “disembedded” from the social institutions and norms that had previously sustained and constrained them.

Nevertheless, the autonomy of the economic realm under capitalism is only relative, not absolute. Indeed, Polanyi (op. cit.) argues that the attempt to create a self-regulating capitalist market is utopian. Drawing on the history of Britain from 1815 to 1845, he shows how the conversion of land, labour and money into what he calls “fictitious commodities” endangered nature, human beings and even business itself, giving rise to popular grievances, social resistance and protective counter-movements. “Backed by phalanxes of political economists, entrepreneurs and politicians, the idea of the self-regulating market could appear an irresistible force, but it possessed a critical flaw: it was quite simply unsustainable … No sooner had industrial capitalism secured its footing in Britain, in 1834, than a deep-seated movement sprang into being to protect society from its perils,” (Dale, 2010: 60).

Thus, the elements of capitalism form only a sub-system in a larger social whole. Nowadays, of course, we depend on this sub-system for our livelihoods. Governments too need it to perform well. So it makes sense to speak of capitalist societies. But no account of their “anatomy” or “laws of motion” is adequate which fails to consider how the bare elements of capitalism are articulated with the institutions and activities of the state; with kinship systems, gender relations and the sexual division of labour; and more generally, with historically evolved cultural norms and beliefs, including attitudes towards nature.

3. Varieties of capitalism

The scale and scope of state intervention and participation in the economy are continually contested in a way that almost defines the nature of politics in modern capitalist societies. In different societies at different times, the state has variously sought to accommodate, guide, regulate, manage or unleash capitalism. Mid-Victorian Britain worshipped the gods of free trade and laissez-faire, but Germany, the US and, at a later stage, Japan all industrialised behind tariff walls under the aegis of a developmental, nation-building state. Even in Britain, the dislocations caused by the First World War, the Wall Street Crash and the Great Depression shattered confidence in classical liberalism and the minimum state. From the mid-1930s to the mid-1970s, a strong consensus favoured state-managed, socially protective capitalism. But the crisis of “stagflation”, falling profitability, rising aspirations and socio-political conflict that erupted in the 1970s led to a resurgence of belief in the superiority of free markets, and as governments sacrificed full employment to the control of inflation, deregulated labour markets, sold off state assets, introduced floating exchange rates, unshackled the financial sector and removed barriers to cross-border capital flows, the neo-liberal word was made flesh.

Since capitalism is a global system, these successive transformations have affected all countries to some degree. Yet capitalist societies display significant institutional differences. Scholars have proposed several more or less elaborate typologies, but simplifying drastically, the “varieties of capitalism” boil down to two ideal-types: “liberal market economies” (LME) and “social market economies” (SME). The former are characterised by arm’s length government and competitive markets; stock exchange finance and the pursuit of shareholder value; minimalist social protection and high levels of income inequality. In the latter, government works closely with key firms and relies on producer organisations, including trade unions, for help in managing the economy; bank loans rather than stock markets provide “patient” capital, permitting firms to make long-term plans and form “productive” relationships with employees and other stakeholders; and social policy is designed to offset market inequalities, safeguard personal security and avoid class conflict.2

Actual capitalist societies can be placed on a continuum between these two polar types. Among OECD countries, the US, Canada, UK, Ireland, Australia and New Zealand lie towards the LME pole; Germany, Austria, Switzerland, Belgium, Holland, Denmark, Norway, Sweden, Finland and Japan are closer to the SME pole; and France, Italy, Spain, Portugal, Greece and Turkey lie somewhere in between. The US is the archetypal LME, Germany the exemplar of an SME.

Why has the world not converged on a single model of capitalism? One explanation runs in terms of “path dependency”. In the absence of any countervailing force, the institutional framework in place at the beginning of capitalist development persists as a formative influence in the forging of subsequent, complementary institutions. For example, London’s eighteenth century market for government bonds provided the means of financing capitalist enterprise in the nineteenth century. Similarly, the principle of “lesser eligibility” enshrined in the Poor Law Amendment Act of 1834 has continued to shape British public policy towards joblessness and poverty. A second explanation emphasises the role of social and political conflict, particularly at times of crisis when established institutions come under stress. In the 1960s and 70s, for example, successive UK governments adopted a “corporatist” approach to policy-making in an attempt to revamp the country’s lagging economic performance. The Thatcher governments of the 1980s cut short this “deviation” and put the country firmly on the neo-liberal path.

4. Transforming and transcending capitalism

Over the past thirty years, SMEs have come under intense pressure to liberalise markets, weaken social protection, and embrace casino capitalism. In some respects, they have succumbed. Labour markets have become more flexible; stock markets, footloose capital, and mergers and takeovers have all grown in importance. Nevertheless, though the varieties of capitalism are less distinct than they were, institutional differences have not disappeared and what Ingham (2008) calls “the battle of the systems” continues.

Does the forward march of neo-liberal capitalism mean that it is, in some sense, a superior economic system? It depends what you mean by superior. Economic performance is multi-faceted and different evaluative criteria yield different international rankings. But there is certainly no evidence that free market economies do best. Consider three standard measures of performance: the long-term growth of GDP per head and output per worker or per hour worked, the extent of cyclical instability and the degree of income inequality. By none of these yardsticks do LMEs excel. First, despite some variation in specific periods, over the long run SMEs are just as good at achieving economic growth. Second, since rampant inflation brought the golden age to an end in the mid-1970s, the depth and duration of recessions have increased markedly, as have the frequency and scale of financial crises. And third, income inequality is greater – often much greater – in LMEs than in SMEs. Furthermore, as Wilkinson and Pickett (2009) show, unequal societies tend to do worse on a wide range of indicators of personal and social well being, from the incidence of anxiety and depression to teenage pregnancy and crime rates.

There is, in short, more than one way of organising a viable capitalist economy. Hence, in the long run, it can be argued, institutional arrangements are a matter of collective choice. But institutions and norms cannot be reshaped like putty: changing regimes, as distinct from policies or governments, is normally a long hard slog. And if transforming capitalism is a struggle, the idea of transcending it altogether looks like the stuff of dreams.

The uses of utopia

Nevertheless, we should not give up the idea of life after capitalism. Rather, we need to clarify the relationship between imagining a better world and trying to change this one. The two are related, but as guide and conduct, not as goal and journey.

Any idea for improving the world invites three questions: Is it desirable in principle? Would it work, if it could be achieved? And what are the chances of achieving it?  Of the desirable ideas, some are viable, but not currently achievable because they lack the requisite support. Others are not viable in the world as it is, but would or might become so in a transformed world. Still others will never be viable: they belong to the realms of fantasy. The boundary between possible worlds and flights of fancy is blurred. It is also elastic in the sense that views about the limits of social possibility change over time. Utopias straddle this contested and shifting boundary.

The word “utopia”, coined by Thomas More in 1517, is a pun, a Latinised amalgam of the Greek words “eu” (well or rightly), “ou” (no or not) and “topos” (place). So utopia is a good, but non-existent place. Could it exist? That is a matter for debate. More admired the institutions of his imaginary island. Its inhabitants were pagans, but their virtues, he thought, put Christian Europe to shame, though they were neither better endowed by nature nor technologically more advanced.

Could utopia be brought into existence, perhaps by a wise ruler, Modern Prince or some other human agency? The question is misplaced. Utopia is not a goal or destination, but an image of excellence, an answer to the question: “Given what we know about human nature and the human condition, how, ideally, should we live?” not to the very different question: “All things considered and in the situation as it is, what shall we do?” Accounts of utopia are deliberately vague as to its whereabouts or genesis. More’s prototype lay just beyond the edge of the known world. Later, as the globe was spanned and mapped, time travel replaced the voyage of discovery as the standard device for “getting to” utopia, now transposed from terra incognita to the more or less distant future.

If utopias are not prophecies, blueprints, manifestos or roadmaps, what are they? Various answers have been proposed. The German Marxist Ernst Bloch saw utopian thought as a secular substitute for religious faith, helping to sustain collective hope for the future. For William Morris, a fierce critic of capitalist industrialisation, utopia was a tool for the “education of desire.” His romance News from Nowhere was a riposte to the consumerist paradise described by the American utopian novelist, Edward Bellamy, who put his faith in technology and capitalism rather than art and socialism. But whether concerned with material prosperity, social arrangements, human passions, moral codes or aesthetic standards, most utopias – and, for that matter, their dystopian cousins – are thinly disguised forms of social criticism, offering normative benchmarks against which what passes for “civilisation” is judged and found wanting. And when writers of fiction or political philosophers engage in reasoned speculation about what the world would be like if some long-standing, deep-seated and taken-for-granted features of the present social order, such as the sexual division of labour or perpetual economic growth, were somehow to disappear, they are conducting utopian thought experiments.

A world in which the core institutions of capitalism have been transformed to the point where market forces, commodity production and capital accumulation no longer dominate economic and social life, may or may not come to pass: no one knows or can know. But thinking seriously about it enables us to explore the limits of social possibility, to gain a better understanding of capitalism itself and, above all, to ask more searching questions about its contribution to human well-being.

Work-income blues and the economics of happiness

By way of illustration, consider the evidence from surveys of self-reported happiness or life-satisfaction and its implications for the way we organise work and distribute income. In all countries, the rich are happier than the poor. Yet in rich countries, raising the incomes of all does not increase the happiness of all. This is because our happiness depends on both absolute and relative income – that is, where we stand in the income hierarchy. Holding relative income constant, raising per capita GDP increases aggregate happiness in poor countries, but leaves it unchanged in rich countries.3

Thus, once societies cross the threshold of affluence, economic growth becomes a treadmill. What stops us getting off it? One barrier is that capitalism contains an inbuilt bias towards output expansion: competitive rivalry compels the enterprise to grow or die. This is reinforced by our addiction to getting and spending: we prefer to enjoy the fruits of productivity growth in the form of increased consumption rather than shorter working hours. Then there is the problem of joblessness: with rising productivity and unchanged working hours, if GDP stopped growing, employment would fall and unemployment would rise. And as the old Marxist adage has it, the only thing worse than being exploited is not being exploited. Unemployment lowers happiness not just because it lowers income. The unemployed report substantially lower levels of happiness than those in employment with exactly the same household incomes, probably because of social stigma or loss of self-esteem. Psychologically, unemployment hurts per se. And whereas people eventually recover from other kinds of loss such as bereavement or divorce, continuing unemployment continues to hurt.

Yet we remain an overworked society. Some workers – mostly men – work longer than is good for them or, indeed, for their families. Examples abound at all levels of the occupational hierarchy, from corporate executives to low paid drudges. On the other side of the gender divide, many women (and some men) juggle with the competing demands of career and family. More generally, despite the emergence of childcare as a major concern of public policy and the overwhelming evidence that early childhood experience is crucial for subsequent life-chances, Britain, in common with most other European countries, has failed to reconcile motherhood with employment and is locked into a low fertility syndrome. With the native population failing to replace itself, inward migration is used to relieve labour shortages, depressing wages at the lower end of the labour market, while individual preferences regarding family size are left unsatisfied. And all the time, willing slaves keep the treadmill of economic growth turning – no longer breadline proletarians, to be sure, but wage slaves for all that.

Re-imagining the work-income nexus

As things stand, there are no institutions that allow us to engage with these problems. Imagine then how we might create them. A key step would be to replace the existing social security system by one based on Citizen’s Income (CI): a recurrent, tax-financed money transfer payable on a lifelong basis to every individual member of the political community, each in his or her own right, with no means test and no work test. To make a real difference to people’s work-life options, CI would have to be paid on a scale that enabled people to meet their basic needs, defined according to prevailing social norms and adjusted for age and disability. This benchmark is generally known as Basic Income (BI).

Imagine further that BI is financed exclusively from personal income tax, with other public spending programmes defrayed from other sources of tax revenue: corporation tax, VAT, excise duties etc. An integrated, self-contained tax-transfer system of this kind has important advantages. It is transparent: people know what their income tax payments are used for and how their own income compares with the social minimum. It is inclusive: everyone is in it together. And it combines fiscal discipline with transforming potential. The system must be routinely monitored and managed, as part of the annual budgetary cycle. This is because proposals to adjust tax rates and transfer scales are bound to have repercussions for the disposition of people’s time and hence for the balance between different kinds of economic activity.

Our present economic system is dominated by capitalist commodity production. Under what we might call “Basic Income Capitalism”, the balance of social power undergoes a subtle shift. The partial decoupling of income from employment effectively subsidises unpaid activities in the household and voluntary sectors of the economy, countering the bias towards getting and spending. At the same time, the onus is on commercial interests to justify the expansion of commodity production rather than taking it for granted that what is good for business is good for society. Conversely, critics of unlimited economic growth are better placed to raise searching questions about the work-life ratio – the proportion of the week, year or lifetime devoted to paid work rather than to other uses of time, from child-rearing and voluntary work to recreation and the life of the mind.

The need to monitor and manage Basic Income Capitalism not only broadens the framework of social accounting; it also brings questions of value and distribution into a common frame, encouraging people to ask not just who gets what and who does what, but what things are worth having and doing. What, in other words, is the best kind of life, not just for me, someone like me or the group I most identify with, but for human beings in general? This question invites further questions about the way society is organised and the distribution of power: in a nutshell, who decides what?

Once these questions emerge from the shadows, they are bound to impinge on the policy-making process in general and the annual budget in particular, helping to shape the terms of debate and highlighting the need for a multilateral system of policy negotiation in which all relevant stakeholders are represented. A Basic Income Democracy (BID), as we might call it, would be far better equipped than existing capitalist democracies to tackle the central challenge facing rich societies: how to deal with competing claims on resources in a context where economic growth – the traditional remedy for distributional conflict because it expands productive capacity, creates jobs and boosts tax revenue – has ceased to promote personal happiness and is seriously damaging both the fabric of society and the natural world.

There would still be social division and conflict – between employers and employees, skilled and unskilled, jobholders and jobless, men and women, old and young, able-bodied and disabled, and so on. But BID enables the “associated producers” – broadly understood as all who produce the goods and services that help to keep society going – to manage these conflicts by pitting their shared interests as citizens against the sectional interests that divide them. This is, of course, a utopian vision. But it is a possible world, unlike the fantasy of a relentlessly competitive and endlessly expanding capitalist cornucopia that somehow remains inclusive, cohesive and sustainable.


  1. Interviewed by Robert Peston on BBC2, “Britain’s Banks: Too Big to Save”, 18th January 2011.
  1. See Hall and Soskice (2001: 1-68). What they call coordinated market economies, I prefer to call social market economies to avoid any suggestion that liberal market economies are uncoordinated.
  1. For an accessible account of happiness economics, see Powdthavee (2010). The relationship between income and happiness is discussed in Chapter 2; the impact on happiness of unemployment and other kinds of loss is detailed in Chapter 6.


Dale, G. (2010) Karl Polanyi (Cambridge: Polity)

Hall, P. and Soskice, D. (eds.) (2001) Varieties of Capitalism (Oxford: Oxford University Press)

Ingham, G. (2008) Capitalism (Cambridge: Polity)

Polanyi, K. (1944) The Great Transformation (Boston: Beacon)

Powdthavee, N. (2010) The Happiness Equation (London: Icon Books)

Wilkinson, R. and Pickett, K. (2009) The Spirit Level (London: Penguin)


3 thoughts on “What’s wrong with capitalism?

  1. An Alternative to Capitalism (which we need here in the USA)

    Several decades ago, Margaret Thatcher claimed: “There is no alternative”. She was referring to capitalism. Today, this negative attitude still persists.

    I would like to offer an alternative to capitalism for the American people to consider. Please click on the following link. It will take you to an essay titled: “Home of the Brave?” which was published by the Athenaeum Library of Philosophy:


    John Steinsvold

    Perhaps in time the so-called dark ages will be thought of as including our own.
    –Georg C. Lichtenberg

  2. The supposedly learned author of the above article unfortunately makes the same mistake that all such authors do. They start of their “lecture” without fully understanding capitalism. They start with false assumtions and proceed to build a house of cards from this lack of understanding. Perhaps Mr. Purdy would benefit greatly from further study with an open mind, this time around.

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