Capitalism Can be Inefficient Sometimes

Capitalism is broken in the sense that it is not efficient.  Yes, these inefficient markets do tend toward fixing themselves without government intervention, but the inefficiencies do exist.  And, that is what makes it so great!  There is absolute beauty in inefficient markets.  Those flaws are what enable opportunities.   A disparity in wealth and the existence of classes create incentives for people who earn less to want to make more, and because people in capitalist/free enterprise societies are less restricted in their choices, they pursue more affluent lifestyles without having to leap over so many obstacles, as exist in more regimented societies.  A perfectly efficient market immediately closes gaps that makes better than average opportunities no longer available.  In other words, with perfectly efficient markets, everyone essentially holds the same amount of wealth, eliminating the incentives that produce growth in an economy.  Purely communist societies seek to eliminate inefficiencies through centralized planning, but those in power of such systems find it irresistible to not use their positions of power to grow personal wealth, thereby creating two classes, largely disparate, with little opportunity for most people to change their station in life.

Among the criticisms of capitalism is there is a sort of inherent unfairness, that wealth can become concentrated amongst some while others are less fortunate.  Of course, this ignores the fact that there are also classes of the wealthy in socialist and communist societies.  It’s just that in those societies, the wealthy are the ruling class rather than private individuals, and there tends to be a wider disparity between poor and rich with sometimes no existence of a middle class.  So, instead of calling disparities “unfairness,” it’s more accurate to consider them as the consequence of inefficient markets.

As a practical example of how inefficiency in capitalism works to the benefit of nearly everyone who participates, we can look to the stock market.  The stock market moves on information – earnings announcements, forecasts, government actions, rumors, etc.  Because that movement of information is imperfect, there are opportunities to find stocks whose prices are below their intrinsic value.  A stock’s intrinsic value is derived from the present value of its future cash flows.  However, all variables that may affect those cash flows are not known to everyone, and no one has all the pertinent information, because the entirety of the economy has some sort of effect on each stock.  So, because the market is valuing such stocks in an inefficient manner, people can profit from them.  If perfect information were available, there would be no movement in stock price, because the intrinsic value of the stock would have been assigned with all information taken into account.  Because no one person has all the information available, it doesn’t matter who you are.  You have the opportunity to make money from investing in stocks.  Even small individual investors can get an edge on people who are insiders that have either not heard or not taken into account information you may hold.

Similarly, in a capitalist system, all goods and services are priced inefficiently, as is labor and capital.  This is why economists have differing predictions.  Again, there is an imperfect flow of information and no one person has all the information available.  So, opportunities are created for inequities in the pricing of all goods and services that allow people to accumulate different levels of wealth.  Some goods trade on prices out of parity with their value that allows for greater profits.  Some services sell at prices greater than their value.  Individuals who capitalize on these inequities grow their personal wealth.  As they grow such wealth, there is still more wealth to be made, and so they continue to contribute to the economy’s growth, creating even more opportunities along the way.

More at Source: Capitalism is a Broken System – Being Libertarian

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