Capitalism and Values

According to the Britannica Encyclopedia, capitalism is the economic system in

which most of means of production are privately owned and production is guided and income
distributed through the operation of markets.[1] Everything traded under the capitalist
structure has a value in monetary terms, which is called prices. However, these values set by
capitalism do not always reflect utility in the society.
In its early development, capitalism is thought to always establish values on the best
interest of the society. Adam Smith explains the operation of markets as the invisible hand:
a products price is determined at the point where supply and demand meet; higher demand or
lower supply leads to higher prices and vice versa.[2] This price is called the equilibrium
price. In the market, suppliers try to sell at the highest possible price, while consumers try to
buy at the lowest possible price. Their desires are most satisfied at the equilibrium price
because if a seller charges a higher price than the equilibrium one, buyers will go to other
sellers and the man will not be able to sell anything. Smith argues that assigning values
through the supply and demand relationship is the most efficient method to allocate
resources: an individual by pursuing his own interest he frequently promotes that of the
society more effectually than when he really intends to promote it.[3]
One example how the prices set by capitalism maximize economic welfare is the
division of labor. Because people have different innate ability: some are good at arts, some
are good at logic, some are good at emotions and so on, they have different abilities to
produce different goods and services. Therefore, everyone has a comparative advantage over
others in supplying one certain product. In other words, one has lower costs in producing that
good or service. Since everyone has to sell at the same price determined by the supply and

demand in the market, each person has different profit in supplying each market. Hence, to
maximize profit, one will produce what they have the advantage on and have the lowest costs
of production in the economy, and fulfill other needs by buying from others. As all goods and
services are made at the lowest possible price, the society is at its maximum efficiency. In this
instance, the values set by capitalism are at the societys maximum benefit.
However, many later economists argue that Smith theory is based on a too simplistic
economy of the 18th Century. As economic activities develop in both amount and complexity,
markets often fail to present values on the best interest of the society.
One way capitalism can establish non-socially-utilizing values is in monopoly
situations. Adam Smith realizes that monopoly is a method to receive higher prices than the
market equilibrium prices. The monopolists, by keeping the market constantly understocked,
by never fully supplying the effectual demand, sell their commodities much above the natural
price, and raise their emoluments, whether they consist in wages or profit, greatly above their
natural rate. The one is upon every occasion the highest which can be squeezed out of the
buyers.[4] Under capitalism, monopolists can reach their satisfactory level of profit without
reducing costs of production. They can sell at higher prices, and gain as much profit as they
like without cutting costs. As a result, goods and services are not produced at the lowest
possible costs, and economic efficiency is not achieved. Further, because the monopolist can
choose any amount of output, disregarding the most suitable amount decided by the supply
and demand in the market, too little outputs would be produced as they understock the
market. The total resources in the economy are limited, more or less of them being directed to
the monopoly leads to less or more left to the economy. Hence, resources are allocated
inefficiently. In a monopolistic market, the capitalist mechanism tends to establish higher
prices on goods and services than the social utilizing values.

Another case in which markets assign values that is not on the best interest of the
society is merit goods. These are goods that have spilled over benefits beyond what it
brings to buyers and sellers.[5] Under pure capitalist markets, buyers and sellers only focus
on their own profit, but there might be a third party affected by the transaction, which is not
accounted for by the other two. Consequently, these goods tend to be underproduced and
underconsumed.
One classic example for merit goods is education. In a capitalist market, potential
students would consider the benefit from getting the education with the price they are paying
for. The equilibrium price implies that there are people who are not willing or able to
purchase the service. Therefore, only a portion of the population would go to school. The rest
would spend the money for something else because that other thing can gain higher revenue
to that particular individual. Capitalism gives people the right to do choose on which to spend
their money on, with the expectation that they would unconsciously allocate their resources
most efficient to the society.
However, this market price fails to compensate for the benefit of ones education will
have on others. For instance, his or her future family will benefit from having a well-educated
member. The children can be better guided by literate parents than by illiterate ones. In a
macro scale, if everyone can read, there is no need for intermediate peoples to write and read
for others. The costs of communication are much lower. The family and the society did not
pay for the education but still benefit from the persons education. The educated one also has
to way to oversee these third partys benefits. Therefore, if that one is the only to pay for the
education, he or she is over charged, leading to lower consumption. That one chooses not to
go to school is a loss to the society. Capitalism evaluates education as only the benefit it

brings to the buyers without considering the benefit for the society. Hence, the capitalist
values are lower than the one that represent best social interest.
Most importantly, even when markets function as desired at the economic efficient
level, in many instances, the capitalisms values excludes nonmarket values. Michael Sandel
in his book What money cant buy shows that the capitalist market structure erodes other
values when letting the invisible hand be the only factor on deciding the values of goods
and services.[6] One worth that Sandel argues to be crowded out by the market is the ethics
of the queue: first come first serve.[7] The queue values peoples needs by their time spent
in the line rather than the money they pay for the products. Capitalism, on the other hand,
would support paying to skip the line, in other words, putting financial value above the value
of time spent on queuing. Therefore, although efficiency is achieved, the market prices do not
fully correspond to the real values of the goods and services.
The market for kidneys is an example where the capitalist system crowds out
nonmarket values. This market would function very efficiently under capitalism: each kidney
is valued by capitalists by their prices. Paying for kidneys means more people are willing to
give and there are more kidneys available. Economic efficiency is improved by the
introduction of this market. However, the values of these kidneys should not be put in
monetary terms because peoples richness does not decide their need for the kidneys. A
wealthier man does not require, value or deserve the kidney more than a poorer man. By
letting the monetary values of the market have the deciding power, we ignore a basic value:
everyone has an equal right to life. Therefore, even though market efficiency is achieved,
capitalisms structure allows erosions of nonmarket values.
Nonetheless, the alternative to letting the market evaluating prices of goods and
services and distributes resources through the invisible hand is government allocation of

resources. Milton Friedman demonstrates that government intervention in the market can
cause severe consequences to the society. In Capitalism and Freedom, he examines how the
government involvement in the credit market through the Federal Reserve converted a
moderate contraction into a major catastrophe known as the Great Depression.[8] After the
stock market crashed, the Fed continued to reduce the money supply in the market and
refused to save banks facing runs on them. According to Friedman, this led to a domino effect
and caused a disastrous crisis in the economy. Hence, to stop operation of markets in
capitalism might make the situation even worse.
In conclusion, prices the values capitalism assigns for goods and services are not
always the utilized values for the society. Under capitalism, prices might not function
correctly: in the monopoly markets and markets for merit goods, which leads to market prices
different from the efficiency maximizing prices. Even when the market is efficient, capitalism
can establish values for things it should not have the power on, and crowd out nonmarket
values. Thus, in these cases, the capitalisms values are not the social utilized one. However,
it is important to note that the operation of markets is still crucial in the society and trying to
determine values accurately by any system different from the supply-demand relationship is
very challenging and might cause severe consequences.

Bibliography
[1] "capitalism." Encyclopaedia Britannica. Encyclopaedia Britannica Online Academic.
Edition. Encyclopdia Britannica Inc., 2013. Web. 11 Dec. 2013.
[2] Smith, Adam. The Wealth of Nations. Oxford : Clarendon Press, 1976.
[3] Smith, Adam. The Wealth of Nations. Oxford : Clarendon Press, 1976.
[4] Smith, Adam. The Wealth of Nations. Oxford : Clarendon Press, 1976.
[5] "government economic policy." Encyclopaedia Britannica. Encyclopaedia Britannica.
Online Academic Edition. Encyclopdia Britannica Inc., 2013. Web. 11 Dec. 2013.
[6] Sandel, Michael J. What Money Cant Buy. New York: Farrar, Straus and Giroux, 2012.
[7] Sandel, Michael J. What Money Cant Buy. New York: Farrar, Straus and Giroux, 2012.
[8] Friedman, Milton. Capitalism and Freedom. Chicago: University of Chicago Press, 1962