Why capitalism can't deliver

Capitalism is the only economic model that has been shown to deliver growth, but increasingly this seems to be at the cost of growing inequality. To participate, you must have something to sell. For most people that means selling their labour. But the rewards to labour have been falling and not everyone can work.

In the UK and many other Western economies, traditionally the welfare state has supported those who fall through the net of capitalism. But welfare state are being dismantled. Political rhetoric has it that the welfare state is too expensive.  Economics is about the allocation of resources. Income – whether from state welfare benefits, past savings, insurance policies or current income is a claim on resources. Welfare benefits are, by and large, funded from taxation. So, when as a society we say ‘the welfare state is too expensive’, what we really mean is ‘we are not prepared to pay the level of taxation needed to fund these benefits’. Instead, individuals are expected to make their own choices about what financial protection and security they want; they are expected to rely on capitalism to deliver their needs.

There are two reasons why capitalism can’t deliver this. Firstly, individual responsibility has distributional consequences. Some people who would have been protected by the welfare state will be unable to arrange their own financial security. For many, their income is too low, the cost of products too high and, in some cases,  their financial resources are just too small to be of interest to financial providers. So individual financial responsibility tends to be a regressive system that perpetuates and increases income inequality. Secondly, there are financial capability issues. Financial products are complex and often bought infrequently. Financial contracts are drawn up by producers unilaterally, not in negotiation with consumers. And financial markets seem particularly prone to unethical and fraudulent behaviour. These asymmetries in information, understanding and power, together with the risks and uncertainties inherent in long-term financial planning, mean that individuals who diligently take responsibility for their own financial security can still experience bad outcomes. So, when as a society we say ‘the welfare state is too expensive’ are we really saying that we are happy to live in a divided and divisive society?

Presentation time: 
Monday, 30 June, 2014 - 18:30

Jonquil Lowe

Jonquil is an economist specialising in personal finance. Much of her work as a researcher and formerly as a journalist and consumer campaigner has concerned pensions, particularly the tension between individuals’ need for a secure income in eventual retirement and the risks and costs involved in saving over the long term.