What is social capitalism?

Social capitalism is any capitalist system that is structured with the ideology of liberty, equality, and justice. Instead of aiming to accumulate only economic forms of capital, it explicitly values all forms of capital, including social capital, human capital, and natural capital. Instead of maximising profit for the 1%, it involves profit maximisation for all of society. This eliminates externalities^[1] and stops labour, and therefore humans, from being treated as a commodity. This form of capitalism could be called moral capitalism.

Social capitalism explicitly values all forms of capital, including social capital, human capital, and natural capital.

Capitalism describes an economic system in which a society’s means of production are held by private individuals or organizations, not the government. Capitalism is however not the perfect free market that is described by idealistic economic theory. All forms of capitalism involve various rules and regulations that aim to minimise the destructive effects of capitalist market dynamics such as inequality and exploitation. Without these social protections capitalism would collapse. Capitalism provides the conditions for its own destruction.

Every capitalist system, in every country, has social protections that mitigate the destructive effects of market dynamics. There are many flavours of capitalism, with various degrees and types of regulation of the market. Capitalism does not spontaneously evolve; it is designed by governments that create and enforce the ‘rules of the game’, and these rules change over time. Different countries have different market regulations and different degrees and forms of social protections.

These regulations relate to labour, market practices, common property and many other issues. Examples of labour regulations can include minimum wages, fair hiring and termination rules, antidiscrimination laws, and health and safety rules. Market practices include protections against price gouging and price fixing, and common property rules control use of commonly owned resources and prevent dumping of waste on public land. Most government activity relates to the regulation of market forces, highlighting how quickly capitalism would collapse without regulation.

Unfettered capitalism is inherently incompatible with the values of liberty, equality, and solidarity.

Unfettered capitalism is inherently incompatible with the values of liberty, equality, and solidarity. Capitalism claims to be libertarian, to allow people to act as one pleases without oppressive restrictions, however, the reality is quite the opposite when the majority of the population becomes ‘locked in’ by poverty and the systematic exploitation of their labour.

Similarly, capitalism claims to provide equal opportunity for individuals to pursue a profit, however the deck is stacked against anyone who lacks capital. The result is increasing inequality that must be somewhat remedied by government regulated wealth redistribution in the form of taxes and social security.

Finally, capitalism undermines solidarity since it encourages competition and self-interest and values narcissism over solidarity.

The economic theories underpinning capitalism involve assumptions that create contradictions that ultimately and inevitably result in collapse. These assumptions simplify complexity which makes analysis possible, however the assumptions should be recognised as such, and not used as the foundation for the entire system. These assumptions tend to be only partially true or only true under certain circumstances or conveniently exclude factors that are difficult to value empirically.

I will briefly discuss a few of the key assumptions below.

Infinite growth

Capitalism requires growth, without which the economy collapses. Capitalism is predicated on infinite growth, which is clearly impossible in a finite system (i.e. earth). There have been claims that there could be a decoupling of material throughput and profit; that profit could increasingly be derived from non-material services so not requiring natural resources. This however is only partially possible and is yet to be realised.

“Anyone who believes in indefinite growth in anything physical, on a physically finite planet, is either mad or an economist.” Kenneth Boulding

The rational actor

Classic economic theory assumes that people always act rationally. The key assumption is that rational self-interested firms maximize profits and that rational self-interested consumers maximize their “utility”. This however has little resemblance to reality. As any sociologist knows, our reality is subjectively constructed, meaning rationality is also subjective. What is rational for one person, based on their constructed reality, may not be rational for another. Behavioural economists have accumulated a mountain of evidence that suggests that we don’t behave as a rational homo economicus^[2].

Perfect information

In economic theory, the assumption of the perfect free market is based on all consumers and producers having perfect and instantaneous knowledge of all market prices and all benefits and disadvantages of the product, its production and disposal. This is an absurdity that has no connection to reality.

The “invisible hand”

One of the bedrock assumptions of neoclassical economic theory is that self-interested actions automatically create socially desirable ends. While originally used by Adam Smith to describe ideal market function, the concept has been used to justify laissez-faire economic philosophy^[3] and trickle-down theory. However, this assumption is crude and naïve trust in the goodness of those wielding economic power as demonstrated by decades of economic disasters and the absolute failure of trickle-down economics to improve the plight of the working class.

“The reason that the invisible hand often seems invisible is that it is often not there.” Joseph E. Stiglitz

Externalities

Externalities are the true costs or benefits of a product or service for society as a whole that cannot be reflected in the market. They are any costs or benefits that affects a third party who did not choose to incur that cost or benefit. An example is pollution where the producer profits while individuals or the whole society bear the costs. While government regulation can take actions to internalize externalities^[4], they can never be perfect since it is not possible for regulators to have all the information required to design a perfect intervention. This leaves opportunities for exploitation.

Moral responsibility

Within capitalist economies individuals have the opportunity to pursue profit even where others (human and non-human) are exploited. Capitalism has created the absurd situation where some people claim that corporations have a moral responsibility to their shareholders to maximise profit, within the limitation of the law. Taken literally, this has been used by executives to justify abhorrent exploitation in the name of profit. For example, cost cutting on health and safety measures that have resulted in injury and death. It can also include breaking regulations that protect society or the environment where the fine is less than the profit made by breaching the rules.

Labour as a commodity

The productive power of human labour to create capital is a very important part of capitalism. Labour is a major factor of production so is valued in so much as it can generate capital and on the basis of scarcity. A worker tries to sell his or her labour to an employer in exchange for a wage or salary. This commoditisation of labour tends to be dehumanising, especially where work is reduced to this transaction.

Further discussion of these assumptions is beyond the scope of this article.

These assumptions are divorced from reality and mean unrestrained capitalism is inevitably unsustainable. This is not a new finding and it is the reason why the market is regulated by government. All capitalist systems require intervention to avoid rampant exploitation and inequality.

Concern over excessive market control

Some people see the degree of social protections on a continuum from limited protections to oppressive protections. They equated an unregulated market with freedom and market regulation (i.e. social protections) with oppression.

Appropriate social protections tend to only oppress capitalist’s ability to exploit others

This is complete nonsense since for the majority of society the opposite is true. Appropriate social protections tend to only oppress capitalist’s ability to exploit others, including non-human others.

Proponents of the free market fear that oppressive altruism punishes the productive and rewards the unproductive. They think that if people can get wealth redistribution they will be lazy and not motivated to work. This however is unfounded. Evidence suggests that humans feel a strong desire to work, to create, and to be part of productive ventures. There will likely always be free riders who want to take more than they contribute however these problems can be solved in other ways.

Social capitalism

Social capitalism is not fundamentally different from the form of capitalism that exists in many countries today. The key difference is in the values that underpin the system. Social capitalism involves a reorganisation of our society and economy to account for and value non-economic factors.

A corporation can treat labour as a factor of production that creates profit WHILE valuing and respecting their workforce for more than their labour. Those businesses who do this typically enjoy more profit than those who take a more exploitive approach. It is possible to reduce environmental impacts while making a profit; they are not mutually exclusive.

Social capitalism may be achieved from top down regulation to correct market failures; however, it would be far more effective for us to change our value systems. This would make regulation unnecessary.