Why can’t capitalism be changed so that it prioritizes long term profits over short term?
- 1. The fundamental forces causing capitalism to be short-sighted
- 2. Why wouldn’t a capitalism focused on long term profits be sufficient to address all things that socialists/communists care about?
- Wait, it’s all just game theory? Always has been.
- What is it about capitalism, exactly, that you think is worth salvaging?
I saw this post on r/DebateCommunism, and I had a bunch of thoughts that seemed suitable for a blog post of sorts, so here I am.
For full clarity, the post has the same title as this blog post, and the content of the post simply has the word “Shouldn’t*” — indicating that they maybe meant the second word in the title should be “Shouldn’t”, instead of “can’t”
So with that in mind, I’m going to speculate on what they were getting at. I think, given the context of the subreddit it was posted to, it was presented as an alternative to socialism/communism. That is, “Why isn’t making efforts to cause capitalism to value the long term outcomes over the short term outcomes sufficient to solve the issues that socialists/communists care about in society?”
I think there’s two main ways to answer this question:
- Why you can’t reform capitalism to prioritise long term profits over short term profits, and
- Why that wouldn’t be sufficient, even if it were possible
1. The fundamental forces causing capitalism to be short-sighted
This point can be further broken down into
(i) capitalism as it exists today, with its share trading and financialisation, and
(ii) capitalism’s fundamental incentive to guarantee the rise of (i)
For (i), any system which allows people to invest in, profit from, and then withdraw from, at will, necessarily favours short term thinking.
Financialisation isn’t really necessary to talk about here, but it’s a further abstraction and liquidation of the layers beneath it, so it’s just a compounding of it.
If you have an enterprise that has a long term strategy of short term pain in exchange for later long term gains, and share trading is freely available, then a ‘rational actor’ simply doesn’t buy in until after the short term pain period is over, instead investing in another enterprise that’s currently in it’s post-short-term-pain, “long term gains” period in the meantime.
This is a fairly basic game-theoretic analysis of such a system. Of course, real world behaviours are never that simple, and maybe some specific implementations try to mitigate such incentives, but the strategy is more optimal than any others, and so the incentive (2nd order) to ensure the system retains these incentives is inescapable — see (ii).
The way to escape this is to have a 2nd order incentive to change the system to avoid those incentives, but I believe that’s all but prevented from being a permanent solution due to (ii).
For (ii), the fact that shareholders could conceivably make money more “efficiently” by enabling such free share trading as described in (i), means there’s always the incentive to give rise to the system described in (i), which contains those incentives to favour short term strategies.
Since the shareholders / owning class in any capitalist society are the ones with the most incentive and means sway policy to suit their interests, such a system will always arise under capitalism.
2. Why wouldn’t a capitalism focused on long term profits be sufficient to address all things that socialists/communists care about?
Well, I mean, obviously, what I’m going to say is going to be along the lines of “favouring short term profits over long term profits isn’t the only problem with capitalism”
It’s not even one of the main problems, in my mind, any more.
Don’t get me wrong, it’s significant, and a lot of aspects of life under capitalism would be significantly better if capitalism were possible to change in this way and was thus changed.
However, the bigger problems are, which are not possible to address with this approach
- negative externalities: if corporations aren’t required to pay for the full extent of the negative harms that their actions do to society and the environment, they’re never going to prioritise it over profit, even if they know that, if nothing changes, eventually, the world will end in the metaphorical and literal fires of climate change, for one example. A corporation that pollutes is ~never going to volunteer to increase costs by reducing or eliminating their pollution — unless it’s as an attempt to head off political pressures to introduce regulation. And even then, corporations are ~always going to support, often significantly and financially, any efforts to prevent and undermine regulations against pollution — they can spend a million on lobbying to save tens of millions in increased cost. Again, this is just game theory, in this case I believe it’s the “Tyranny of Small Decisions”. Further, similar to what I described in section 1.(ii), there’s always an incentive and means (under capitalism) to modify the system such that this point remains or becomes true once more.
- the profits in question are the profits of a few people, not broader society: I’ve understood for a few years now that economics isn’t a zero-sum game, so often when a corporation (or its shareholders) generate a lot of profit, it has positive effects on some of broader society, at least for a time. This is similar to how capitalism is “better” than feudalism; it’s not all bad, compared to all possible alternatives. However, since the profits are directly controlled by the few that own the enterprise, and those few are the same people who have control over the enterprise, the enterprise will ~always favour the interests of those few over the interests of broader society. One of the biggest examples of how this matters is point 2.1 — negative externalities.
- none of this addresses the most fundamental contradictions of capitalism — that it favours the concentration of wealth and power into fewer and fewer hands. Capitalism’s mechanisms ensure it’s own degradation into something akin to monarchy or despotism. Sure, some long term foresight can see this coming, but foresight alone cannot change the incentives and mechanisms. To change the incentives enough to prevent this outcome would be to change the system enough to no longer be able to meaningfully call it “capitalism”.
There’s one slight possibility — social democracy (SocDem) — a society in which capitalism continues, but the people of the society are politically informed and active enough to maintain meaningful control over legislation to prevent capitalism from having the power to break free from its regulations, but I am not convinced that this is actually possible at this time; I think the incentives to consolidate wealth and power is such that it will always, eventually outweigh the general public’s capacity for political activeness. The only way to prevent this from happening is to disallow the ability to privately make money from existing wealth — while-ever this is possible, the wealthy will always be able to accelerate their wealth-accumulation far and above the average citizen, and thus concentrate wealth over the long term, until the population’s political activity can no longer contain it within any established institution (I do ultimately think that the total sum of available power of the population can never be surpassed, at least, not unless and until we’re outnumbered and outgunned by generalised AI… jokes…mostly).
Wait, it’s all just game theory? Always has been.
In summary, game theory is pretty great for analysing these systems.
I’m sure there’s plenty of other useful frameworks that also give adequate or even better analyses than I have here; I wrote this in basically a one take braindump, so I’m sure there’s loads of good points I’ve left out, as usual.
My conclusion is: “capitalism is cringe”.
And on that note, I might leave you with a question:
What is it about capitalism, exactly, that you think is worth salvaging?
Spoiler alert: whatever you say here, I’m almost certainly going to say isn’t a defining or exclusive feature of capitalism. But I guess we can address that later.