This article is part of the Small Business Series intended to support the development and growth of small business. As a small business built to serve others like us, we believe small businesses are fundamental to a healthy market and democratic society.

Capitalism is an unsustainable and destructive force. I know, “them’s fightin’ words”, but let me explain. The primary goal of capitalism is to multiply capital, but this operating force creates a perverse incentive that inevitably leads to the decline of quality.

Those of us nurtured with a quasi religious cultural devotion to the ideology will at first take offense to this preposterous assertion. After all, we were told capitalism nurtures competition and competition creates higher quality and lower prices. But it’s always healthy to question our assumptions and go back to first principles thinking, especially when discussing strongly held beliefs. In this case, even the most superficial review of lived experience leaves no doubt that over the past 70 years we have seen a significant reduction in the quality of food, products and services. This should motivate the curious and honest thinker to at least ask why.

Declining Quality in Every Sector

Below are a few basic examples of undeniable decline in quality, enough to show the trend is pervasive across sectors. Obviously there are exceptions where quality has increased, but as we’ll discuss below this is happening despite the primary forces of Capitalism, not because of it.

Food. The invention of processed food allowed manufacturers to remove critical nutritional components from food (e.g. fiber) to greatly increase shelf life. Fast food transformed low quality ingredients into tasty treats for busy lifestyles. Monoculture industrial farming improved yield, but required unhealthy pesticides, selected for fast growth and supermarket beauty over taste and quality. Many lactose or gluten intolerant Americans are shocked to find out they can eat bread and drink milk without problems when they visit Italy. Food quality has severely diminished under Capitalism’s relentless push for profit.

Products. Mass-produced clothing has lower-quality materials designed to wear out quickly. Appliances used to last for decades, but now lower quality components and intentionally designed “Planned Obsolescence” deliberately sabotage products with key components made out of an entirely inappropriate weak material so that it breaks after a predetermined number of uses, making an otherwise functional product totally unusable. To make matters worse products used to be repairable, but now it’s either not possible to repair things (because they are glued together or proprietary replacement parts are not available on the market) or the parts and labor to repair something are nearly as expensive as purchasing a new product. Product quality has severely diminished under Capitalism’s fiduciary obligation to investors.

Service. We are all familiar with declining quality in air travel experience (e.g., shrinking seats, baggage fees, less legroom, disappearing in-flight refreshments). Customer service across most sectors has replaced serious employees with automated phone trees, ridiculously long wait times, and if you are lucky you’ll reach a real person who is either an overseas operator or a prison inmate paid slave wages who expresses fake concern without the power to do anything. Service quality has severely diminished under Capitalism’s primary focus on growth.

Subscription not Ownership. The latest business trend is turning everything into a subscription model so that we don’t own anything. Music, movies, games, software are no longer owned but rented via monthly subscriptions. Twenty-Five percent of cars in the U.S. are now leased instead of purchased. The average age of a first time home buyer is 56, which means that the majority of people pay what is essentially a monthly subscription for housing as well! 

In every category we see clear examples of how the pursuit of profit (increased accumulation of capital) has actually undermined the quality of the product or service. These market driven choices were great for profit, but absolutely devastating for real metrics of quality of life like health, education, ownership, and independence.

Markets vs Capitalism

To understand how this decline in quality is possible, we need to be sure we know what Capitalism actually is and isn’t. We often confuse our terminology and lump all business and markets under one big umbrella called “Capitalism”, but this is inaccurate. 

We live in a self-described Capitalist society, so we just assume everything good is the result of Capitalism and everything bad is Socialism. But what is the specific difference between Capitalism and traditional markets where vendors and customers have exchanged value for as long as human civilization? What makes the corner market in Communist Beijing different from the one in Capitalist New York? They are both privately owned, they both set prices based on supply and demand, and they both create profit.

When we take a word or concept for granted, but suddenly find we can’t offer even the most basic uniquely defining characteristics, we know we’re entering into the realm of ideology and faith. Exploring the answer to this can offer enlightening insights into the fundamental structure of our society and our own personal worldview itself.

Merriam-Webster defines Capitalism as “an economic system characterized by private or corporate ownership of capital goods, by investments determined by private decision, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market.” But all of these features are not unique to Capitalism per se as they just describe basic market exchanges that have been in practice in every corner of earth for thousands of years and even happen in Communist countries like China. So the defining characteristic of Capitalism must be much more subtle.

Ironically, the word “capitalism” itself was first coined by a French Socialist politician Louis Blanc around 1850 to describe a system where capital (wealth and means of production) was controlled by a few at the expense of the laboring classes. The term was later popularized by the now infamous Karl Marx in his treatise Das Kapital (1867), where Marx analyzed the capitalist mode of production as a system where surplus value is extracted from workers by people he called capitalists. Initially used as a sharp critique of a real social phenomenon causing great harm, after the Second World War the term was strategically whitewashed as a positive cultural identity and ideological alternative to “Communism” (during America’s Cold War with the United Soviet Socialist Republic). But at the core, the very real exploitation and intrinsic problems of Capitalism didn’t magically disappear.

Economic Anthropologist and London School of Economics professor Jason Hickle, gives us a clear definition of what differentiates Capitalism. Traditional market participants focus on the fair exchange of goods and services because they have utility. Capitalism is an economic system that invests capital in order to generate and accumulate more capital. You read that right, money is not a means to an end but the end goal itself, money exists to create more money. Capitalism puts the cart before the horse, and in fact the horse isn’t even strictly necessary if the story about the horse is convincing enough, and you can sell futures or abstract bundled derivatives about what the horse might do.

So as an example, a vendor who innovates a better, cheaper way to produce a product that has utility for a buyer may accumulate more capital (get rich) as a result of his hard work and intelligence. That’s what we generally think of when we defend “Capitalism”. But that’s not capitalism, that’s just old-fashioned hard work and a fair exchange of value based on utility. It becomes capitalism when he sells shares in his company to investors with the promise that his company will continue growing in profitability every year (multiply capital). The investor is not satisfied with a healthy thriving business that generates the same revenue every year, they want to grow their capital. That’s capitalism. But making the growth of capital the primary goal creates a perverse and dangerous incentive that creates the very real problems that Marx and others described when they coined the term Capitalism.

The Relentless Demand of Unsustainable Growth

When the primary goal is multiplication of capital, there is a relentless force that demands constant, cumulative growth. But that imperative means everything else can and eventually will be sacrificed. And as we see by comparing current products and services with those from decades ago, quality, a low hanging fruit, is usually one of the first things to go. Not to mention the environment or human well being.

An established publicly traded company is expected to grow revenue and dividends 5-15% per year. And startups are expected to grow an incredible 300-500% per year in the early years of Seed and Series A and B. This is truly insane. 

To return to the example of just a regular small business that sold shares to an investor, the business owner has now engaged in a very demanding agreement. At the very least an investor would expect to get more ROI than a low risk mutual fund which will return at a minimum 5% per year. This type of growth at first might come from adjustments like working a little harder, staying open on weekends, producing more quantity of product, increasing advertising. But then the next year the business needs to continue doing all that and also grow another 5%. But the owner can’t work more hours in the day so he must expand to new markets, selling in other neighborhoods, then other cities. But opening up new markets is risky, one location is not identical to the next, some locations have different tastes and needs, others have more fierce competition, some locations fail. And opening up new stores, hiring, training, scaling up production, all this requires capital. So the business must seek a combination of debt and new rounds of investment to fund this growth. 

But the next year he still needs to grow capital for his investors or they’ll sell their shares and his company won’t be able to sustain the expanding infrastructure costs and debt. So he shows his amazing growth numbers to a new round of investors that want a piece of the action. With this new money he buys out his competitors, corners the market, and raises prices. This isn’t great for consumers, but it makes his investors happy. But next year he needs to generate more growth again, so he cuts corners on production costs, reduces the quality of materials/ingredients. The next year he still has to grow 5%, but those cuts didn’t produce enough growth to satisfy investors, so he decides he is going to need to grease the palms of politicians to reduce environmental protection costs, give him cheaper mining rights, secure public contracts, and add regulations that discourage competition and protect his effective monopoly. The next year he needs to generate 5% more growth, so he exports labor to another country with cheaper labor and no workers rights. 

He’s taken on debt to grow, and everything is manageable as long as the business keeps growing, as long as the music doesn’t stop. But every year this continues, an incessant requirement for endless growth of capital. Grow or die. And very quickly every decision is based on hitting growth targets, multiplying capital for investors, so that the music doesn’t stop, triggering a collapse of the house of cards. 

Explosive Growth Is Not Natural

In contrast to an investor funded Capitalist model, a simple small business can thrive by providing a great product and service for a fair price. There is steady growth that is a direct result of real market demand for fair exchange of value. It creates an honest living, it creates a solid business and it is sustainable and not overextended. Capitalists will scoff, saying that they aren’t interested in anything without explosive growth. But it’s good to remember that explosive growth is not natural. In nature explosive growth is dangerous, it is found in volcanoes, cancer, epidemics, swarms of locusts, anything that doesn’t respect balance and well established limits. Explosive growth indicates something is not healthy, and things always go back to equilibrium. Cancer kills the host. Locust devours the land. And yes, Capitalism destroys the market that feeds it.

Why didn’t competition improve quality and drive down costs?

Competition should in theory create fitter companies with higher quality and lower costs. But in reality competition is not actually an integral value or priority of Capitalism per se, it’s an inherent factor in traditional free markets that operate independently of investor capital priorities. Unregulated Capitalism will happily destroy all competition to create a monopoly, if it results in growth. And in fact, competition is Capitalism’s enemy, it makes profit much more difficult to achieve. More competition creates a smaller market share and lower prices, which means lower profit and less capital accumulation. 

Competition “should” create better quality, and yet Capitalism and growth wins. Competition is a passive unguided force in the market, while Capitalism is driven by powerful people with great resources that have the ability to manipulate the market and laws in order to achieve their goals. Capitalism’s driving force actually seeks total monopolistic domination, which is inevitable as power accumulates.

Quality will be reduced as much as possible as long as it doesn’t compromise growth. And the same is true of reducing costs, companies all share the same desire to charge as much as the market will bear, so they do (and often collaborate unofficially toward the same goal of higher prices/profit). One practical example of this is mobile phone service: in Italy you’ll pay $10/mo for the same service that costs $100/mo in the United States. Why isn’t Capitalism working to increase the quality to cost ratio? It is, it’s working perfectly, exactly as it’s designed to work: increase capital for investors. And the costs will remain high, as long as the market will bear it.

In general, there isn’t really much competition for a few different reasons. First, unregulated Capitalism devours itself because capital accumulation increases the power to accumulate more capital, which creates power that inevitably leads to monopolies. And even when there is an appearance of competition, there is effectively no real competition when the same banks and investment firms and billionaires own stocks in and sit on the boards of “competing” companies. Another aspect of this accumulated power is the ability to corrupt politicians in order to weaponize regulation, to increase the barrier of entry into the market for small competitors. And finally, smaller competitors are simply purchased and integrated or left to remain as separate brands to give the appearance of competition.

And the other side that is needed to breed competition is demand. It’s not that people don’t want quality products and services, but the purchasing power of the majority of market participants has declined, due dramatic fiat currency debasement and inflation. The capital owning class had the disposable extra income to invest in non-cash assets not degraded with currency debasement, so they do have money to afford the same quality products and services that were normal 50 years ago, but they are only 1% of the population. Everyone else has slowly seen their savings devalued, wages stagnate, and the real-world purchasing power of their money eroded with inflation. As a result, the market demand is weak for high quality products and services, so there is no competitive incentive to increase quality for a market that has no money to pay for quality.

The Crisis of Capitalism

Unfortunately you can’t deliver endless growth without eventually sacrificing everything else, including quality. And even if you do sacrifice quality, there are real limits to how much a standard product or service can be degraded in quality, year after year, and still remain a functioning, competitive product. And there are real limits to how much extra profit you can squeeze out of making production more efficient. And there are limits to how many customers you can obtain on earth. And at some point there are hard limits to how many resources you can extract from a finite planet. At multiple points capitalism’s demand for endless growth reaches an existential crisis.

Historically Capitalism has always run into hard limits of growth. We see this pattern repeating over and over again. But each time Capitalists find a way to continue accumulating capital past these limits, but it always requires violence and exploitation. For example when peasants in 15th century feudal Europe began to increase their standard of living and independence thanks to access to the Commons (hunting, grazing, fishing, timber) they were no longer willing to be exploited by the lords. So the oligarchs passed “enclosure” laws to prevent access to this public resource that was critical for the peasants to establish and sustain their independence (i.e. the wealthy seized the means of production). This created artificial scarcity and forced the working class back into poverty and into the cities to work in an increasingly industrialized economy that needed cheap labor. 

When resources were exhausted in Europe, colonialism became the next “solution” that allowed capitalists to extract cheap resources and cheap slave labor from other parts of the world. Like the peasants that no longer had access to the Commons, these new colonial lands then became new markets to expand profit. They often destroyed thriving local industries that allowed the natives to be independent, forbid locals from consuming their own resources (e.g. potatoes and wheat forcefully exported to a foreign market) and then resold them foreign products at high prices. 

For a more detailed and fascinating historic summary, see Jason Hickel’s book Less is More, chapter entitled “Capitalism: a Creation Story”.

Amoral or Immoral

Capitalism’s primary goal is the accumulation of more capital. The International Monetary Fund says one of the primary and important features is “self-interest”. Under this logic, a housing developer is incentivized and justified to leave perfectly good houses empty, while people freeze to death on the street, because an artificially low supply will maintain higher prices for the other occupied homes. A company that reduces costs by 90% by hiring prison inmates as slave labor, has made the correct fiscally responsible decision to fulfil their “fiduciary obligations” to increase a return on investment to their investors.

Capitalism is sold as amoral, neither good nor bad, just supply and demand with abstract partners working out the best price. This has allowed good Christians to justify a dual loyalty to Jesus and Capitalism, without considering the contradiction between “self-interest” and core tenets of their faith, where Jesus’ condemnation of the wealthy make Karl Marx look mild. As philosophers have long understood, money is power, and power is politics. Every choice has moral implications, supply and demand has a social impact, consequences on resource usage, worker exploitation, environmental impact, human rights, quality of life. 

If billions of dollars of marketing and a culture of consumerism has brainwashed someone into feeling so inadequate that they feel a “need” to pay for something they don’t need, this is a moral problem with a social and environmental impact. If someone is forced to pay for something they do desperately need but can’t afford because prices are artificially elevated due to engineered supply shortages, this is a moral problem. We cannot pretend that economics is amoral and wash our hands of all responsibility because the abstract “free market” has rendered its inscrutable judgement. Morality is ultimately just survival instinct, the accumulation and cultural normalization of common sense, thousands of years of pragmatic lessons teach us what is necessary to keep a society healthy and sustainable. A system driven solely by self-interest and the unique goal of multiplying capital will consume itself if it does not concern itself with morality and common sense. 

And beyond just quality of product, Capitalism is also failing its promise of protecting “private ownership”. The accumulation of capital by a few wealthy and powerful people, is creating immense compounding inequality to a point where the majority of people are peasants that own nothing. Ironically we were told that Socialism is bad because it advocates for shared public ownership of the critical means of production (contrary to popular conception, personal ownership is fully normalized). But as we see Capitalism is effectively abolishing both public ownership of the means of production (privatization of key public infrastructure and destruction of small business) as well as personal ownership (subscription economy). Instead of private and public ownership, now everything is just owned by a few corporations (without the public even having the right to vote in the entities that rule over them).

Capitalism leads to unsustainable consumption, destroying the environment and people through over extraction and exploitation for short term profit. Capitalism leads to a dangerous concentration of wealth, because money is power and power is able to create monopolies and market manipulation. All of these things happen in a system where the only moral imperative is growth of capital. A religion whose only doctrine is growth at all costs.

Clarification and Call to Action

A healthy, moral business does not have to stay “small”. The natural elements of a traditional market can allow an intelligent business to innovate, create a superior product that meets real market demand, so that it grows to employ thousands and creates great wealth. There is nothing immoral about “wealth” or “growth” per se, when it’s not the result of exploitation and corruption, and when it’s sustainably based on real market supply and demand (not artificial market manipulation and extraction at all costs).

And as discussed in my other article Regaining Control of the Means of Production, small business has a critical role to play in powering a healthy economy by keeping ownership of production widely distributed. This protects democracy by preventing wealth—and thus power—from concentrating in a few hands. And small businesses’ close ties to the community and each employee foster fairness, collaboration, and strong, cohesive communities.

And in the real world, these lines are obviously blurred, our market is full of every type of business that employ varying degrees of Capitalist values. A company may take some capital investment at key points to fund growth, without compromising values, because they have a solid enough business position to allow them to be patient and push back on unrealistic investor expectations, or because they have very principled founders who stay true to their values despite pressure to cut corners and multiple capital at all costs. 

But the point of this article is to analyze the real-world results of the Capitalist system as a whole. The mechanisms that control capitalism create a perverse incentive to sacrifice quality, and the trend shows this is true. The purpose of learning is so that we can recognize the inherent problems of a system, and then avoid repeating those mistakes. There is nothing inherently immoral or stupid about borrowing money from a bank or accepting investor funds for very specific and justified business purposes. But you must understand the risks and be sure you have the plan and means to avoid risks, i.e. select investors that share your values, and don’t seek investment in speculative growth that isn’t backed up by real market supply and demand.

The purpose of this entire Small Business Series is to support small businesses and entrepreneurs who operate ethically, based on a fair exchange of value and sustainability. This is particularly important in a market context that is increasingly hostile towards small business. It’s very important to understand that small business interests and values are not aligned with Capitalism per se. And corporate lobbying for supporting “business” is generally not in the best interest of small business. In reality, investor-funded corporations are in fact seeking to manipulate the market environment in their favor, which puts small business at a disadvantage. Consider this when holding your political representatives (of both parties) accountable as they accept ludicrous amounts of corrupting money from corporate lobbying. 

Common sense and ethics that are good for people, will also be good for small businesses. Put people first, in business practice and political policy, and your business will thrive. And if there is a conflict between the interests of the public and the goals of your business, the business is probably doing something wrong that needs to be evaluated and fixed, because long term even the business will suffer if it harms the people in the market that makes its existence possible.