Western economies are losing sight of true capitalism. Instead of connecting supply directly to demand, bankers and large corporations are wedging themselves in and pushing the two primary participants further apart. Monopolies, bubbles and price fixing are becoming common place.
The fundamental principle of Capitalism is that price is dictated by market supply and demand. If supply is too low or demand is very high, the price increases which motivates producers to create more. If the supply is abundant or demand evaporates, then the market corrects again to reduce production. This ensures that effort and money is applied only to activity that is good for society and the economy. No single entity should have complete power over pricing or this balancing act breaks down.
Cartels and monopolies are the oldest examples of where this breaks down. Producers collude to fix the price much higher than the market would naturally pay. The market distortion is limited though as demand can irreversibly change if the price is fixed too high. For example, if the price of oil is raised too high, people will drive less or switch to organic fuel substitutes. What I am more concerned about these days is the banking industry’s involvement in the market. Huge trading desks exist for various different commodities. Investment bankers and fund managers are taking huge chunks of wealth to the market and it is distorting demand. In the last decade, many asset bubbles have come and gone at an alarming pace. Money that could have gone towards into improving society or better technology has been spent on overvalued assets and meaningless financial services.
I’m no longer sure how to categorise our economic model. All I know is it isn’t Capitalism.
Random Musings 