Capitalism or Fraud?

The Risk of Imagining Capitalism to Be Unfettered
by Dean Baker, Center for Economic Policy Research
16 August 2016

In the case of Volkswagen, they deliberately lied to their customers about the product they were buying. Many of the people buying Volkswagen’s diesel cars were buying them explicitly because they wanted an environmentally friendly cars. It is not clear that it is accurate to call a system of capitalism “unfettered” if companies are allowed to lie to make money from their customers. Would this mean that in “unfettered” capitalism, airlines could charge people in advance for a plane ticket and then not actually give them a seat on the plane? That would be equating unfettered capitalism with legalized fraud.

In the case of Vioxx, Merck was alleged to have deliberately withheld evidence that the arthritis drug posed risks to patients with heart conditions. Its motivation was to increase sales. The reason that Merck had such a large incentive to increase sales was that the government gave them a patent monopoly that allowed it to sell Vioxx at a price that was several thousand percent above its free market price.

Without this patent monopoly, Merck’s profit margin on Vioxx would have been comparable to the margins that companies make selling paper cups and pencils. These sorts of profit margins would not likely have provided the sort of incentive to conceal evidence at the risk of patients’ health and life. It is hard to see how a government-granted patent monopoly can be seen as unfettered capitalism.

In the case of predatory lending, the question is whether companies can use deceptive practices to get people to take out loans if they do not fully understand the terms. The logic here is that smart people trained in law can write complicated contracts that a typical customer is not likely to be able to understand without spending a great deal of time and effort reviewing it.

If we allow for complex contracts with consumers to be enforceable, then we are providing an incentive for highly trained lawyers to spend a great deal of time figuring out how to design complex, deceptive contracts. We also then will effectively force consumers to spend far more time reviewing contracts to ensure that they are not being ripped off. This is an enormous waste of resources which is also likely to result in an upward redistribution of income.

As is the case here, in many instances where people claim they are talking about unfettered capitalism, they are actually talking about one person’s “right” to dump their sewage on their neighbor’s lawn. The dumper is invariably more powerful than the dumpee. It gives the issue way more respect than it deserves to ascribe to it a principle like “unfettered capitalism.” It’s really just a question of whether we want a system where the rich are allowed to rip off everyone else.