Capitalism’s Toxic Assumption (Book Review)

My book review on Eve Poole’s Capitalism’s Toxic Assumption, redefining next generation economics.

Classical assumptions on competition, pricing mechanism, and other elements of capitalism find little support among modern theories of market economics. For example, game theory emphasized the importance of cooperation and undermines the old theory that competition is always the best business strategy.

The Shaky Foundations of Classical Economic Theory

Scottish philosopher Adam Smith’s influential Inquiry into the Nature and Causes of the Wealth of Nations, written from 1766 to 1776, serves as the literary foundation of capitalism.

Some regarded it as the bible of modern capitalism. But today, the capitalist orthodox in The Wealth of Nations could turn out to be a deterrent to the advances of market economies. Since the book’s publication, seven “toxic assumptions” about capitalism have gained a strong foothold and now threaten the economic system’s evolution.

The 7 toxic assumptions are as follows

  1. The Assumption of Competition
  2. The Assumption of the Invisible Hand
  3. The Assumption of Utility
  4. The Assumption of Agency Theory
  5. The Assumption That Market Pricing Is Just
  6. The Assumption of the Supremacy of the Shareholder
  7. The Assumption of the Legitimacy of the Limited Liability Model

Capitalist’s 7 toxic assumptions invite challenge. Efforts are under way to foster more worthy alternatives, but, to date, such efforts have had limited impact on mainstream thinking.

Obstacles to greater business cooperation include the need for complex changes in the regulation of competition. The dominance of men in business leadership also preserves the current capitalist model. And that could change over time as more women ascend to the top of management jobs.

Meanwhile, alternative business models could helps to spur progress. Employee ownership, for example, could prevent limited liabilities companies from adopting the bad habits associated with shareholder ownership. These changes must be implemented to fix the US economy.

Main reading points from the book

  • 7 toxic assumptions about capitalism makes the reality of market economies much more dubious.
  • First, competition theory, which holds that competing rather than cooperating yields the best results, is erroneous. Game theory in turn has dispelled this myth.
  • Biology drives men to compete and not to cooperate when they perceive threats.
  • Second, contrary to Adam Smith’s concept of the invisible hand, self-interested people will not necessarily produce the best overall outcomes.
  • Third, the utility theory which says that life’s purpose is personal contentment or utility which overemphasizes selfish pragmatism and ignores people often irrational motives.
  • Fourth, agency theory, wrongly holds that principal’s and agent’s interests don’t align.
  • Fifth, market pricing erroneously states that supply and demand are independent.
  • Sixth, modern trading technology makes shareholder supremacy out of date.
  • Its limited shareholder liability has attracted investors to corporations since the mid-1800s. Since then, firms have cut costs and increased dividends
  • And seventh, limited liability hopes to protect shareholders from risk. However, public policy should encourage alternatives to the limited liability structure.

Quotes from Capitalism’s toxic assumptions

“The market as a whole is run by rules that are well past their sell-by date.”

“Market capitalism depends on seven big ideas. These have served the world well in the world well in the past, but over the years they have become cancerous, and are slowly killing the system as a whole.”

“The idea of competition is fundamental to the way we think.”

“On re-examining competition, the cornerstone of capitalism,it became apparent that there is a strong mathematical case in favor of cooperation.”

“Men are biologically conditioned to respond to perceived threats by competing to win.”

“Managerialism is the belief … that generic management skills can be applied to all organizations, regardless of their type.”

“In theory but not in practice … supply and demand are independent variables.”

“Limited liability used to be rare, and the presumption was always that parties in a business partnership or corporation were liable for losses as well as for gains.”

“The ‘invisible hand’ will not deliver benevolent outcomes unaided.”

“The market over time adjusts to mirror the desires of those creating it through the sum total of their actions.”

“Apart from the fact that we can’t predict the future, there are lots of reasons why we often don’t choose to ‘maximize our utility,’ none of which fits neatly into… mathematical models.”

“No one believes that the earth is flat any more, as early scientist did. Economist, on the other hand, haven’t budged from their original world view.”

“Economics … has largely ignored the messiness of human decision making.”