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US history
Course: US history > Unit 10
Lesson 1: United States history overview- Why study US history, government, and civics?
- US History Overview 1: Jamestown to the Civil War
- US History overview 2: Reconstruction to the Great Depression
- US History overview 3: WWII to Vietnam
- Appomattox and Lincoln's assassination
- When Capitalism is great and not-so-great
- 20th century US capitalism and regulation
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When Capitalism is great and not-so-great
Understanding when capitalism can potentially undermine innovation, competition and merit. Created by Sal Khan.
Want to join the conversation?
- I really don't like the generalization of socialism and communism. Looking at modern socialist countries, such as the Nordic ones, for example Norway and Sweden, the incentive structure is still basically the same. It is just as much a meritocracy. Having a good education or being innovative will still lead to a well above average income. The profit you make will of course be taxed way higher than if you were to live in say the US. A few questions arise for me at this point.
How much is innovation and willingness to work actually connected to the amount of profit you can achieve? Are people in capitalist countries more inclined to work or innovate because they could make a larger profit from it?
A higher taxation leads to a stronger welfare state, i.e, public education and health care. This means people has a chance to educate themselves regardless of what social status the family one is born into. Doesn't that lead to more people being able to work and innovate at a higher level?(30 votes)- Norway and Sweden are fantastic countries -- in fact, Sweden has the highest number of Nobel Peace Prize winners and one of the lowest murder rates in the world -- keep in mind they are not purely socialist countries, they are democratic socialist countries. That means they follow a lot of socialist beliefs but also some democratic beliefs, such as electing a president.(21 votes)
- I honestly feel that the government is not considered Capitalist since they have the authority of preventing some companies from monopolizing and gaining to much wealth. So would our government be considered a hybrid of Capitalism & Socialism?(11 votes)
- Some things a government does can be socialist, like providing education, Social security, and police. Some can be capitalist such as allowing for the private ownership of property. There are usually never pure capitalist economies. Most economies are "mixed economies": a private marketplace and government regulations, some public ownership and some private ownership. So yes, the US government's policies are a hybrid, but so are most every other government's policies.(11 votes)
- If the government is acting as agent of capitalism by breaking up monopolies, but seems to be so susceptible to corruption(AKA politicians, lobbying, or even social justice)what are the tools that would be used to prevent the goverment from becoming monopolized? I understand that the obvious ones would be the the constitition and the bill or rights, but they seem to be being ingnored, and our two party system only seems to work for those in power or wanting power or with money to make it work.(7 votes)
- The US Constitution is different from other constitutions in the world because it is not, "We the Government grant these rights..." It is "We THE PEOPLE claim these rights..." THE PEOPLE are what make the country run. Politicians don't become politicians without a lot of people voting for them. If we put them in office, we can vote them out. The Constitution and Bill of Rights can only lay the rules, but it is THE PEOPLE who have to be aware of what their elected representitives are up to. THE PEOPLE need to make sure the government acts within the bounds set by the Constition and the Bill of Rights. It is THE PEOPLE who need to be educated voters and be involved in society, making sure the government's actions coincide with the voice of THE PEOPLE- that the government acts with prudence and in the interest of the country.(11 votes)
- Have you ever heard of Ayn Rand? The philosopher who advocates for "the virtue of selfishness" and pure capitalism? I, personally, do not follow her teachings, but if we were to determine that there was a necessity for some form of regulation (for the sake of social mobility and meritocracy), seeing that we live in a capitalistic society, how would we accomplish that with disciples of Rand, tea-partiers, and such a strong anti-regulation bias in the U.S.? Oh and also create a philosophy channel?(0 votes)
- Adam Smith, writer of "The Wealth of Nations" who coined "the invisible hand" of the market, much quoted by "Rand's cultists", believed that regulation was a requirement for capitalism and markets in general, as did a great many economic theorist after.
The phrase "free market" specifically doesn't mean free from government regulation.
"Free Markets" require free access, to participate or not. Free markets also require openness (freedom) of information, both for the value of the things in trade (for each participant), but also the positioning of the participants and its effects on the market. There are other requirement, such as, that participants be free from coercion (by players within the market). These freedoms must be guaranteed. The "invisible hand" at best is a tendency, not a guarantee.
An outside authority, i.e. government, must guarantee these market conditions in order to establish a free market, hence no free market without government regulation.
To your question about Rand, the answer is in the question: Rand was a cultist, having "disciples", and not a philosopher. Her "theories" were riddled with logical fallacies. At best, her ideas serve as examples of errors in logic and morality.(16 votes)
- At, Sal says Capitalism can aline everyone's incentives, what does he mean by that? 1:16(3 votes)
- An "incentive" is a thing that motivates you to do something. Capitalism "aligns incentives," because if you work harder, you get more money. Socialism sometimes does not provide as much incentive to work harder because usually the more money you make, the greater percentage of your income is taxed by the government to provide for social services, such as healthcare or welfare.(7 votes)
- In this video Sal seemed to compare largely the pros and cons of moderate capitalism to extreme socialism. Wouldn't it not have made sense for him to compare the U.S. version of captilism to the Sewedish version of socialism? Since true examples are hard to find on either extreme end picking two that have both been successful would have been more beneficial. Anything looks good against nothing and so why not compare against something that actually has merit?(4 votes)
- You say yourself that examples are hard to find. The reason for that is that they do not exist. Every country has capitalistic and socalistic elements.
I prefer Sals approach in this case because rather than going into intricate details of one country which would not be applicable to another, he defines the basic concepts at large. While he could have used those countries as examples, it would make for a much longer video which he likes to avoid.(3 votes)
- atSal starts to talk about a monopoly, what is a monopoly? 7:17(3 votes)
- A monopoly is when only one person or corporation supplies a certain thing. The result is that the corporation does not have to compete with others to sell the thing and people can only buy that thing from the corporation. The corporation can then sell things at a higher price. Sometimes countries make laws to prohibit monopolies, and sometimes governments create monopolies. An example of a monopoly being broken up by the government would be AT&T in 1984. Examples of government-sanctioned monopolies are public utilities like water and electricity.(6 votes)
- What is a lobbyist?(2 votes)
- A lobbyist is a person who is paid to try to persuade politicians to agree with his or her client's point of view.(5 votes)
- What examples of a monopoly ever being created in the U.S. are there?(2 votes)
- Standard Oil, Us Steel and General Electric were all monopolies(3 votes)
- What does the idea of fairness and equality means in terms of actual life? There is nothing fair about being born rich just as there is nothing fair about being born intelligent, or artistic, or musically inclined. The actual result of a 100% inheritance tax would be to destroy savings and investment because where is the incentive to make more than you can consume in your lifetime unless you can pass it on to those of your choosing without a large portion taken off for taxes?(4 votes)
Video transcript
After the fall of
the Soviet Union, and even China's migration
to a market-based economy-- even though they call
themselves Communists, their economy is now,
essentially, capitalist-- there's been a general
consensus around the world that capitalism
is the way to go. And just to put my bias out
there, right from the get go, I am in that camp. I would consider
myself a capitalist. But what I want to do in this
video is do a little bit more of a nuanced discussion
of capitalism versus, say, socialism. Because I feel like there
has been-- especially here, in the United States,
and in the West-- a knee jerk reaction
against anything that even has a whiff of the
government getting involved or even a whiff of socialism. So I want to think
more about what are we trying to achieve with
the capitalist system. And where we could
fall into the things we don't want to achieve if some
of the aspects of capitalism are allowed to go on
without any type of controls or, maybe, some
type of regulation. I don't want to
advocate anything. I just want to give, maybe,
a framework for thinking about it. So you ask any capitalist,
including myself, you say, well, what's
good about capitalism? And I would say,
well, you know it aligns everyone's incentives. So it's good incentives. If you work harder,
you can earn more, you can generate a
capital for yourself. You can use that to improve
your standard of living. You can reinvest that capital. So it's a good
incentive structure. I'm not saying that
everyone is motivated purely by the desire to earn. I think there's plenty of people
in the world who are motivated for the desire for social
good, for elevating mankind. But the general census
in a lot of parts of-- is that those type of things
are specific to certain domains. But, in other domains, if
someone's running a trucking company, it's not clear that
someone would run a trucking company optimally just
for the good of mankind. Maybe they would run some
type of nonprofit that way. But a trucking
company, or a farm, or something like
that, who knows. So in general, you have a
good incentive structure. There's also this notion
in a capitalist economy that it's a meritocracy. It is meritocracy. And I'm going to,
actually, put a box around this because a
meritocracy, in my mind, is super duper important. Because even if you talk
to us-- almost everyone is a fan of a meritocracy. Even the communists were
a fan of a meritocracy. They would give exams
to people and have the people who were
successful have more authority within
the communist regime. So a meritocracy is something
that everyone lays claim to. And actually a lot of
socialists or communists would claim that extreme forms
of capitalism, when the wealth disparity becomes two extreme
or where you have inherited wealth, actually goes against
the idea of meritocracy. So let me actually put
meritocracy here as well. And we'll talk about
that in a second. And then the other
ideas is that you have innovation in capitalism. And these are all related ideas. That if the incentives
are good, if capital gets in the hands of people
who are most deserving of it because they've somehow earned
it, they've somehow innovated, that can also lead to innovation
because the right people are handling the capital. Now, if we go to the
socialist side of things, they'll say, well, look, there's
a social cohesiveness to this. So let me write this down. And I won't speak
to the-- I don't claim what I'm going to do in
this video is comprehensive of all of the pros
and cons of either. I just want to give a little
bit of nuance to the discussion. So social cohesiveness. You won't have this
situation where you have a gazillionaire
sitting behind a walled compound with armed guards
and their people right on the other side of
that walled compound starving to death. And these people don't
even, necessarily, view themselves as part
of the same society, that they somehow have a
responsibility to each other. And that is happening in
some parts of the world where you have severe
disparities in wealth. The rich people don't
even view themselves as the same species as the
poor people or even vice versa. You have the other
idea of-- and I'll put this in quotes-- fairness. And I'll put it in quotes
because one could say, well, it's fair if you make
more, if you work harder, you should get more. If you innovate more,
you should get more. And then their
notion of fairness says, well, yeah, but look
sometimes this wealth gets so extreme. sometimes
you have this notion of inherited wealth. Generation after generation. Old money. What's fair about that? That people are
just randomly born into a situation where they can
just extract the interest off of their wealth and
never have to work. And other people have
to work super hard and they really
get nothing for it. So this notion of fairness,
I'll put it over here as well. Fairness. Because there's
arguments for either. And so, like I
said, I'm definitely biased to the capitalist
side of things. I think there is an
importance to these things that we have on the
right hand side. But the reality,
at least what we've seen in the economic
experiments of the 20th century, is that even though communists
and socialists might speak to these types of
things, to a large degree there's less social
cohesiveness. The senior communists
in the Soviet Union would drive fancier cars. And they did have a very
different lifestyle then the workers. And they would hide
that lifestyle. And then it would lead
to a lot of hypocrisy. In general, the extreme
forms of socialism-- not clear that it was a meritocracy. It might have been just
the best people climbing up the party ladder that
get to the top as opposed to the people who would
innovate and actually produce in a better way. But with that said, I
want to give fair warning, that capitalism, if it goes
unchecked in certain ways, it could also lead to those
same problems of socialism. And the main problems
there, when you think about good incentives. I think the incentives,
and once again, I'm giving my opinion
here, the incentives work out well when you
have a bunch of competitors who can compete and innovate. And it makes complete
sense that, let's say, that this person comes
up with an innovation. And because they
have that innovation, they're able to provide a better
good that's cheaper to society. And so they make more profits. And it seems
reasonable that person should get more profits,
and more wealth, and grow. And it could even
be good for society because this person's
an innovator. Maybe there was an
element of luck there. But it seems like they're
competent at managing these resources. So it's good for society to give
them more resources to manage. The areas where it becomes
less clear that capitalism is unambiguously
good, is a situation where this person becomes
out right dominate. So let's say that this person
becomes so big that none of these other players can
even compete with them. So they all disappear. This person can just
undercut everybody. And all the other
players disappear. And this is the
situation of a monopoly. And the problem here is,
when this guy had competition he had every incentive
to work harder. He had every
incentive to innovate. It was a meritocracy because
the person who innovates well grows the fastest. But once you get to
a monopoly stage, and everyone else
has died down, this is the only player in the
economy, then all of a sudden, he has no incentive to innovate. This corporation or this person
can just keep raising prices. There's no competition. There's no one else to say,
hey, I can have a better product or I can sell it to you cheaper. And so it actually goes against
the ideas of innovation. That's why it's
really important. And that's why it's part
of, especially in the United States, the economic system that
you try to break up monopolies. That you don't like
monopolistic practices. The other risks
that you have when you start having a lot of
wealth and a lot of influence in one entity, or one
person, or one corporation-- and this can happen in a
democratic or even a non democratic regime-- is that,
the control of resources aren't just control
of those resources. Aren't just control of land,
and buildings, and railroads. They can also use it to
influence government. And in the United
States, this has been institutionalized
in the form of lobbying. And when you have
excess resources and you can influence
government in this way, you can get the
government-- so let's say this is the government
over here-- to, essentially, do things for you. So it works to your advantage. And may be allowing
you, eventually, to become a monopoly. So you can view this
as crony capitalism, where lobbying can be a
form of legalized bribery. And in that way, you kind of
own the elected officials. I'm not saying that this
is happening everywhere but it could happen. And in that situation,
you have the government acting on behalf of these. And, once again, it goes against
the idea of a meritocracy because when you have
this cycle developing, maybe this person right over
here has the innovation. But this person
doesn't have the clout, doesn't have the influence
with the government. And so this guy gets
the government contract for the planes. Or this guy gets the tax
benefits from the government so that he can be
even more competitive. He can undercut this
guy even though this guy has the innovation. The other element-- and I could
talk about this for hours. And these are just
things to think about-- are the idea
of inherited wealth. And I'm not saying
that inherited wealth is a bad thing. But there's this idea
that, let's say, someone through their competence,
maybe competence with a little bit of
luck, is able to accrue a huge amount of wealth. And maybe they're not
even a monopolist. But they're able to get
a huge amount of wealth. But they were able to do
it-- that they're really good managers. They're kind of these
really smart dude. He can he can really manage
a lot of resources well. The question arises
is, what happens when this person passes away? In a very purely
capitalist situation, you pass this onto
your children. So you pass this
onto your children. And the issue here is, one, what
did this person do to earn it? And also from a society's
point of view, maybe this person here is a dummy. Maybe there was
another kid over here who was born at the exact
same time, who is way smarter and who-- but this kid is now
in control over 100 gazillion dollars. And he can completely
mismanage the resources so that they're
completely wasted. And so you have this idea
of-- over time-- inherited wealth in a
capitalist society can go against the ideas
of meritocracy. It can go against the
idea of good incentives because if this guy
inherits enough money, he has no incentive to work. Why should he have to study
hard and go and tackle math and all that? He's inherited
enough money that he gets millions of dollars
just off of the interest. Why should he educate himself? He got daddy's or
granddad's money. And so it also goes against
the idea-- and why should he try to innovate? Why should he ever do anything? He could maybe just hire
some of these people and give them a minimum
salary, whatever it takes. And so it goes against these
ideas of fairness and all that. And I'm not saying that
I'm against inheritance. I'm just saying this is
something to think about. And there's some, probably,
threshold of inheritance that it starts to undermine
some of these ideas of a meritocracy, and good
incentives, and fairness, and all that. And that's why I
think it's funny when people who call themselves
"old money" are proud of it. They view themselves
as, somehow, being part of a better caste
because "old money" means that you did not earn
the money yourself. That your granddad or you're
great grandad earned the money. And you've just happened to be
born in this family and are, essentially, just living
off of the interest. And it's funny because
they'll talk about "new money" as if they're not as
good as old money. But at least in new
money people-- maybe it was through
luck, but maybe it was through competence or
innovation-- this is something that, at least in my mind,
I'd respect more than old. Old money, you've done nothing. What's the difference
between old money, or a king and a queen, or
the aristocracy of Europe, that goes against a lot of the
philosophical underpinnings of what the United
States is even based on. So I'll leave you there. I just want to add a
little bit of a nuance to the conversation. And I will say--
I'll say it again-- I come to this conversation
with a capitalist bias. But I'm hoping
that this gives you a little bit of more nuance. So that instead of
saying, capitalism is an unambiguous
good and socialism is an unambiguous bad,
these are the things that we should try to promote. And to do that, we do
have to do some things, like make sure that
everyone is educated so that we can
have a meritocracy. If everyone is educated, then
you have a level playing field. You have this notion
of equal opportunity. And that does involve some
type of, on some scale, redistribution of-- at least
in the form of education. Maybe you do need some way
for people to get health care. You don't want people
dying in the streets. I'm not going to
take a stance here, but I'm just showing
you that you can't just, even though I do consider
myself a capitalist, you can't just say
that everything has to be purely
capitalist and you can't have any notion of
government intervention. You maybe want the
government to invest in things like
long-term research. Where they don't have
an immediate profit motive, but 50, 100
years down the future it might allow the society
to thrive or whatever else. So I'll leave you there.