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Saturday, March 23, 2019

Capitalism Is Imperfect Because the World Is Imperfect, But…

Is capitalism inefficient and wasteful because bakeries end up throwing away some pastries at the end of the day?

Image Credit: Pexels-Madison Inouye | Pexels License (

Despite the capitalist system’s tremendous success at lifting humanity’s living standards since 1800, many people still vehemently criticize it for all kinds of supposed flaws, such as the existence of menial or meaningless jobs, persistent, significant income and wealth inequalities, and even the wasting of consumer goods that are produced but not purchased.

However, critics almost never seem to ask where these imperfections come from. To them, they are at best the annoying features of the predominant system of production and distribution that can be either abolished with the system itself or tinkered away with through government intervention.

Why Baguettes and Pastries Go to Waste

This approach is suspect, however. Consider waste. In an argument on Facebook, a French friend of mine claimed that one could witness the inefficiency of capitalist societies by simply visiting a bakery around its closing time. Indeed, if you do that, you will most certainly find that quite a few of those wonderful baguettes and pastries have not been sold and will probably have to be thrown away. But does this mean there is something inherently wrong and easily fixable with the way that bakeries function?

Consider me and the bakery next to my house in Aix-en-Provence, where I go almost every morning to grab a pastry and a coffee. I am already a very atypical client in the sense that I come almost every day, but even I do not order the same thing. I usually order one pastry, but sometimes, when I am really hungry or when I am planning to do some physical activity right afterward, I take two chocolate breads. And sometimes, even I do not visit for several days in a row because I am not in Aix (or for some other reason).

The limited predictability of human behavior even at a large scale is a fundamental feature of the world.

Most other clients come only occasionally, if not once if they are tourists. The job of the bakery is to attempt to figure out a rough pattern of aggregate usage in this sea of what seems to be a total mess of random purchases.

Luckily for bakeries and other businesses, the behavior of large groups of humans is somewhat predictable over relatively short periods of time, even if the behavior of individual members of those groups is not. However, as we are dealing with a complex stochastic order of interactions, this predictability is far from perfect. This is where the unfortunate unsold baguettes and pastries ultimately come from.

Notice that I have not yet said anything about prices or the mode of ownership of bakeries or anything related to this. Even if all the bakeries in France or Aix-en-Provence were managed by the Central Bakeries Board that decided which of them produced what items in what quantities, the same problem would remain. The limited predictability of human behavior even at a large scale is a fundamental feature of the world.

Bakeries Output Is Determined By the Market

But I would also like to argue that the capitalist system is a decent adaptation to the challenge that bakeries face. First, every one of them is autonomous to a certain degree, even if it belongs to a chain like Paul or Lavarenne. This allows them to better take into account and respond to the conditions on the ground. More importantly, though, the fundamental feature of capitalism—the profit and loss mechanism—quickly gives them important feedback on whether what they are doing creates more value for people or detracts from it.

Bakeries use resources like the space they rent, the electricity, the labor of people who bake and sell products, and the ingredients, like flour. The capitalist system ensures that both the inputs and the products have prices that are denominated in the same monetary units and can thus be compared. If the total sales of the bakery are larger than the total input price, it earns a profit. In the opposite case, it generates a loss. A bakery can also experiment by seeing what happens to the bottom line if it introduces this or that change.

Overproduction is capped by the profit and loss mechanism. If a bakery continually overproduces, it will incur losses and shut down. 

Returning to the issue of overproduction, since it is difficult to precisely predict demand, bakeries probably prefer to have a margin of error and produce somewhat more than the daily average. The reason for this is that on a given day, it may happen that the demand for a particular type of pastry or baguette is higher than usual. If some clients come and are unable to purchase what they want, they might not come to the same bakery again.

However, the overproduction is capped by the profit and loss mechanism. If a bakery systematically produces too much, it will incur losses and will not be able to function anymore. After some time, its owners or management will change, or the space it now occupies will be taken by some other venture that serves clients better.

In this approach, bakeries may also try to introduce innovations aimed at limiting the waste even further. For instance, a chain of bakeries could try to train a neural network on its past sales to try to better tease out the customer demand pattern. The cost of this has to be taken into consideration, however, because it may well be that the efforts of machine learning specialists could be better used somewhere where they could deliver more value, for instance, in drug discovery.

Government Intervention Would Create More Inefficiency

A critic of capitalism may say that all this is well and good, but perhaps the government could do something to make bakeries be even less wasteful. Without going all the way to centrally planning how many chocolate breads to produce each day, maybe the government could limit the weight or volume of products that remain unsold at every bakery. Or there could be an unsold bread tax. Will this not reduce waste?

The problem is that it may reduce the easily visible waste in bakeries by creating it elsewhere and hurting people. Consider that any government intervention of this kind will need to be enforced. Bakeries will have to engage in compliance procedures, and some bureaucrats will need to monitor them.

If there were gains to be made from less waste, entrepreneurs would have already figured that out because they have a strong incentive to do so.

Non-compliant bakery owners will need to be brought to courts and the court decisions enforced. All this takes a lot of resources, especially human labor that could certainly be used elsewhere. At the same time, since there are no clients voluntarily paying for the government to publish wasteful bakeries, there is not even imperfect market feedback to gauge whether the reduction in wasted bread creates any value.

One could, of course, object, claiming government interventions may actually force bakeries to be more efficient, but this is extremely unlikely. If there were gains to be made from less waste, entrepreneurs would have already figured that out because they have a strong incentive to do so.

Finally, one can of course go as far as saying that regardless of what customers demonstrate in their purchases, having less bread thrown away is valuable in itself. This, however, would be a very arbitrary moral judgment. The idea that the socio-economic system should (however imperfectly) cater to people’s preferences seems to be far more intuitively appealing than the aesthetic dissatisfaction with some easily visible waste.

The Larger Moral of the Story

The seemingly simple story of bakeries has a much bigger lesson to teach us. In it, what seems like a problem with the capitalist system of production and distribution turns out to stem from a fundamental imperfection of the world. An imperfection to which the said system is the best response known to humanity because it allows humans to adapt to it in ways that enhance human well-being the most.

The same is true for unpleasant jobs (the world does not have enough deeply satisfying jobs for everyone) or inequalities. Hence, when critics think they rightly admonish capitalism, they really mostly blame it not for its features but for the inherent imperfections of the world around us.

This article was reprinted with permission from the author.

  • Daniil Gorbatenko is a free-market economist living in Aix-en-Provence, France. He obtained his PhD in economics from Aix-Marseille University in 2018