One of the frustrations I have with politics and economics is the absolute refusal of many people to actually look at how our economic system diverges from capitalism. We hear so often about how theoretical capitalism's mechanisms fix things, but no one ever takes into consideration how well theoretical capitalism is implemented in the real world.

A good rule of thumb to keep in mind is that, from a "competition is the ideal" perspective, profit margins represent market inefficiency. In a maximally efficient market, no one can make more money than the absolute minimum required to make participating worth their time, because otherwise someone else will come in and undercut them.

A simple, relatively free market is sometimes a passable approximation of a perfect market, but not always.

If your product will save me 10$ but costs you 2$ to produce, charging 5$ is beneficial to both of us.

The problem we have now is that the current large companies believe that they're entitled to receiving the same profits they've had in the past without innovating or even adapting to the future.

If your value proposition is only worth 2$ to me in the future, why should the government come in and tax all companies in my industry because I don't think you're worth paying anymore?

I suppose that's a simplistic view but then again I've always abhorred working at large companies because of the huge number of people I'd see around me contributing very little. I think small companies will very often beat big ones on both quality AND cost because of the lack of bureaucratic overhead. The overhead though is exactly how the incumbents protect themselves from the newer entrants, entrapping government to create barriers to protect themselves.

If your product will save me 10$ but costs you 2$ to produce, charging 5$ is beneficial to both of us.

Except that in a maximally competitive market, someone else would quickly come along and offer to sell you an equivalent product for $4, and then someone else comes along, etc. Competition always pushes prices towards the cost of production.

Of course, cost of production varies as well. In an idealized sense, the cost to produce a product is proportional to the amount produced (due to scarcity), whereas everyone in the market has some price limit below which they would want to buy the product. At a given price point, if the cost of producing an additional unit is below the highest price limit among people who wouldn't buy the product otherwise, it's a net gain for me to make the product and sell it to the person with that limit. Of course, at any price point, there's some people who want the product but not enough to pay that price, and some people who would happily pay more; but that's just the system working as intended.

The end result (in theory) is that every product eventually settles at a price point reflecting optimal resource allocation to production, plus some small profit margin to make the time spent on the transaction worthwhile.

In practice, it's... a bit more complicated.

No. In a maximally efficient market, no one can make more money than the absolute minimum required to make participating worth someone else's time. If I can make widgets twice as fast as everyone else, I can make lots of money.

While that's true, it's also the case that the "absolute minimum" rises as people in a society get wealthier, and markets are the fastest method known for generating wealthy societies. The minimum amount for which most people are willing to work is absurdly high by the standards of all but our own very recent past.

The reason I submitted it is because I thought and hoped it would generate some very interesting discussion here.

It also says nothing two of the biggest problems our brand of capitalism faces, which are perverse incentives and lack of transparency, both of which were leading causes of the recent meltdown and our current health care woes.

It does cover at least some perverse incentives with regard to corporate governance.

It is also a summary of a lot of issues. There are links to articles with more details.

If you can't come up with a hard-and-fast rule, then the interpretation/selective-enforcement is just going to open the door to patronage and corruption.

Tight regulation and nationalization are rewards for growing a "natural" monopoly? This doesn't make any sense. That's not capitalism, it's fascism.

Capitalists would argue that complete lack of government regulation is how you "fix" capitalism.

Almost every point made in this blog post is, at a fundamental level, diametrically opposed to what capitalism is as an economic theory and ideology. The author had drafted a manifesto for an aggressively mixed economy which is ideologically identical to what we have in America today.

If the government puts up road blocks for new companies to enter a line of business, the market isn't truly free and the mega corporations are free to charge whatever they want and do whatever they want. It would be impossible for there to be a "startup" telecom company or "startup" railroad company.

Interestingly enough, the the railroad companies are the most often cited example what happens when the government messes with the free market. The idea is that because the government has already messed up the railroad market it has to continually subsidize the railroad companies or, you're right, "good people wouldn't be able to get to work". Regulation and subsidies beget more regulation and subsidies.