in this forum essay, i discuss capitalism and distributive justice from the standpoint of a neoclassical economist. I am motivated by the conflict between the purported virtues of a free-market system (and the income inequality such a system is known to generate) and the egalitarian principles espoused by Latter-day Saint scripture. This is a complex subject upon which no easy closure can be expected. Part of the difficulty comes from the fact that capitalism itself is an ill-defined concept. I use capitalism and free-market system almost interchangeably, consistent with the way they are generally understood in everyday discourse. It bears emphasis, however, that capitalism is more than a sum of individual markets. It is a system that requires supportive institutions to function. Such institutions include, in addition to the legal enforcement of property rights and contracts, a work ethic, a materialistic and individualistic culture, what I call the market ideology, and a program of indoctrination in the rhetoric of capitalism.Capitalism takes various forms. While much of the discussion is relevant to capitalism in general, my most critical judgments apply particularly to an extreme form called neoliberal capitalism, which calls for wholesale deregulation and privatization to minimize the government's role. Globalization has spread the culture of neoliberalism from its epicenter, the United States. Coinciding with the rise of neoliberalism, income inequality has risen precipitously across the world but especially in the United States.1 Thomas Piketty provides convincing evidence that rising income inequality is innate to the nature of capitalism, but this tendency accelerated starting in the early 1980s.2 To make matters worse, neoliberal capitalism has exhibited a proclivity for economic crises and, given its focus on competitive individualism, an increasing incidence of mental health disorders.3 The human toll has been substantial even if it is conceded, as the capitalistic rhetoric holds, that it has brought unprecedented aggregate material prosperity.The Doctrine and Covenants (D&C), a collection of revelations mostly received by Joseph Smith, espouses egalitarian principles, if not a perfectly egalitarian society. Paramount among these principles is the notion that “one man should [not] possess that which is above another” and that income inequality reflects the sinful state of the world (D&C 49:20). The idea that, unless members are “equal in earthly things,” they cannot be “equal in obtaining heavenly things” (D&C 78:6) reflects the concept of freedom advocated by Amartya Sen, defined by opportunity and capability.4 The injunction against idleness (D&C 42:42; “for he that is idle shall not eat the bread nor wear the garments of the laborer”) may appear at first glance to be a free-market principle, but it would be a superfluous reminder in a capitalistic system. To make sense, therefore, one must surmise that this presupposes a society in which everyone reciprocates by “seeking the interest of his neighbor” (D&C 82:19). D&C 38:27 implies that the purpose of egalitarianism is to create social harmony (“be one; and if ye are not one ye are not mine”).The significance of these passages is that they were given well after the birth of capitalism. When early Mormon pioneers attempted to live the law of consecration and stewardship, it was not out of their ignorance of a capitalistic system. Rather, the United Order movement was, in the words of Leonard Arrington, “a deliberate flight from the gradually developing exchange economy into the . . . self-sufficing households and village economy of the frontier.”5 The church authorities were familiar with the language of capitalism: “We have learned of the struggle between capital and labor. . . . [T]here is . . . a spirit for extravagant speculation and over-reaching the legitimate bounds of the credit system; resulting in financial panic and bankruptcy, paralyzing industry, thereby making many of the necessities and conveniences of life precarious and uncertain. . . . [W]e must become the friends and helpers of each other, in a common bond and brotherhood.”6Despite scriptural pronouncements and a rich heritage of economic cooperation, there is little trace of egalitarian philosophy in the practice of contemporary Mormonism, at least as located in the United States. Over the past century of assimilation into American culture, it seems that many American Latter-day Saints have become ardent advocates of the rhetoric of capitalism. To be sure, their church takes seriously the scriptural injunction to look after the poor by instituting, among other things, fast offerings and various humanitarian programs. Yet these are remedial measures to deal with the symptoms of a disease, not an attempt to cure the disease of a system that creates inequality.7 American Latter-day Saints are not alone in accepting the distributional consequences of capitalism, if not wholeheartedly, as a necessary evil. Many Americans who align themselves with the Republican Party (and perhaps others) share similar approving views of capitalism.Capitalism's indoctrination campaign has been so successful that many (including myself) find it difficult to liberate themselves from its spell, accepting as truth many unproven propositions, including the assertion that it is the only system capable of generating material progress. There are several reasons why many are spellbound. They are primarily of two types: (1) philosophical or non-economic arguments, including libertarian philosophy; and (2) economic arguments based on “efficiency.” My task below is to show that none of the plausible reasons withstand scrutiny. I address the philosophical or non-economic arguments first before moving on to address the economic efficiency arguments.First, a common pitfall is to accept too willingly the polarity of capitalism and socialism. Capitalism is often presented as the only alternative to socialism, which leads to the erroneous conclusion that there is no reasonable alternative to a capitalist system. In reality, there are many ways to organize a system of allocating resources to competing ends. There can be many variants even within capitalism. Japanese or German capitalism, subject to greater social control, is different from American or British capitalism in the way they operate. The recent spectacular rise in income inequality observed in the United States and United Kingdom is largely an Anglo-American phenomenon as these are virtually the only countries that have seen an explosion of executive compensations.8 Although it would take a revolution to dismantle capitalism entirely, there exist alternative strategies to tame its destructive forces.Second, many often confuse capitalism with a market economy. Markets have existed since antiquity. Ancient Greece and Rome, for example, boasted developed markets, including for land and labor. To what extent we can call these capitalistic is a matter of debate, but most scholars date the birth of capitalism to somewhere between the sixteenth and nineteenth centuries. Ellen Wood argues that capitalism began in seventeenth-century England as a confluence of factors converged (e.g., a centralized state, extensive tenant farming, and politically weak landlords); the market became capitalist when participation became compulsory.9 According to Karl Polanyi, capitalism was born when social relations became embedded in the market (as opposed to the market being embedded in social relations), and British capitalism only attained its full stature during the first half of the nineteenth century.10Third, many often conflate capitalism with modernity and progress. In this view, capitalism as an embodiment of universal human profit-maximizing behavior has always been present throughout human history, but it needed to be liberated from the shackles of feudalism. Ellen Wood's masterful work The Origin of Capitalism is entirely devoted to refuting this idea by establishing that capitalism had a beginning, as noted above. If any one of the confluence of factors had not existed, capitalism would not have come into being. The end of feudalism led to divergent paths in different places—for example, with autonomous cities emerging in Italy and absolutism in France. Capitalism in England proved more successful in producing material gains, which forced other countries to adopt capitalistic systems in order to compete on the global stage.Fourth, economic liberalism, the governing philosophy of capitalism, has gained a large following since the early nineteenth century. It was actively promoted by the state as “a military creed” with “a crusading passion.”11 Milton Friedman has been hugely influential in propagating the libertarian defense of capitalism, for example, by articulating that economic freedom was a necessary condition for political freedom,12 an idea that resonates with the Mormon doctrine of agency. I have heard in Latter-day Saint religious discourse that capitalism is the only economic system compatible with the divine plan. Individual liberty is important, but why would agency necessarily deny a role for the government? If freedom is defined more broadly to include the dimensions of opportunity and capability, as Amartya Sen advocates, then public provision of universal education, access to health care, and social protection would become essential to allow everyone, not just a few, to pursue more fully what he or she values.What has contributed the most to the rhetoric of capitalism may be the success of economics as a social science. The economics profession has successfully made economics part of the core curriculum of undergraduate liberal arts and graduate business education, including at Brigham Young University. Hundreds of thousands of new graduates enter the workplace every year reasonably persuaded that free markets are the best mechanism of resource allocation. They have been taught, among other things, the purported virtues of self-interested actions working through the “invisible hand.” Admittedly, economics is a useful framework with which to look at the world. The foundational assumption of rationality in the sense of maximizing behavior (to be explained below) has enabled calculus to be used, bringing analytical rigor and precision.A problem arises when one fails to understand that economics is an abstraction of reality. Propositions in economics are necessarily derived from assumptions. The proposition most consequential for the rhetoric of capitalism, known as the fundamental theorem of welfare economics, maintains that a competitive equilibrium is “efficient.” However, obtaining this result requires making stringent assumptions (such as perfect information and no transactions costs) that almost certainly do not hold in the real world. When any of these “efficiency” assumptions are violated, more freedom—more competition—is not always better. Another well-known proposition in economics, called the theory of the second best, shows that, when an efficiency condition is not met in one market, the second-best outcome may call for moving away from perfect competition in another. The efficiency argument for capitalism is therefore tenuous.Let me explain what economists mean by rationality and efficiency before illustrating how the underlying efficiency assumptions, upon which the efficiency argument rests, do not hold up to reality. The specific sense in which “rationality” is used has already been alluded to. While maximizing or economizing behavior (of seeking more for less) captures part of universal human nature, humans are capable of being altruistic and rising above crude material needs. Likewise, the economic concept of efficiency—a logical consequence of the particular concept of rationality—has a very specific meaning: a condition where no one can be made better off without making someone else worse off. This so-called Pareto criterion follows from economics’ eschewing of interpersonal welfare comparisons—that is, the happiness a billionaire derives from an additional million dollars cannot be compared to the happiness a pauper draws from the weekly paycheck of a few hundred. Devoid of distributional considerations, Pareto efficiency has limited usefulness as a basis for social choice.An example of an efficiency assumption that does not hold in practice is perfect information. Think of health care and finance, where two parties to an economic transaction have different amounts of information. Milton Friedman once made a case against the state licensing of physicians, arguing that natural selection would suffice (“nobody wants to see an incompetent doctor”). It would, however, be costly to obtain that information, including in terms of human lives. Friedman was making a libertarian, not an economic, argument against state intervention. In reality, no market for health care would function without a credible mechanism of ensuring a minimum standard of qualification. Likewise, the capital market (where securities are traded) would remain underdeveloped without a credible mechanism to ascertain the creditworthiness of borrowers. The financial sector is heavily regulated in contemporary economies, as it should be, by provisions such as accounting and disclosure standards, rules against excessive risk-taking, and conflict-of-interest and insider trading rules, to reduce information asymmetry.Another example is perfect competition. Curiously, those who preach the virtues of a free-market system often use their political power to get the government to grant them monopolies under the cover of patent protection. A patent purports to promote investment in a research and development activity with a potentially high but uncertain payoff, but its contribution to innovation (“no life-saving drug would be developed without patent protection”) is unproven and may well be overplayed, thanks to the success of capitalism's indoctrination campaign. Corporate executives are driven by a profit motive, to be sure, but scientists who actually do the work are more likely motivated by “the pursuit of truth, the pleasure of using their minds [and] the sense of achievement from discovery.”13 Besides, not all innovation is welfare-enhancing, as seen in the example of the waste involved in replacing perfectly working products every few years when a new model is introduced. Capitalism, despite its free-market rhetoric, is constantly creating monopoly profits through branding and advertising, in contravention of its purported principles.Concepts in economics are often metaphors and should not be taken literally, especially for public policy purposes. As an illustration, think of the employment impact of raising a minimum wage. This is a popular pedagogical tool to teach how supply and demand works. Here, the concept of a labor demand “curve” is invoked, but there is no such thing in real life. To have a well-defined “curve” would require stringent assumptions, such as that all workers are homogeneous, all firms are operating on technical efficiency, and nothing else is correlated with the wage rate that affects the demand for labor. Even though labor demand is smaller when the wage is high than when it is low, such a broad-brush relationship cannot be used to predict the impact of a small change on the lower end of the wage spectrum. Ultimately, the question boils down to how to divide up total revenue between labor and capital, with some well-designed empirical work suggesting that a minimum wage increase raises the income of low-skilled workers with little impact on employment.14Finally, and perhaps most critically, economics is not meant to be an ideology. Rationality is an assumption to explain and predict how people behave, similar to the way physics describes observed events in the real world. It is not meant to prescribe how people should behave any more than gravity dictates how an apple should fall from the tree as a moral proposition. Even more important, the efficiency of a competitive equilibrium derived under unrealistic assumptions must not, on its own, be invoked to design an ideal economy. Economic rationality is a useful concept to the extent that a rational decision would lead to an efficient outcome in which something cannot be obtained without giving up something else. The maximization principle—“Would the benefit exceed the cost?”—is routinely used as a business or even personal decision tool. Yet efficiency is only one consideration, which may be overridden by other well-reasoned considerations. Human rationality, after all, involves “subjecting one's choices . . . to reasoned scrutiny.”15Let me close with a personal experience. While driving from Washington, DC, to Nashville, I encountered a medevac helicopter at the site of a trailer truck accident on the other side of Interstate 81. State troopers stopped the traffic, which caused a congestion that extended many miles. I found myself wondering if, in a world with perfect information and no transactions costs, a high-priced corporate executive stuck in the traffic might negotiate with the injured driver's wife over the economic value of her husband before the helicopter was called in. Fortunately, we have not allowed the logic of capitalism to be taken to that extreme. We have decided as a society that some things are too important for us to give up, to remain human. Karl Polanyi remarked that to “allow the market mechanism to be sole director of the fate of human beings . . . would result in the demolition of society.”16 The late nineteenth and early twentieth centuries could be understood as a history of resistance to the encroachment of the market ideology, with the introduction of various forms of social protection. The rise of neoliberalism has been a reversal of this process.The question is not whether but how and how much we should tame the ferocity of unrestrained capitalism. My thinking has been influenced by Sen's argument that distributive justice should be defined in terms, not of material resources, but of capability. Framing the discussion in this way does two things. First, as noted earlier, the concept of freedom becomes more expansive than the libertarian definition of freedom defined by antecedent rights. Second, it creates room for duty and obligation to emerge naturally. Appealing to Gautama Buddha, likely referring to the asymmetry of power in the context of Buddhists’ duty to be kind to animals, Sen writes: “If some action that can be freely undertaken is open to a person . . . and if the person assesses that the undertaking of that action will create a more just situation . . . then that is argument enough for the person to consider seriously what he or she should do.”17 This resonates with a passage in Latter-day Saint scripture that is often repeated from the pulpit: “For of him unto whom much is given much is required” (D&C 82:3).I have explored why, despite the scriptural pronouncements on distributive justice and a heritage of economic cooperation, many contemporary American Mormons have fallen under the rhetorical spell of free-market capitalism. My purpose has been to present a case that none of the plausible reasons for (the spell of) free-market capitalism withstand close scrutiny, on either libertarian or efficiency grounds. It is true that the public sector is often inefficient when there are viable private alternatives, and that, given the scale of information required to run a complex modern economy, there is no feasible alternative to the decentralized mechanism of markets. Yet these considerations alone cannot be an argument against having a good government. D&C 136:8 intimates the need for equal burden sharing when taking care of the poor (“Let each company bear an equal proportion”). Free-market capitalism with private charity does not do the job. Collective action is required to create a more just society in which there is no poverty and everyone thus has freedom and an opportunity to pursue happiness.