October 23, 2026
Dear Leland and Everett,
Today I want to talk about capitalism.
I realize I’ve spoken briefly about capitalism in missives regarding billionaires and Marxism, but I’ve never really given my thoughts about capitalism itself. Truth be told, I tend to take capitalism for granted: I majored in economics in college, and viewed the world through an economic lens ever since. I guess I assumed everyone else had a similar journey as I.
What I’m learning, however, is that most people didn’t have the learning trajectory I did. Many people I encounter demonstrate little or no understanding of our economic system, and I’m beginning to appreciate how few people have ever been exposed to a basic understanding of economics. My initial reaction to economic illiteracy was general frustration; now I’m starting to realize those of us who understand economics have an opportunity to educate and influence others. So, this letter serves to organize my thoughts a little. Hopefully by the time you read this, we will have discussed all the contents, everything will be old news, and this merely serves as a reminder, or a snapshot in time of what your dad was thinking about when you were kids.
Capitalism reminds me of the Winston Churchill quote regarding democracy: democracy is the worst form of government except all those other forms. This is meant to be tongue-in-cheek, of course: neither democracy nor capitalism are terrible; the point is to acknowledge that capitalism has flaws, reflecting the flawed people who practice it. Herein lies the rub: every system is flawed precisely because people are flawed. Capitalism’s brilliance lies in its ability to align incentives between individually flawed people and societal interest as a whole.
Let’s define capitalism briefly. I previously argued that capitalism just means that individual people get to own stuff (as opposed to the state owning all the stuff). Actually, that definition is incomplete. A capitalist system requires not only individual property rights, but also free markets. By free markets I mean the right to trade goods and services with minimal governmental interference. Examples of government interference preventing or restricting free markets could include laws prohibiting certain types of transactions, excessive taxes or subsidies, or price controls. Capitalism is unique as an economic system in that it allows you, the individual, to own land and tools; from there, you can sell the land and tools if you so choose (at a price to be determined by you and the buyer), or you can use the land and tools to produce goods or services that you might then sell to customers.
Humans have attempted many varieties of economic organization since the advent of agriculture. Until the adoption of capitalism, these systems dramatically restricted individual freedom in various ways. Some systems tied people to the state by requiring them to work the land in manorial or feudal systems, while other economies were built on a small number of relatively free individuals supported by large populations of slaves. Some systems limited property rights via state owned, granted, or chartered monopolies. And some systems restricted free markets from forming and operating, either by directing production outputs, exerting price controls, and/or imposing heavy tax burden on transactions. These restrictions were not mutually exclusive; growing up in many eras one might lack the right to move freely, the right to own property, and the right to engage in market transactions. To be clear, no society has ever been fully capitalist, nor has any society ever been fully socialist or feudal: for as long as humans have organized into nations, the state has exerted some measure of control over property and transactions while free market transactions occurred, at minimum, away from the watchful eye of the state. When we describe a nation as capitalist or socialist, we are describing a matter of degrees. As a result, it’s a little difficult to define when (and which) societies first leaned into capitalism. Broadly, I’ll submit the precursors were the 17th century Dutch and British systems, which led to America’s adoption of capitalism and, in parallel, a spread of capitalism through most of Western Europe. Over the last 100 years (and especially the last 40), capitalism spread to more countries, particularly in the east. And I submit the results have been nothing short of astounding, bordering on miraculous.
Over the last 200 years, practically every quantifiable measure of human wellbeing improved dramatically. The number of people living in what we consider extreme poverty declined from somewhere between 70-90% (estimates vary) to below 10% today. Child mortality (the share of children who die before the age of 5) decreased from roughly 40%+ to less than 4%. Life expectancy increased from less than 30 years to more than 70. The share of children required to work to support their families declined, though to what degree is hard to measure (global records don’t go back that far). Adjusted for inflation (pegged to 2011 $), one estimate shows GDP per capita increased from ~$1k to almost $17k in 2022. The accuracy of any of these numbers, particularly from two centuries ago, is debatable; regardless, the direction and magnitude of the changes are consistent and difficult to deny.
Most of the gains in income and poverty occurred in the last 40 years or so. Such is the magic of compounding growth. In that time, GDP per capita more than doubled. The share of global population living in extreme poverty plummeted, from above 40% to below 10%. Also in the last 40 years, literacy rates increased, and the death rate due to a lack of access to sanitation or clean water plummeted. By virtually any measure, the world is a much, much better place for the median human than it was two centuries ago, and for most of the world things are dramatically better than they were a mere four decades ago.
Why do I think the conversion toward capitalism is causal, and not merely correlated with these improvements in global wellbeing? Because the data is pretty compelling. For one thing, the nations who first leaned into property rights and free markets were the first economies to experience explosive economic growth and the rise of a middle class. For another, a huge number of countries (China, Singapore, Taiwan, Japan, Hong Kong, and most of Eastern Europe) experienced explosive economic growth (and accompanying improvements in the other metrics outlined above) precisely when (and to the degree) they adopted capitalist reforms. Perhaps my favorite argument is that we have multiple controlled experiments: in both Germany and Korea, we have examples of nations that split, whereby one part became relatively capitalist and the other became communist. In both cases, these were one people, one culture, and one language. And in both cases, the capitalist nation (West Germany and South Korea) thrived while the communist nation (East Germany and North Korea) remained mired in, or in the case of North Korea increasingly backslid into, poverty. Germany even gives us a before-and-after, where the reunification of East and West Germany led to the rapid economic growth and wellbeing for the people living in the former East Germany. The data supporting capitalism’s positive impact on humanity is compelling and robust, to a degree that I’m shocked how many people fail to understand and appreciate the miracle we’ve produced and experienced.
To be fair, and as mentioned before, capitalism is imperfect. Many people argue capitalism fosters and rewards greed. Personally, I think this misunderstands the human condition. Greed is universal, and every economic system gets corrupted by the greed of the powerful.
What distinguishes capitalism is the degree to which it aligns incentives between the greedy and the rest of humanity. All systems reward value capture: the powerful have extracted value from the powerless across eras, societies, and economic systems. Capitalism separates itself from other systems in the degree to which it incentivizes and rewards value creation.
Value creation is sometimes a difficult concept to understand, but it’s critical to thinking through the choices facing humanity right now. Value creation supposes human activity can create value that didn’t previously exist. When a farmer grows crops more valuable than the cost of production, when a chef cooks a meal more valuable than the cost of ingredients and equipment, or when Apple sells an iPhone more valuable than the myriad components and equipment used to manufacture, these are all examples of value creation.
Value capture is more intuitive. If I steal something, I have captured all the value in the transaction, without creating any. If an autocratic nation takes all the goods produced at a factory without remuneration beyond the cost of manufacturing, value was created and entirely captured by the state. In most free market transactions, by contrast, value creation is shared between the buyer and seller. The seller sells because they are able to retain some measure of profit, and the buyer buys because the good is worth more than the money they pay. How much value is created is hard to measure, because it’s hard to quantify how much the buyer would have paid. But we do know that, for the most part, buyers only buy because they get value from a transaction, and thus the profits companies produce are some percentage of the value they created.
We intuitively become a little queasy when we perceive companies are extracting too much of the value they create. This most commonly happens in monopolies, when customers don’t have choices, and the monopoly can restrict supply in order to drive up prices and generate exorbitant profits. This phenomenon does happen: examples are easy to come by, and the data is pretty robust. As a result, governments have developed a set of tools for preventing the creation of monopolies, restraining them once they do come into existence, or breaking them up if necessary. We should remain diligent in protecting humanity from monopolies, but I am fairly confident we will so long as those monopolies are privately held.
Except when created by monopolies, I submit huge profits are mostly a good thing. They suggest a company has created huge value for humanity. And while I appreciate the concern that companies might be using large profits to abuse humanity, I tend to argue the other way. As Jeff Bezos (Amazon’s founder) famously said, “your margin is my opportunity”. If a company is making huge profits, those profits send a compelling signal to others to enter the industry and capture some of those profits. The larger the profit, the larger the incentive for others to enter. When others enter, supply increases and prices come down, and more of the value moves from the producers to the consumers.
Sometimes governments decide profits are too high, or the potential for abuse too great to ignore. In these instances, the government steps in to regulate an industry, attempting to protect customers. Ironically and counterintuitively, these attempts typically backfire, providing the incumbents protection from competition and ensuring their ability to make excess profits. We call this phenomenon regulatory capture, and it can be seen most obviously when companies call for government regulation of their industries. This phenomenon is currently happening in the AI industry, where AI companies are often the loudest in calling for government regulation. While some of the motives are no doubt pure, it’s also true that the incumbents stand the most to gain from regulation: as established companies, they have the resources to weather the costs of regulation, whereas aspiring entrants mostly will not. Thus, regulation of the AI industry would have the counterintuitive impact of protecting the existing players from new competition, thus protecting their profits at the expense of the public.
The industries currently causing the most consternation in public discourse, and thus the loudest clamoring for government regulation, are health care, housing, and education. Socialists, or capitalism’s detractors more broadly, point to these industries specifically as the obvious examples of the failures of capitalism. The problem with the socialist argument: these are the least capitalist industries in America!
Let’s start with health care. Intuitively, the idea that a doctor or hospital might price gouge a desperate family attempting to save a dying patient strikes us as both plausible and repugnant. And so, we regulate the health care industry. Fair enough. The problem has been the implementation. A fair form of regulation, adhering to free market principles, would be to ensure prices are publicly available and consistently applied; this would mostly protect desperate patients from gouging providers. Instead, the American government set up a byzantine set of regulations, creating an overwhelmingly and needlessly complicated industry that strays pretty far from the free market principles fundamental to capitalism. The complexity and regulation serve, again, to protect incumbent players, to add enormous cost in the form of adhering to the regulation, and also to create opportunities to exploit the complexity for profit that wouldn’t exist without the regulation. The result is an industry that consumes almost a fifth of American GDP not because of capitalism, but because of the overwhelming restrictions on capitalism.
Housing suffers from two socialist-influenced infringements on capitalist ideals: zoning and public approval. Zoning laws assert local governments’ rights to restrict what we can develop on the land we own. When the government interferes with our ability to do what we wish with our private property, we begin to sway away from capitalism and toward socialism. On the margins, zoning limits the amount of housing (and development in general) built, which restricts supply and leads to higher prices. Public approval, at least in some states and municipalities, grants the public the ability to weigh in on proposed developments. The process of securing public approval can lead to comically inefficient activities. California created environmental requirements, ostensibly to ensure developers didn’t wreck the environment in the process of development. In practice, these regulations grant the public a tool to restrict development, raising the prices on artificially scarce homes. Developers can be required to spend exorbitant sums of money demonstrating the minimal environmental impact of their proposals, only to be told to do more environmental studies. These studies raise the cost of development substantially, and result in innumerable projects never getting proposed (much less developed) for fear that the approval process will prove too costly and time consuming. These practices restrict the number of housing units built, and increase the cost of producing the units that are built. Restricting supply and increasing the cost of production invariably lead to increasing prices, which is precisely why the American public is so frustrated with housing costs.
America’s education system might be the least capitalist of all. To talk about education, we really have to split into the K-12 primary through secondary education system and the higher education system. Let’s start with K-12. For starters, most schools are publicly funded and operated. The land, buildings, and equipment are owned by the local governments, and the teachers and administrators are government employees. What I just described is plainly not capitalist. Private schools do exist, and people do have a right to pay for private education. In some states, private and charter schools are allowed to compete with public schools for state and local tax dollars; these innovations introduce some capitalism into the K-12 educational system, but only some: teachers unions and socialist-leaning voters fight these so-called “voucher” systems tooth and nail everywhere they are proposed for as long as they exist, despite pretty robust evidence that they improve education outcomes to the degree they introduce capitalism into our educational system.
Higher education is more nuanced. Public schools exist and serve a significant number of students, but private schools abound. Unlike K-12 schooling, students have a right to select whatever school will accept them. As a result, schools compete not only for students, but the highest quality students they can attract. Unfortunately in order to become recognized as an institution offering higher education, a school needs to become accredited. Herein lies the rub: the accreditation board is made up of the existing body of member schools. What incentive do these schools have to approve more competition? None. Thus, how many new schools have become accredited in the last 40 years, despite exploding tuition fees (thus, profit opportunities)? Shockingly few. Higher education is more capitalist than K-12 education, but still not particularly capitalist.
So far, the public solution to each of these industries has been to subsidize demand. But subsidizing demand is socialist! Or, at the very least, subsidizing demand shifts an industry away from capitalism toward socialism. In health care, we provide government assistance via Medicare and Medicaid, pumping huge amounts of federal dollars into our health care system. More recently, the Affordable Care Act (colloquially known as Obamacare) pumped hundreds of billions of dollars into providing Americans health insurance (thus increasing access to health care); this law had the effect of spending lots of public money, increasing prices, and increasing supplier profits…with rather modest impacts on longevity and health outcomes. To be fair, some studies show low-income folks, those who might not have been able to afford health care otherwise, did see measurable impacts on longevity. My understanding is that this was the only cohort with any meaningful impact, and that the effect was not large enough to increase national life expectancy noticeably. Successfully enabling low-income folks to afford life-extending health care is a worthy goal; that we apparently achieved said goal is laudable. My submission is that the hundreds of billions of dollars we’ve spent are an outrageously expensive and inefficient way of achieving that goal.
In housing, we allow people to deduct mortgage interest and property taxes from their income when paying federal taxes. Families are able to exclude hundreds of thousands of dollars in capital gains when profiting on the sale of their home. Fannie Mae and Freddie Mac buy the vast majority of mortgages on behalf of the government, and guarantee these purchases from lenders; these purchases have the impact of reducing the interest rates homeowners pay. We subsidize rent for low-income housing. Some states provide incentives for first time homebuyers. Each of these initiatives might be morally defensible; for now I merely point out that each of these are various methods of subsidizing demand for homebuyers.
In education, K-12 is almost entirely government funded already, so no need to focus on additional demand subsidies. In higher education, there are several. The federal government provides below-market-rate loans to students. We grant tuition assistance on perceived basis of need. We let people deduct myriad higher education expenses for income tax purposes. We created investment accounts that allow people to save for college without paying capital gains taxes on the amount used to pay for higher education. Again, my point is not to critique the morality of these initiatives, but to point out the various ways we subsidize demand for higher education.
The problem with subsidizing demand while restricting supply – which, as demonstrated, we do in each of health care, housing, and higher education – is that, combined, these lead directly to higher prices. The effect of subsidies in these industries isn’t to help consumers, but to enable the providers to enhance profits. Thus, socialist-influenced proposals to solve these problems (like making Medicare and college free for everyone) is likely to exacerbate the very problems they propose to solve – either by raising costs, reducing quality, or both.
My point is that capitalism, for all its faults, has proven over and over to be vastly superior to the directionally socialist counter proposals offered to date. Whether we zoom out and look at historical trends, make side-by-side comparisons between nations, or examine specific industries within America, I find the same results wherever I look: capitalism laps the alternatives.
Socialists are right to suggest that our ultimate goal can’t be to have a small number of outrageously rich and a large number of hopelessly poor people within the same society. Where I disagree, fundamentally, is with all the proposed solutions. The socialist solutions I’ve heard range from seizing the means of production (either in the form of wealth taxes or nationalizing industries like health care) to imposing more restrictions on what people can do with their assets (in the form of more regulation of industries) to price controls to further demand subsidies. All of these ideas are terrible because they distort incentives and restrict value creation.
What do I propose instead? In an ideal world, we would deregulate the industries I’ve noted above. In health care, we would remove restrictions on the number of doctors medical schools graduate each year, we would remove regulations on the services that need to be provided by doctors (as opposed to nurses or physician assistants, for example), we would unwind distorting effects of company-provided health insurance, we would unwind the byzantine regulations that attempt to micromanage what doctors can prescribe and when, and finally we would require price transparency for all health care providers. In K-12 education, we would foster more competition expanding voucher systems and removing barriers to voucher programs. In higher education, we would allow new universities to become accredited, accompanied by a gradual but drastic reduction in tuition subsidies. Finally, we would remove zoning restrictions and basically all restrictions on one’s right to build on their own property. These changes would gradually reduce some of the crushing burden families face paying for what feel like the fundamentals of life.
At a national (and international, where others choose to join us) level we would continue to pursue economic gains via innovation (read: value creation) and trade. We would see the potential for an explosive growth in energy demand, and start unshackling human potential to harness energy. This means allowing more cultivation of oil and gas, more refineries, reducing friction in deployment of solar (which is rapidly becoming the cheapest source of energy available, a trend I expect to continue as costs come down via scale and learning curves), and authorizing a diversified set of nuclear power plants to develop.
In other words, my recommendation would be to double-down on capitalism.
In parallel, we would recognize that socialist-influenced proposals offer the wrong solutions (restrictions on property rights and free markets) to the right problems (inequality, corruption, and the abuse of power). I submit that inequality, corruption, and inappropriate behavior cannot be legislated out of existence. These problems are spiritual at root, and ultimately need spiritual instead of regulatory solutions. The way to eliminate inequality, corruption, and bad behavior is to address our spiritual shortcomings.
We address our spiritual shortcomings, first and foremost, at the individual level. I’ve come to believe, fervently, that we can only help others heal spiritually to the degree that we ourselves have healed. As we heal ourselves, and allow and enable those around us to heal, we should recognize those perhaps most in need and want of spiritual healing by recognizing those most interested in imposing their worldview on others. I’ve come to believe that a need to impose my will (or worldview, or behavioral desires) on others directly broadcasts my own spiritual shortcomings out into the world. We would do well to highlight these shortcomings on those who, unconsciously, are asking for our help. The help might get rejected, but I think we have to start by telling the truth to those who, unconsciously, are asking to hear it.
Healing, I submit, would enable us to move into a world of abundance instead of scarcity. From a mindset of abundance, we can pursue a global GDP per capita well above today’s ~$17k per person. From that place, we don’t have to forcibly take money away from the rich in order to give to the poor (scarcity mindset) because we will trust we can produce enough for everyone (abundance mindset). We can trust ourselves, and our neighbors, not to hoard (scarcity mindset), but to share (abundance mindset). We can trust that God, as encountered in our fellow man and the entirety of the world we encounter, will provide for us. When Jesus counsels us to pray “give us this day our daily bread”, I think he was encouraging us not only to surrender to God’s will, but also to develop an abundance mindset.
If humanity merely matches recent trends of doubling GDP growth every 30 years or so, we could go from making ~$17k to $34k to $68k for every man, woman, and child on earth within the span of your lifetime. That would be a truly remarkable global achievement.
Remarkable as it is, it might understate the potential. GDP growth grew faster over the past 60 years than it did the prior 60, or the 60 before that. In other words, growth might not just be compounding (which is powerful enough), but accelerating. Global GDP growth accelerating from ~2.3% (doubling every 30 years) to ~3.5% (doubling every 20 years) would mean you would see global GDP double again, to $135k per capita, within the span of your lifetime. We can’t comprehend what that type of abundance would look like, but that’s kinda the point: I think we have to trust and just, well, go for it.
And so, more capitalism.
My guess is by the time you read this, global transformation will be well underway. Either we will be rapidly accelerating toward a world of global abundance, or we will have backslid on a path of authoritarian control resulting in increased poverty. In that world, you might not even have the freedom to read this letter. Let us hope it never comes to that. Perhaps more importantly, let us start to build the safeguards to ensure that never happens.
Here’s to building the safeguards for your future. I may succeed or fail in my attempts; just know that I am committed to doing my part.
I love you both.
Love,
Dad
