Economics - General

Capitalism only works with trust

Capitalism is imperfect. Yet is it the best system developed to allocate scarce resources across society. However, capitalism only works if people are moral beings. For instance, if you sell a treatment and promised benefits are never realized or–even worse–the treatment is harmful, this is a problem. Typical capitalistic responses to this issue are that: (i) reputational effects will de-incentivize people from selling fradulent goods, or (ii) consumers can use the courts to seek remedy from harmful goods. However, the reputational effects only work if the preponderance of people are moral and the dishonest seller is an outlier. The court system can provide remedies to injured parties, but the injury typically needs to be large, as it is expensive to take cases through the court cases.

This reality hit home reading an obituary in The Economist about Shuping Wang. Dr. Wang was dedicated to insuring that there was clean blood supply in China. After starting at a blood bank in 1991, she saw that blood supplies were not safe. Individuals were paid to donate blood and blood centers could then sell the blood at a profit. However, the screening to insure the blood was safe was largely inadiate. Dr. Wang found that in 1992, the national rage of hepatitis C infection among blood donors was 34%. It was 80% in Henan province where Dr. Wang was practicing. China did mandate Hepatitis C testing in July 1993, in part due to her efforts. She also helped to expose high rates of HIV contamination in the Chinese blood supply in the mid-1990s.

Shuping Wang, from The Economist.

Why am I writing this blog post? First is to commend Dr. Wang and other physicians like her who are making a difference in so many patient’s lives in China and around the world. Second, is that capitalism in not antithetical to ethics, rather capitalism relies on an ethical, trustworthy population for it to work properly, particularly in the medical field. Previous research (here, here and here, among others) has shown that societies with high levels of trust grow faster. As this post indicates, that should come as no surprise.


  1. If you’re interested in that topic, Douglass Starr’s Blood: An Epic History of Medicine and Commerce is quite good.

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