Two of the defining problems of our times are wealth inequality (both globally and within the first world) and climate change. With any socioeconomic order - our mixture of capitalism and government being just one - there are going to be consequences both good and bad. There are going to be challenges that the socioeconomic order is particularly good or bad at addressing. The point of this post is to expand on how these two defining problems - global warming and inequality - are products of our particular socioeconomic order, that they are two problems that our system is particularly ill-equipped to deal with.
Government vs Markets:
We have this mixture of systems because markets and governments have different strengths and weaknesses. By using a combination of the two, we are able to try and minimize the weakness of each.
On the market side, a negative externality occurs when the cost of a particular market transaction (going fishing, say) is not directly felt in full by the immediate actors in the transaction, but negatively affects others. For instance, in a fishing habitat, any individual fisherman contributes to a problem of over fishing which lowers the future availability of fish. While in aggregate the externality becomes very negative, the contribution from any individual fisherman is quite small and they would be in their rational best interest to continue fishing since the cost of their overfishing is spread out among so many others. This is the so called tragedy of the commons.
Capitalism as a socioeconomic construct is particularly poor at addressing tragedy of the common problems. Because the system is one where individual and voluntary actions are free to occur, there is no mechanism in capitalism, by definition, to pay the costs of negative externalities. It is perhaps ironic that one of the greatest strengths of capitalism is its ability to finely tune pricing structures to account for the costs that it "sees" with ruthless efficiency, yet one of its greatest weaknesses is the inability to "see" certain types of costs.
In contrast, government is very successful at dealing with these types of problems. By using the fiat power that governments have, they can manage tragedy of the commons situations by, say, putting regulations on fishing in a fish habitat to prevent the negative externality of unsustainable declining fish populations. Indeed, many of these environmental roles like legislating against certain forms of pollution tend to be where the role of government is most complementary to the role of markets and has the strongest cases for government intervention.
Global warming is the mother of all negative externality problems, where the true costs from our energy consumption paradigm doesn't manifest itself locally, but manifests itself in the "commons" of our global ecosystem. The consequence of climate change is felt widely, but for any individual there is a massive cost with marginal gain for changing their individual actions to help. We all drive to work and heat our homes (in the first world, at least), and each individual contribution to global warming is miniscule. The cost benefit analysis for an individual is clearly to continue. But these effects on aggregate are enormously consequential.
The problem for global warming is that despite it being exactly the type of tragedy of the commons problem that government, not markets, are best suited to address, there simply lacks a sufficiently powerful global governance mechanism to make this happen. It is a global problem, but we don't have a global government to impose regulations by fiat.We have been reduced to try and form some agreement between countries to voluntarily act together.
This has been, for the most part, rather unsuccessful and actually suffers from a tragedy of the commons problem itself, just at a larger jurisdiction. Thinking of countries as individual actors in a larger market, the tragedy of the commons problem returns. Any individual government would be massively advantaged if it didn't have to pay the cost of dealing with climate change while everyone else did the heavy lifting. Somewhat unsurprisingly, no comprehensive agreement has yet been made.
I previously wrote about how the dominant role of government (both descriptively and normatively) is wealth distribution, providing a massive net equalizing force on our world that taxes disproportionately from the wealthy but distributes education and infrastructure and healthcare and so on relatively equally. This underlines just how staggeringly powerful the tendency for capitalism to be unequal really is. The basic dynamic (which can be expanded on at some length) is that the tremendous opportunities that capitalism provides are easiest to take advantage of from those who have resources, which means that the benefits of capitalism disproportionately accrue to those with resources.
Within a country like Canada, inequality is a problem but it is a problem that is mitigated considerably by our redistributive government policies. As a progressive, I believe we should do more, but we are undoubtedly doing a lot already. Between countries, however, inequality falls to the same problem that global warming does, namely a lack of sufficiently powerful governance at the inter-country level. It isn't exactly zero; the UN, the WTO, and the like, curb some of the rough edges. There is a small (relative to GDP) trickle of wealth voluntarily from rich to poor countries. However, these redistributing effects are nothing like what they are within countries, and help explain why there is such staggering differences between the countries, and between whole continents.
Both of these two problems are problems coming from the market side of our socioeconomic system, problems that would normally be left for the government to try and ameliorate but due to their scale are particularly difficult to deal with. This shouldn't be taken as a criticism of capitalism per se. Indeed, we have some pretty striking examples in history of one way things can go horribly bad when the role of government is taken to far. Nonetheless, for our mixture of the two, the two biggest problems of our times are products of market side that the government side is ill equipped to deal with. Indeed, perhaps together they make the case that we should strengthen considerably our inter-country governmental organizations.