The demand signals never allocated the resources, a small number of people always did. Those people react to the demand signals (and they still do).

IMO a more important question is: what happens when the market power of a segment of society grows much greater than the rest? In a "K-shaped" economy, the top 20% have so much spending power (and even more future spending power) than their demand signals can overwhelm the rest. Then IMO the market won't respond to the demand signals of the bottom 20% and capitalism stops working for all. Add to that the possibility of AI automating more and more work and you have a system that only works for folks at the tops.

This isn't a resource allocation problem! it's a purchasing power distribution problem.

The word you’re looking for, is Serfdom.

I have a theory that this issue happens because we put money into the stock market for our pension. This creates a concentration of wealth/money into a relatively few organizations. I think money and wealth should be created more locally.

Of course, this is very idealistic and simplistic.

However, what did people think was going to happen when the common wisdom is to put your money into an index and then shut up? It simply cannot be true that putting money into the index means you win. There's cost somewhere, a parasite on the system, that is going to come due at some point.

That is the entire Marx's Das Kapital. The main argument being free market will lead to concentration of power and then capitalism collaspe. He expanded on what he thought the not-capitalism could be.

Then Lenin concluded that if you will always have concentration of power and some folks doing centralized planning, it might well be the state.

The same group of minds that were behind communism were also behind modern capitalism. It's no surprise that these systems produce the same net results - it was by design.

Fun fact: Internally all corporations are organized by central planning

"....It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it." - Adam Smith, final paragraph of Book I, An Inquiry into the Nature and Causes of the Wealth of Nations

Warning about companies being able to command regulation on themselves. We're far past anything Adam Smith would have thought was a good idea for how we organize capital and commerce.

You can do a lot of central planning if you can convince investors to give you a large enough pile of money, but it still doesn't compare to what the US government can do. You're not going to fund social security that way.

That doesn’t sound right. Silicon Valley is clearly responding to massive demand for AI services. The reason Nvidia has so much money is that people are paying them for something only they can make. It’s not like they’re issuing stock into a meme stock spike or something. They’re selling hardware that companies are demanding in large quantities because those companies need the hardware to provide services that people and companies want so badly that every marginal hardware dollar spent earns a large number of service dollars.

This is probably the most demand-mediated response of all time. The natural form of that is that the guy who we give lots of money to for his stuff is going to have lots to spend.

There are old words for this: Monopolies and Trusts. The US around this point last century put a lot of work in Trust-Busting and Anti-Monopoly/Anti-Corruption work.

The other related word is Oligarchy, rule by a select few that think they know better than everyone else. Oligarchy seems to be a failure case of most modes of politics and economics. Capitalism and communism both fail over to oligarchy when left unchecked.

It's been argued that for as many centuries as humanity spent under feudalism that oligarchy is almost the "default state" of politics and economics and it takes great effort to avoid it. Adam Smith saw economic monopolies and knew they were a failure case of capitalism from early on. Capitalism was built on top of breaking apart monopolies like the East India Trading Company. We've always known that capitalism is just as likely to slip into oligarchy as any other "ideal" form of resource allocation/economics, especially because it started as oligarchy.

> Then I think there's Adam Smith's ideal form of capitalism

People have this idea that Adam Smith "idealized" capitalism or that the Wealth of Nations is some sort of manifesto. It's much more of an empirical research (by the standards of the time) with observations and findings. It's equally useful if you're a communist or a free-market capitalist.

Adam Smith himself was fairly skeptical of massive corporations capital accumulation:

> "The directors of such companies, however, being the managers rather of other people's money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master's honour, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company."

This observation is exactly the Marxist prediction of how capitalism gradually transforms society from early capitalism, which nearly fit the Econ 101 assumptions of many small producers and consumers and such, into something that operates economically more like communism by being centrally planned, but with the severe drawbacks of a minority ruling class and being run undemocratically on the basis of private profit not usefulness to people. This is an interesting book on the subject of how far we have come in this regard: https://en.wikipedia.org/wiki/The_People%27s_Republic_of_Wal...