Americans have traditionally been the most enthusiastic champions of capitalism. Yet a recent American public opinion survey found that just 50 per cent of people had a positive opinion of capitalism while 40 per cent did not. The disillusionment was particularly marked among young people 18-29, African Americans and Hispanics, those with incomes under $30,000 and self-described Democrats.
Three elections in a row in the U.S. have been bloodbaths by recent standards for incumbents, with the left side doing well in 2006 and 2008 and the right winning comprehensively in 2010. With the rise of the Tea Party on the right, and the Occupy movement on the left, this suggests far more is up for grabs than usual in this election year.
So how justified is disillusionment with market capitalism? This depends on the answer to two critical questions. Do today's problems inhere in today's form of market capitalism or are they subject to more direct solution? Are there imaginable better alternatives?
The spread of stagnation and abnormal unemployment from Japan to the rest of the industrialized world does raise doubts about capitalism's efficacy as a promoter of employment and rising living standards for a broad middle class. This problem is genuine. Few would confidently bet that the U.S. or Europe will see a return to full employment as previously defined within the next 5 years. The economies of both are likely to be constrained by demand for a long time.
But does this reflect an inherent flaw in capitalism or, as Keynes suggested, a "magneto" problem (like the failure of a car alternator) that can be addressed with proper fiscal and monetary policies, and which will not benefit from large scale structural measures? I believe the evidence overwhelmingly supports the latter. Efforts to reform capitalism are more likely to divert from the steps needed to promote demand than to contribute to putting people back to work. I suspect that if and when macroeconomic policies are appropriately adjusted, much of the contemporary concern will fade away.
That said, sharp increases in unemployment beyond the business cycle"”one in six American men between 25 and 54 are likely to be out of work even after the U.S. economy recovers"”along with dramatic rises in the share of income going to the top 1 and even the top .01 per cent of the population and declining social mobility do raise serious questions about the fairness of capitalism. The problem is real and profound and seems very unlikely to correct itself untended. Unlike cyclical concerns there is no obvious solution at hand. Indeed the observation that even Chinese manufacturing employment appears well below the level of 15 years ago suggests that the problem's roots lie deep with the evolution of technology.
The agricultural economy gave way to the industrial economy because progress enabled demands for food to be met by only a small fraction of the population, freeing large numbers of people to work outside agriculture. The same process is underway today with respect to manufacturing and a substantial range of services reducing employment prospects for most citizens. At the same time, just as in the early days of the industrial era, the combination of substantial dislocations and greater ability to produce at scale is enabling a lucky few to acquire great fortunes.
The nature of the transformation is highlighted by the 50-fold change in the relative price of a television set of a constant quality and a day in a hospital over the last generation. While it is often observed that wages for median workers have stagnated, this obscures an important aspect of what is occurring. Measured via items such as appliances or clothing or telephone service where productivity growth has been rapid, wages have actually risen rapidly over the last generation. The problem is that they have stagnated or fallen measured relative to the price of housing, health care, food and energy or education. As fewer and fewer people are needed to meet the population's demand for goods like appliances and clothing, it is natural that more and more people work in producing goods like health care and education where outcomes are manifestly unsatisfactory. Indeed as the economist Michael Spence has documented, a process of this kind is underway; essentially all employment growth in the U.S. over the last generation has come in non-traded goods.
The difficulty is that in many of these areas the traditional case for market capitalism is weaker. It is surely not an accident that in almost every society the production of health care and education is much more involved with the public sector than the production of manufactured goods. There is an imperative to move workers from activities like producing steel to activities like taking care of the aged. At the same time there is the imperative of shrinking or least slowing the growth of the public sector.
This brings us to the charge that the governments of industrial market capitalist societies are bankrupt. Even as market outcomes seem increasingly unsatisfactory, budget pressures have constrained the ability of the public sector to respond. How and when–and not whether–basic programs of social protection will be cut back, is now back on the table. The basic solvency of too many capitalist states seems in question.
Again the problems are very real. While I believe more than most that the U.S. government will be able to borrow on very attractive terms for a long time, if as I fear private borrowing remains depressed, there is no denying that the current path of planned spending and planned revenue collection are inconsistent. And Europe is teaching us that markets can take significant fiscal problems and make them catastrophic by becoming too alarmed too rapidly.
At one level the answer here is simply to insist on more political will and courage. But at a deeper level, citizens of the industrial world who believe that they live in progressive societies are right to wonder why increasingly affluent societies need to roll back levels of social protection. Paradoxically, the answer lies in the very success of capitalism which has made the opportunity-cost of an individual teaching or nursing or administering that much more expensive.
When outcomes are unsatisfactory, as they surely are at present, there is always a debate between those who believe that the current course needs to be pursued with increased vigor and those who argue for a radical change in direction. That debate is somewhat beside the point in the case of market capitalism. Where it has been applied it has been an enormous success. The challenge for the next generation is that while that success will increasingly be taken for granted and indeed will become an increasing source of frustration in these pinched times, its success cannot be matched outside the market's natural domain. It is not so much the most capitalist parts of the contemporary economy but the least"”those concerned with health, education and social protection–that are in most need of reinvention.
“Markets have inherent and well-known inefficiencies. One factor is failure to calculate the costs to those who do not participate in transactions. These “externalities” can be huge. That is particularly true for financial institutions. Their task is to take risks, calculating potential costs for themselves. But they do not take into account the consequences of their losses for the economy as a whole.
Hence the financial market “underprices risk” and is “systematically inefficient,” as John Eatwell and Lance Taylor wrote a decade ago, warning of the extreme dangers of financial liberalization and reviewing the substantial costs already incurred – and also proposing solutions, which have been ignored.
The threat became more severe when the Clinton administration repealed the Glass-Steagall act of 1933, thus freeing financial institutions “to innovate in the new economy,” in Clinton’s words — and also “to self-destruct, taking down with them the general economy and international confidence in the US banking system,” financial analyst Nomi Prins adds.
The unprecedented intervention of the Fed may be justified or not in narrow terms, but it reveals, once again, the profoundly undemocratic character of state capitalist institutions, designed in large measure to socialise cost and risk and privatize profit, without a public voice.
That is, of course, not limited to financial markets. The advanced economy as a whole relies heavily on the dynamic state sector, with much the same consequences with regard to risk, cost, profit, and decisions, crucial features of the economy and political system.” some balance to the debate…
Capitalism like Communism is only good on paper, in real life communism robs you of initiative and capitalism makes the cake crumbles go up instead of down.
Capitalism, by its nature, requires the free market pricing mechanism to function properly. It is disingenuous to criticize capitalism as flawed due to the problems the United States is experiencing when this depression is arguably the result of the LACK of a free market.
At its core, a free market requires price discovery. The marketplace must be allowed to clear all prices. However, the most important price in the market… the price of money… has been manipulated for decades by central banks. This distortion generates ripple effects throughout every decision-making process… every industry… which can only result in misappropriated resources, which then must inevitably result in depression.
The response, unfortunately, has been more central planning to try to avoid the symptoms of central planning. Please restore free market capitalism and give it a chance to work before dismissing the concept.
Solemn and sagacious words from one of America’s most serious people. Words that betray a shallow intellect, a failure to apply even the most basic macroeconomic theory and no attempt to provide a plan or program to address the malaise afflicting our great nation. We are being led by a group of brilliant, energetic, facile dance instructors, forward, backward, side to side.
KIT
Summers completely ignores 3 basic issues with the health of capitalism in the US (and world): Overuse of Leverage, Tax Structure that favors Speculation, and Subsidized Industries (oil, real estate, big agri).
Overuse of leverage is the main culprit of the 2008 Great Recession, as it has been in any great collapse. Any investor knows the dangers of a margin call, and we have just seen a major margin call worldwide. Summers also ignores how the huge growth of derivatives since 1980s (an extension of credit and leverage) have turned investment markets into speculators’ roulette wheel.
The US Tax Structure since the 1980s has reduced short term capital gains and derivative income/gains by more than 70% while at the same time tripled the payroll tax on middle income AMericans. The “carried interest” use by hedge funds and private equity, plus off-shore tax havens have allowed speculators to pay extremely low tax rates, thus pushing out the traditional long term investor which is vital to capitalism. Summers can take direct credit for this trend.
Finally, the US government subsidizes through low tax rates, outright cash grants and extremely low regulations the very industries that have not provided any growth to the US labor force for over 30 years: oil/gas, agriculture and real estate. Depletion allowance, 1031 exchanges, crop subsidies, etc. all distort the market economy and shift resources away from viable industries. Of course, this policy is only in place because of the huge dollars political campaigns receive from these industries.
Capitalism would work if we control speculation, promote a fair tax policy and do not subsidize healthy industries.
There a several comments about the system’s not ‘fair’ and the bailout rigged the system. But you have to remember why the government bailed out the banks…because the banks threatened to take down the entire system. It’s not so much about unfairness, as it is about a system that’s so corrupt, so powerful, so entrenched, that they can literally blackmail the entire capitalist system…because they have that ability. The deregulation of capital markets created a monster that’s eating up all the money and making any government checks ineffective. These out-of-control powers may fail under their own corrupt weight…but when they do, it will collapse on top of all of us.
The biggest problem is, as I see it, is trying to integrate capitalism betweem countries that use it and those who don’t. If you have true competitive markets things work, but to make it work requires a country with a strong government with backbone. The US does not have a strong government and by allowing hoarding of commodities and stock manipulation it works poorly.
Where is the mention of the government subsidies, transparent and fraudelent dealings with Wall Street and banking institutions, greed, and lack of the very source of financial stability in a capitalistic society……..TAXES, monitoring of instuitutions to limit greed and fraud and the lobbying of big corporate entities to continue on their quest for profits where greed and fraud are commonplace?
Capitalism cannot survive without the working man to keep the cycle of invention and consumption working. But the greedy have forgotten that in their quest. They are high on $14 billion in profits for one quarter and the fact that a politician stated that “corporations are people too.”
We are becoming laughable to every progressive nation because of our hatred, ineptness and lack of compassion for our own people. Yet we have stepped into the shoes of the “savior” of all nations from people just like us.
Capitalism that is well regulated and offers severe penalties for those who go outside those regulations or boundaries works best for the masses and the countries in general. Greedy unregulated capitalism just breeds avarice uncaring screw-you-it’s-all-mine CEOS and Wall Street jerks who think they are gods and everyone is just dumb serfs. Greedy capitalism offers countless opportunties for the unscrupulous and scam artists to take over and everyone gets hurt. Tell Phil and Wendy Graham to take a hike and reverse Glass-Steagall now.
We have not had capitalism in this country for nearly 100 years. We have had corporatism. And it is working just fine. The 95% is increasingly improverished and politically impotent. The 5% is totally in control and totally global. The first really big push toward corporatism was under Pres. Wilson who used WWI to push through government control of business. FDR used the Depression to extend controls. Now Democrats and Republicans are in bed together with the Boss and are making him happy.
We do not have a system of “market capitalism,” Summers, and so long as you keep beating that drum, your credibility is exactly zero. The system we bear is one of corrupt crony capitalism, wherein wealth is no longer based upon production, but upon the creation of fictional financial vehicles to prestidigitate “profits,” and the criminal bribery and control of public officials and distortion of public policy to ensure that real revenues are transferred to the corporate coffers, rather than to schools, bridges and water treatment plants.
Your propaganda above is nothing but an attempt to rationalize the continued dysfunctions of that system, while throwing a bone to the losers under that system; “Oh, maybe we should improve health care a bit for you all, and then maybe you will like us.”
You want real change? Then do away with the prison-industrial complex and the insane drug war. Stop killing people overseas, quit waging war on everyone, and eviscerate the military-industrial complex. Destroy the sick-care industry, with the enormously destructive partnership of destructive “foods” and destructive drugs and GMOs, the criminal FDA that attacks health and promotes the illnesses by which Big Pharma profits, and the perniciously subsidized Big Ag industry that is sealing our fate as we speak. Reject a political system that takes its bribes from the richest corporations and tailors its public policy accordingly, that treats corporations as natural persons under the Bill of Rights and elevates their status over natural persons, that maintains and accelerates the police state and destruction of personal liberties (of natural persons), and that cares nothing for the people who are their nominal constituency.
I don’t want chicken bones, Summers. I want heads to roll. Keep talking. Maybe you can convince yourself, but you are getting nowhere with us.
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