Economic inequality a crisis for capitalism

Increasing economic inequality and decreasing mobility have entered mainstream consciousness and been identified as among the most pressing challenges of capitalist societies like the United States in the 21st century. Today, capitalism has a distinctly pejorative interpretation here in its free-market Mecca.

Increasingly, Americans are questioning the ideology of capitalism itself. This crisis manifests itself prominently among the nuevo millennial socialists for whom capitalism is all about profit. For them, profit is a bad word. They ignore the reality that in any economic system people hope to gain more value from things than they put into them, and that this is true in whatever you do in life.

According to a new Harris Poll, more millennials would prefer to live in a socialist country (44 percent) than a capitalist one (42 percent). The percentage of millennials who would prefer socialism to capitalism is a full 10 points higher than that of the general population. What’s more, this crowd rejects capitalism as an economic system because it benefits the wealthy and powerful; poses large social costs; and contributes to the obscene prosperity of a tiny, privileged minority.

Alternatively, proponents of capitalism argue that it is the only system humans have developed that maintains both improvement in living standards and individual freedom. Despite criticism that it is morally bankrupt, capitalism has spread prosperity across the planet. Free markets have generated enormous wealth in recent decades, as documented by the World Bank delivering millions of people out of poverty and raising living standards throughout the world. In 1990, about 40 percent of the global population lived on less than $1.90 a day, according to the World Bank; today it is less than 10 percent.

But the story is different for the average American. Since the 1970s, their wages have stagnated. Since the 1990s, cheap imports made available by NAFTA and Chinese accession to the World Trade Organization benefited consumers, but depressed wages and robbed blue-collar Americans of the secure manufacturing jobs and the health and retirement benefits that went with them.

Technological advances certainly played a major role in worker displacement, but trade policy also contributed to the U.S. losing seven million of its 19.2 million manufacturing jobs from 1980 to 2015. Yes, consumers have enjoyed lower costs for imported products, but displaced workers in the United States have paid the price and contributed to what has been labeled the crisis of capitalism: the growing gap between haves and the have-nots.

How then to define capitalism? In theory it is another ism that describes an economic way of life, a system that emphasizes private ownership of personal property and business assets, property rights that protect ownership, the sanctity of private contracts, using prices to allocate resources efficiently, a reliance on competition and incentives, voluntary exchanges between consenting adults, profit maximization, an effective legal system and limited state intervention.

In practice, capitalism is not monolithic; it takes many forms. For instance, in the United States, government plays a more limited role in economic decisions than under China’s form of market driven state capitalism. There, the government has a substantial role in shaping the rules of the market and is a significant player in the economy. In the Russian style of state capitalism, the Kremlin relies on both direct government intervention in key economic sectors and control of politically connected businessmen to promote the interests of the Russian state and those who run it.

Like any economic system, capitalism is a human institution and, as such, is imperfect. It should be judged on the basis of whether it is the best system available, not the best imaginable. And it is capable of reform. As the saying goes “nothing is forever, not now, not ever, never.”

Finally it is worth remembering, to paraphrase John Kenneth Galbraith’s comment, “under capitalism man exploits man while under socialism the reverse obtains.”

 Originally Published: May 11, 2019.

Widening gap between rich and poor a challenge for capitalism

Capitalism is a well-known paradigm that attempts to answer the question of what constitutes an economically just society through the production and distribution of economic goods. It is a classic example of a paradigm that was developed by studying what was going on in the real world and reducing it to abstract theory.

As practiced in most societies, capitalism is an inevitable outgrowth of the human instinct to trade goods with each other. This instinct seems to be as strongly hard-wired into the DNA of our species as the instinct to reproduce and has defied all attempts to suppress it. Various forms of capitalism have, over time and across countries, improved the lives of billions of people, especially since the collapse of the Soviet Union and China’s adoption of a form of state capitalism in 1976. But how effective is it when it comes to the just distribution of goods among members of society?

A late-night television wag once quipped that paradigms were the last refuge of the intellectually challenged. Preconceptions can be a useful starting point for organizing great masses of empirical evidence, but it is prudent not to edit the evidence to fit our normative theories about what the real world ought to look like.

This was the mistake made by the Medieval European philosophers who based their cosmology of an earth-centered universe on accepted Christian myths carefully propped up with Aristotelian logic. The result was the need for constant tinkering with their theoretical models to accommodate a growing body of astronomical evidence about how the known planets actually moved.

Not to mention centuries of embarrassment for the Roman Catholic Church after it forced Galileo to recant the evidence of his own eyes that supported the “heretical” sun-centered cosmology of Copernicus.

As capitalism matured and came to dominate western societies during the last two centuries, it attracted the attention of various writers who developed paradigms to explain it. Beginning with Adam Smith and proceeding through John Stewart Mill to today’s stained glass theorists of the Austrian and Chicago schools, these writers with the regularity of Swiss trains sought to purify their paradigms and give them a hard core of academic logic.

In Smith’s world, competition among those who pursue their own interest promotes the general welfare of society more effectively than the efforts of any individual who might deliberately set out to promote it. As he simply put it: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”

Critics argue that, as currently structured, capitalism disproportionately benefits the wealthy and powerful. They say it exacerbates both economic inequality and other pressing societal problems, such as environmental issues.

Stated differently, one downside of capitalism as currently practiced is that it results in the rich getting richer and the poor getting poorer. This has led to unprecedented stagnation in American social mobility and been a major factor in the anger many Americans are expressing.

This condition is a real challenge in a country where, just this past November, we learned just how deeply economic and demographic factors has divided the electorate. To paraphrase Florida Sen. Marco Rubio, it is a country in which half the people absolutely hate the other half. The relationship between the haves and have-nots is dramatized by the media and by politicians firing up their base.

In any case, the practical test of a vision’s standing in the real world is whether it can consistently pass the French Revolution Test. That is, whether it can win acceptance by a sufficiently large majority of a society’s members to withstand the inevitable assaults from those who find it objectionable and seek to replace it with their own visions – by force, if other means fail.

Originally Published: February 18, 2017