AMERICANS have traditionally been the most enthusiastic
champions of capitalism. Yet a recent American public opinion survey found that
just 50% of people had a positive opinion of capitalism while 40% 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 US 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 industrialised 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 US or Europe will see a
return to full employment as previously defined within the next five 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 US economy recovers — along with dramatic rises in the
share of income going to the top 1% and even the top 0.01% 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 under way 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
fiftyfold 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, healthcare, 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 healthcare and education
where outcomes are manifestly unsatisfactory. Indeed as the economist Michael
Spence has documented, a process of this kind is under way; essentially all
employment growth in the US 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 healthcare 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 programmes 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 US 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 vigour 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.
- Reuters
*Lawrence H Summers is the Charles W Eliot University
Professor at Harvard and a former US treasury secretary.