It would have been almost unimaginable five years ago that the Financial Times would convene a series of articles on “Capitalism in Crisis”. That it has done so is a reflection both of sour public opinion and distressing results on the ground in much of the industrial world.
Americans have traditionally been the most enthusiastic champions of capitalism. Yet, a recent public opinion survey found that among the US population as a whole 50 per cent had a positive opinion of capitalism while 40 per cent did not. The disillusionment was particularly marked among young people aged 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, by recent standards, bloodbaths for incumbents. In 2006 and 2008 the left did well; in 2010 the right won comprehensively. With the rise of the Tea Party on the right and the Occupy movement on the left, this suggests that 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 the present 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. The 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 demand constrained 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 macro-economic policies are appropriately adjusted, much of the contemporary concern will fade away.
That said, serious questions about the fairness of capitalism are being raised. These are driven by sharp increases in unemployment beyond the business cycle – one in six of American men between 25 and 54 is likely to be out of work even after the economy recovers – combined with dramatic rises in the share of income going to the top 1 per cent (and even the top 0.01 per cent) of the population and declining social mobility. 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, since even Chinese manufacturing employment appears well below the level of 15 years ago it suggests that the roots of the problem lie deep within the evolution of technology.
The agricultural economy gave way to the industrial one because progress enabled demands for food to be met by only a small fraction of the population freeing large numbers of people to work elsewhere. The same process is now under way with respect to manufacturing and a 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 services, 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 food, housing, healthcare, energy and education.
As fewer people are needed to meet the population’s demand for goods like appliances and clothing it is natural that 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 US employment growth 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 is the case with the production of manufactured goods. There is an imperative to move workers from activities like steelmaking 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 – 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 success will increasingly be taken for granted and indeed will become an increasing source of frustration, for 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.
The writer is former US Treasury secretary and Charles W. Eliot university professor at Harvard.
Copyright The Financial Times Limited 2012.