“The Future of Capitalism” by John Edward

John Edward teaches economics at Bentley and UMass Lowell. He’s a frequent contributor of columns on economic issues

The only thing worse than a bad idea is a good idea ruined by an inflated sense of how good an idea it is.

Winston Churchill said democracy is the worst form of government, except for all the others. Adam Smith, often referred to as the father of modern economics, could have said the same about capitalism.

Capitalism is not working well right now. The overall economy appears to be slowly improving. However, for far too many people their personal economy is getting worse. Wages for the majority are stagnant or shrinking. Inequality has reached extremes not seen since just before the Great Depression. When 2.5 million children are homeless in the United States of America, our economy is failing, and our society is less united.

Which led a friend to ask me the question: “What is the future of Capitalism?” Adam Smith offered free-market capitalism as an alternative to mercantilism. Capitalism beat out communism a generation ago. Now the American dream looks bleak. No longer can we expect the next generation will be better off than us. What will happen to capitalism?

We need to restore the American dream. The answer is not to reject capitalism. The answer is rejecting the excessive reliance on self-interest and market forces that ignores the lessons of Adam Smith and over two centuries of experience.

Capitalism as Scapegoat

A properly working economic system improves the well being of the “common man.” Right now, it is not working. We need to know what failed to come up with a solution that will work. Capitalism is the prevailing regime. It will be the obvious scapegoat.

As an economist, I appreciate how well markets work — except when they do not. The problem with our economy is not capitalism. The problem is not the marketplace. The problem is the blind faith in the capitalism of free-market fundamentalists.

People blame religions when extremists distort religious tenets and become terrorists. Many will blame capitalism if extremists distort the principles of Adam Smith and lead us into severe economic and social distress .

Ronald Reagan as Perpetrator

Even if capitalism is just a scapegoat, people will look for someone to blame. The name that comes to mind is Ronald Reagan. President Reagan sold voters on the premise that government was the problem. Three decades later, many are still sold. Future generations will buy the premise that Reagan’s Presidency was the start of our problems.

Reaganomics paved the path to excessive inequality. President Reagan gave huge tax cuts to the wealthy. He burdened the rest of us with a ballooning national debt. His budget deficits led to reductions in government investment. His tax cuts failed to stimulate private investment.

President Reagan believed a rising tide would lift all boats. His policies did not raise the tide very well, and a lot of boats started taking on water. President Reagan said the benefits of his largesse for the wealthy would trickle down to the rest of us. John Kenneth Galbraith offered an apt analogy for trickle-down economics: “If you feed the horse enough oats, some will pass through to the road for the sparrows.”

CEOs as the Greedy and Gluttonous

Even if a long dead President takes the blame for capitalism run amok, people will still look to exact revenge on someone. It has to be someone with deep pockets. The obvious choice is wealthy executives who fail to show self-restraint. No one has deeper pockets than the captains of capitalism who proclaim their faith in whatever price the market will bear, especially when the price is the ungodly pay they receive.

One legacy of Reaganomics is the “greed is good” mentality that permeates the corporate, finance, and entertainment worlds. These gluttons will be the focus of people’s wrath when things get really bad.

Or, if you decide to “Abandon all hope,” enter into Dante’s Inferno. Corporate executives will hold a special place in Dante’s Third Circle of Hell (Gluttony) and in the Fourth Circle (Greed). The wealthiest one percent own about 42 percent of the wealth in the United States – the top 0.01 percent own 11 percent. The wealthy use their vast amounts of money to control the political process in order to preserve and extend their riches. The greedy will go to hell sooner rather than later if the wealth gap continues to widen.

Things Will Get Worse Before They Get Better

Paul Jorgensen, Professor of Political Science from the University of Texas, recently spoke at UMass Lowell. He cites the “Golden Rule of Politics”: if you want to know who rules in politics – follow the gold. His research reveals an extremely high correlation between amounts of money spent on elections and who wins.

Wealth controlling election results means election winners do not represent the median or typical voter. Office holders certainly do not represent those hurt most by excessive inequality. The results reinforce an economy where the people with money have a great advantage  and those without much money suffer grim consequences.

That is why Professor Jorgensen agreed things will get worse in our country before they will get better. He noted the extensive evidence that things are getting worse. Everyone could face grim consequences as conditions do get worse.

We can avoid the grim consequences. We can do so without blaming capitalism. We certainly should not abandon capitalism. We can fix capitalism.

To fix capitalism we need to change our political economics. For that to happen we need political resolve. Political resolve will only come from intense political pressure to resist the moneyed interests. Unfortunately, that political pressure may only become intense enough when conditions get much worse.

The United States as a Target

Every time we invade a country, every time we try to build a nation, every time we project our power in the name of democracy, we make ourselves a target. United States military excursions in the Middle East can be declared “mission accomplished” only if the mission is to recruit a new generation of terrorists.

Market fundamentalism also makes us a target to religious fundamentalists. The United States would better serve other sovereign nations, and ourselves, if we stopped trying to convert them to our fervent faith in the sovereign power of markets, and started reflecting on the true meaning of capitalism.

Socialism Becomes an Accepted Word

It used to be that calling someone a liberal was insult enough. Then the slurs grew harsher by labeling people as a Massachusetts liberal or a liberal zealot. In recent years the ultimate offense became tagging someone as a socialist, or accusing them of supporting socialized medicine. Invariably these charges are levied by people who clearly do not know what socialism is. From Webster’s New World Dictionary:

Socialism n. any of various theories or systems of the ownership and operation of the means of production and distribution by society or the community rather than by private individuals.

Socialism is an extreme. Turning our economy into a pure socialist state will not work.

Believing markets are the answer to every problem is an extreme. Markets do not always work. Again, from Webster’s:

Capitalism n. the economic system in which all or most of the means of production and distributions, as land, factories, railroads, etc., are privately owned and operated for profit, originally under fully competitive conditions; it has been generally characterized by a tendency toward concentration of wealth, and, in its later phase, by the growth of great corporations.

Many politicians advocate reliance on free-market capitalism. Our healthcare system relies more on free markets than any other country. We also have the most expensive health care in the world, by far. Our market-based system does a poor job of paying for health care. Yet, some insist we need even more competition, and more reliance on market fundamentalism.

In his 1996 book The Future of Capitalism, Lester Thurow said: “It is not possible to have an ideology of equality (democracy) and an economy that generates ever larger inequalities with absolute income reductions for a majority of the voting population.” He explained “the revival of free market survival-of-the-fittest economics” as “a return to mythical ancient virtues. It’s what people do when they are confused.” Thurow predicted: “at some point, something will arise to challenge capitalism and capitalism will need the political support of more than the small number of individuals who are actually owners of substantial amounts of capital.”

CEOs, hedge fund managers, and baseball players make hundreds of millions of dollars. Meanwhile, there are 45 million people living in poverty. If we persist in our over-reliance on market forces, with the resulting excessive inequality, then political support for capitalism will erode. Socialism will no longer be a dirty word.

This is not good vs. evil or even democracy vs. totalitarianism. Capitalism can and does co-exist peacefully and prosperously with socialist ideas.

The Future is the Past

Socialism will become an accepted word, but the future is not Karl Marx. The future is Adam Smith.

Yes, the Adam Smith who said: “Individual ambition serves the common good.” and “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.” It is not a big leap to go from these words of Adam Smith to those of Gordon Gekko in the movie Wall Street: “The point is ladies and gentlemen that greed, for lack of a better word, is good.”

Adam Smith praised the advantages of economic incentives inherent in a market-based economy – freedom of choice is good. However, he also warned of social ills that would result from blind faith in markets and from unrestrained self-interest – greed is bad.

Following are just a few examples from the writings of Adam Smith. Although he testified to the positive affect of economic incentives, Adam Smith warned of the negative impact of incentives:

[Business]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 was not a believer in big government. However, one of his biggest criticisms about government was how it works to the benefit of those who control markets:

Civil government, so far as it is instituted for the security of property, is in reality instituted for the defense of the rich against the poor, or of those who have some property against those who have none at all.

Adam Smith did not endorse a classless society. However, he argued against an economy with excessive inequality between classes:

Is this improvement in the circumstances of the lower ranks of the people to be regarded as an advantage or as an inconveniency to the society? The answer seems at first sight abundantly plain. Servants, labourers and workmen of different kinds, make up the far greater part of every great political society. But what improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable.

Adam Smith was not a liberal. However, he offered support for causes often associated with progressives, such as the minimum wage:

A man must always live by his work, and his wages must at least be sufficient to maintain him. They must even upon most occasions be somewhat more; otherwise it would be impossible for him to bring up a family, and the race of such workmen could not last beyond the first generation.

Dismissing one of the typical arguments against the minimum wage:

Our merchants and masters complain much of the bad effects of high wages in raising the price and lessening the sale of goods. They say nothing concerning the bad effects of high profits. They are silent with regard to the pernicious effects of their own gains. They complain only of those of other people.

 Supporting a progressive income tax:

It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.

 And, government investment in our crumbling infrastructure:

That the erection and maintenance of the public works which facilitate the commerce of any country, such as good roads, bridges, navigable canals, harbours, must require very different degrees of expence in the different periods of society, is evident without any proof.

 Adam Smith put a lot of faith (too much, many behavioral economists would argue) in the rational behavior of self-interested humans. However, he was also a humanitarian:

To feel much for others and little for ourselves; to restrain our selfishness and exercise our benevolent affections, constitute the perfection of human nature.

I will give the final word on the current state of capitalism to Gordon Gekko, again from Wall Street, released in 1987 but even more relevant today:

The richest one percent of this country owns half our country’s wealth, five trillion dollars. One third of that comes from hard work, two thirds comes from inheritance, interest on interest accumulating to widows and idiot sons and what I do, stock and real estate speculation. It’s bullshit. You got ninety percent of the American public out there with little or no net worth. I create nothing. I own. We make the rules, pal. The news, war, peace, famine, upheaval, the price per paper clip. We pick that rabbit out of the hat while everybody sits out there wondering how the hell we did it. Now you’re not naive enough to think we’re living in a democracy, are you buddy? It’s the free market. And you’re a part of it. You’ve got that killer instinct. Stick around pal, I’ve still got a lot to teach you.

 That Gordon Gekko was the inspiration for many people pursuing Wall Street careers says a lot about the current state of capitalism. Adam Smith had a lot to teach us about the future of capitalism.

Capitalism does indeed have a future. Capitalism was and is a good idea. Not the inflated capitalism of Ronald Reagan, Gordon Gekko, and the robber barons. The future of capitalism will be based on an understanding of when markets work, and when they do not. The future of capitalism will acknowledge the incentive of self-interest, exercise restraint of selfishness, and embrace egalitarianism.

3 Responses to “The Future of Capitalism” by John Edward

  1. Brian says:

    Nice post. It’s interesting that Adam Smith was also mentioned in Sun’s Focus article Rags to Riches: It’s Just a Myth by by Lawrence Mitchell this past Sunday.

    A quick Wikipedia search shows that Smith influenced the economist Henry George.

    “Although the economic efficiency of a land value tax has been established knowledge since Adam Smith,[1] it was perhaps most famously promoted by Henry George.”

    What are your thoughts on the land value tax?

  2. John Edward says:

    The question on a Land Value Tax is an interesting one because Adam Smith did indeed write about the advantages of such a tax. Actually, again echoing what Churchill said about Democracy, Milton Friedman effectively said a Land Value Tax is the worst form of taxation, except for all the others (what he really said was if you have to tax this would be the best way to tax).
    A Land Value Tax has a number of advantages, perhaps key among them that it is “efficient” in terms of not altering behavior and difficult to avoid, and second being progressive. I do not think a Land Value Tax is as efficient or as progressive as advocates claim (they make unrealistic assumptions about the perfect inelasticity of supply), but still it scores well on both points. It also can be an incentive to spur development in urban areas.
    On the down side there are administrative issues with respect to land valuation, making sure you do not create an unintended consequence of depleting open space, and concerns of the treatment of people who are land “rich” but income poor.
    However, the biggest problem with a land Value Tax is the same as with a progressive income tax in Massachusetts or a value added tax – they are politically untenable, in the case of a land value tax because it will be opposed by the moneyed interest.