Capitalism is in crisis. Who says so? Bernie Sanders, a 77-year old millionaire white male senator from rural Vermont, a state that established a single-payer health care system and then abandoned it because it required untenable tax increases; Alexandria Ocasio-Cortez, a young telegenic congresswoman who has become a leader of the Left and a thorn in the side of moderate Democrats; and many in the media, for whom “Capitalism is in Crisis” is a gripping headline. But more gripping than accurate.
Karl Marx predicted that a vast reserve army of the unemployed and capitalism’s internal contradictions would bring it down. America’s version of capitalism, a mixture of markets and regulation, exhibits neither. The ranks of the reserve army have been depleted: The unemployment rate is 3.8 percent. Capitalists who would immiserate the working class are being forced by persistent labor shortages to offer higher wages to woo staff from competitors. And America’s healthy economic growth belies the notion that internal contradictions are at play. For those, see:
- the former Soviet Union, where Sanders spent part of his honeymoon;
- Venezuela, from which capitalists fearful of expropriation and workers fearful of starvation are fleeing in droves;
- East Germany, when it could no longer keep its inhabitants walled in;
- And Cuba, home to charming decades-old cars because no one can afford the Toyotas and Volkswagens available to them on international markets.
Donald Trump’s description of America as a nation in need of being made great again was, and is, simply wrong. The downtrodden masses in America don’t feel, well, downtrodden. A recently conducted poll by the Gallup organization found that 86 percent of Americans are “very (56 percent) or somewhat (30 percent) satisfied” with most aspects of their lives: “your education”, 93 percent; current housing, 88 percent; personal health, 87 percent; “your standard of living, all the things you can buy and do”, 84 percent; “your job or the work you do”, 79 percent; your household income, 77 percent. The one earlier survey, in 1995, was not strictly comparable but suggests that levels of satisfaction have increased since then. No surprise, since annual per capita personal income has increased since then by 288 percent, or from $23,600 to almost $54,000 last year, after adjusting for inflation. Unlikely performance for a system in crisis.
These expressions of satisfaction seem inconsistent with polls that indicate that some 53 percent of Americans think the country is headed in the wrong direction. But they aren’t. One can be satisfied with one’s personal circumstance but unhappy with the nation’s condition—control by an elite that imposes costs on workers from which it immunizes itself, such as job-destroying trade-deals; the deterioration of the nation’s finances: and, perhaps most important, the state of what we might call the nation’s culture.
Historian Gertrude Himmelfarb complains of a government that “think[s] that smog and insecticides are perilous enough to call for restrictions on liberty but that pornography and obscenity are not.” One can love one’s house, family and job, but be unhappy with the nation’s cultural condition, whether because traditional mores are breaking down and bathrooms have become unisex, or because mores are not breaking down quickly enough, and those annoying “men” and “women” signs remain ubiquitous. One can view restrictions on the use of obscenities in media as restrictions on freedom of speech or, alternatively, as insufficient when the limitation permits the use of f**k as an adjective or verb.
Still, it would be a mistake to draw too fine a line between cultural and economic concerns, or to think most Americans are satisfied with the economy overall. As Irving Kristol forty years ago wrote, “There would appear to be little doubt that the matter of equality has become, in these past two decades, a major political and ideological issue…. In the United States today, one might fairly conclude from the political debate now going on that capitalism … is about equality and will stand or fall with its success in satisfying the egalitarian impulse.” In a way, the concern about inequality is a symptom of a deeper malaise, a perceived loss of control over many aspects of life—from the scheduling of work at Walmart and MacDonald’s, to workplace conditions at an Amazon warehouse, to access to your doctor or, indeed, to any doctor. Try to reach Internal Revenue for the answer to a question and your chance of reaching someone who can give you prompt and correct information is not very good. Try to find an alternative to Facebook, and you’ll discover that the antitrust authorities took a decade-long nap while Mark Zuckerberg snapped up all potential competitors. Little wonder non-elites feel envious of those in a position to view life with greater equanimity.
Whether for these deeper reasons or not, Gallup polls show that 66 percent of Americans are somewhat or very dissatisfied with the way income and wealth are distributed. No use telling them that a rising tide raises all boats, both rowboats and yachts. Those in the smaller craft feel destabilized by the wake of the larger, even if their own boats are more lavishly fitted out than ever before. The somewhat and very dissatisfied, urged on by capitalism’s critics, look with anger at the pay gap between bosses and workers, a statistic most economists believe is a meaningless measure of inequality, but is easily understood and therefore is politically potent. Equilar, a compensation consultant, reports that the median chief executive last year earned 254 times his or her median employee. Trade union statisticians put the ratio much higher (347 times), and the left-leaning Economic Policy Institute estimates that in 1989 the figure stood at only 58-to-1.
“Politicians know that this is an issue that really strikes a chord with people across the political spectrum,” thinks Sarah Anderson, a political scientist at the Institute for Policy Studies, which styles itself a progressive think tank. It seems she is right: almost half of Americans polled favor having the federal government take steps to limit the pay of executives at large companies. It is not that Americans generally object to people earning large sums of money. Few begrudge Jeff Bezos, who has given them the option of never seeing the inside of a retail establishment again, his enormous wealth. Great entrepreneurs such as Bill Gates are widely admired. Few of the working stiffs in the stands boo Bryce Harper because he held out until the Philadelphia Phillies came up with a $113 million, 13-year contract. Or LeBron James, because he negotiated a four-season, $154 million contract that brings him $500,000 every time he sets a sneaker on the court. Pay and performance are clearly related.
It is the corpocracy that attracts attention. Corporate compensation systems are opaque and, worse, rife with conflicts of interest. Compensation consultants eager to please their CEO clients make recommendations to boards of directors chummy with the CEO and eager that “their” CEO not earn less than the median CEO salary. “No CEO below the average” seems to be the received wisdom.
It is difficult for shareholders to deny high-flying executives their hearts’ desires. Almost 90 years ago Adolf Berle and Gardiner Means pointed out what economists have come to call the principal-agent problem. Scattered shareholders cannot control actions by the managers when those actions are not in the interests of the shareholder-owners of the business. It is only recently that institutional investors, with large blocs of voting stock, have begun to force companies to be more transparent about how executive compensation is determined, and to relate pay to performance, admittedly not an easy thing to do.
It is also difficult to deny that in many ways the system is “rigged” against the middle class and the poor. As the late Mancur Olson, an economist and social scientist, pointed out: “When a group that constitutes only a narrow segment of the income-earning capacity of a society is able to act collectively, its main incentive is to distribute to itself through lobbying and price fixing and to continue such activities even when the losses to the society are large in relation to the amount the group obtains through its distributional struggle.” Powerful lobby groups extract favourable tax treatment for wealthy hedge fund operators and property developers; Corn growers in Iowa receive subsidies from politicians eager for votes in the crucial Iowa caucuses; Silicon Valley billionaires agree not to compete for each other’s workers so as to depress wages and increase profits; hair dressers and morticians form lobbying groups to make competitive entry into their trades difficult-to-impossible. Little wonder that only 11 percent of Americans tell Gallup pollsters they have a “great deal or quite a lot of confidence” in congress, less than they have in big banks (30 percent), the medical system (36 percent), and, no surprise here, the military (74 percent). Or that 52 percent of millennials say they would prefer to live in a socialist or communist country than a capitalist one. For these young men and women, promises of free health care, free college education, student-debt forgiveness, cradle-to-grave benefits, and higher taxes on the “rich” sound alluring. Margaret Thatcher’s warning—“Socialist governments traditionally do make a financial mess. They always run out of other people’s money”—is lost on them.
Of course, talking to a pollster and walking the walk are two different things. The millennials who pine for life in a socialist paradise are not forming caravans to make their way to Venezuela, or even to Sweden, which they imagine to be a socialist system that “works”. Capitalism is not doomed to to the ash heap of history quite yet. For one thing, there is no rival system capable of producing and distributing such enormous material wealth. The typical household classified as “poor” by the U.S. government in 2013 had a car, air conditioning, two colour televisions, cable or satellite TV, and a microwave oven according to Robert Rector of the Heritage Foundation. It has more living space than the average non-poor European. And 92 percent of Americans with incomes of less than $30,000 own a cell phone. “The American bottom is indeed better than the middle in most places on Earth,” concludes The Economist.
For another, capitalism has historically demonstrated an amazing ability to incorporate reforms without destroying its driving innovative force. When the Great Depression hit, and many eyes turned to the competing economic systems on offer—Hitler’s National Socialism, Mussolini’s Fascism, Stalin’s Communism—Franklin Roosevelt reined in the big banks; provided electricity to the under-served; created useful jobs for many, from artists to planters of trees; and created a legal system that allowed trade unions to balance the bargaining power of employers. To the surprise of those who expected to see masses of unemployed veterans peddling apples—the fruit, not yet iPhones—the economy emerged from WWII with renewed dynamism. American firms now account for 57 of the world’s 100 most valuable listed firms.
Still, it is past time for another round of reform. Capitalism must be saved from the capitalists. One of that breed, hedge fund operator Ray Dalio, writes, “I believe that all good things taken to an extreme can be self-destructive and that everything must evolve or die. That is now true of capitalism.” Policymakers will have to look at the world through the eyes of those who do not run hedge funds, develop properties, or manage banks when deciding whether to enact a $15 minimum wage, or whether to back features of the tax code that lower the effective tax rate on high earners such as Bernie Sanders and winners of the sperm lottery such as Donald Trump Jr. They’ll also need to reconsider the incentive systems that have produced scandals at Wells Fargo, Boeing, Goldman Sachs, Equifax, JP Morgan Chase and other companies, as well as give weight to social considerations: Shell Oil is developing a system that pegs compensation to executives’ ability to reduce greenhouse gas emissions.
Capitalists, who have the political clout to push these reforms, will have to ask themselves whether and how to accommodate new pressures for reform of capitalism. That might mean accepting more rather than less regulation. It might mean exercising a bit of self-restraint, a bit of modesty in appraising the value of their contributions to society, and using some of the political clout they undeniably have to press for significant reforms—perhaps not on the scale of FDR’s restructuring of the American economy, but significant nevertheless. That’s something they have avoided doing for too long.
