Capitalism As A Cocktail

I recently read that the US Congress plans to pass legislation that will prohibit an $100 million facility, already built in Chicago, to produce subway and train cars.  The reason? Congress and the US government fear the cars will be bugged and could spy on the whereabouts, and not only, of passengers and cargo!  The real reason?  The manufacturer is CRRC Corporation, the biggest maker of trains, which however also happens to be Chinese.  First Huawei, the telecommunication colossus, and now CCRC.  And that’s not all.  Congress and the government also plan to update the Foreign Investment Risk Review Modernization Act so that we can block foreign investments deemed risky for our national security.

That’s what started me thinking about capitalism as a cocktail that comes in many degrees of strength and flavors, each with its own appeal for different people and different times.  Here is the basic recipe.  Recognize property rights; let markets work freely; and let owners of capital deploy it according to their own interests.  Goods are produced and bought according to consumer preferences.  The selfish interest of the butcher and candlemaker guides the invisible hand of Adam Smith.  But this cocktail is not without hangovers.  Goods fall out of favor; factories close; jobs are lost.  There is a lot of wealth creation along with a lot of detritus.  But out of the demise of the inefficient and unwanted the new is born.  And so the system churns going through cycles of Schumpeterian “creative destruction.”

Interestingly, this pure capitalism cocktail is not very popular.  It only sells among libertarians.  The rest of us prefer the watered-down varieties.  Start with taxes that favor and disfavor different types of investments and sources of income.  Next pour in some regulations – who produces what; how markets work.  Then add some state enterprising – take individuals out of the production of some goods and give that to the state.

Take the case of the US, the supposed poster child of capitalism.  Start at the 1950s.  Banks cannot branch anywhere they wish; interest rates are regulated.  Transportation industries, like airlines, are restricted in regards to routes and prices; so are telecommunication firms.  Ownership of TV stations and newspapers also regulated.  And, ….. hold on to your seat, the top marginal income tax rate ranges from 92% in 1950 to 70% in 1980!    And yet the US economy is doing fine.  Between 1950 and 1979, that is, during the three decades of high taxes and heavy regulation, the economy grew at an annual real (adjusted for inflation) rate of 4.04%.  The four decades since, when tax rates were dramatically cut and deregulation ruled, the economy grew at only 2.64%. *

Which capitalism cocktail would you order?  It depends who you are.  In the early post-war decades, workers earned close to their productivity gains and the middle class kept growing.  Things changed in the 1970s.  When some commentators claim how, back then, corporate managers followed a social contract that fairly split economic gains between corporations and workers, they neglect to add that this had a lot to do with the prosperity of American corporations.  Generosity thrives in good times.  There were a lot of spoils for corporate and union bosses to divvy up with less acrimony.  All this went out the window when American corporations ceased to be the only or later the biggest game in town and the economy slowed.  In the 1970s the average GDP growth rate declined to 3.3% from 4.46% the previous decade.  As the pickings got slimmer, equity in distributing the economy’s gains declined and so did confidence in the fairness of capitalism.

How America entered this new period and how its mood changed is what the Hauwei and CCRC examples brought to my mind.  Even in the days of high taxes and heavy regulation, America honored two pillars of liberal capitalism; foreign investments and free trade.  To this end, it pushed hard other market economies to liberalize their industrial policies and financial sectors.  I was still living in Greece and I remember how this liberalization push was greeted with suspicion there and the rest of Europe.  But free movement in investment capital and trade was not something new.  It had been the norm during the long years of Pax Britannica only to be interrupted by the two World Wars.  Liberalization in these areas was a return to normal times.  And liberalization did start to come in the market economies in the 1980s and beyond.

But the greatest surprise came in 1980 when the Chinese President Deng Xiaoping, famous for having said “it doesn’t matter whether a cat is black or white as long as it catches mice,” decided to marry communist rule with free enterprise and markets.  By creating this new and, as time proved, very potent cocktail, Xiaoping took his rightful place as one of the most creative bartenders in the watering hole of capitalism.

But this cocktail, as its other cousins, came with both euphoria and hangover.    China modernized quickly; it reduced poverty; created a middle class larger than the US population; and made a lot of international corporations highly successful and rich.  Back in the American Midwest, however, factories closed, workers lost jobs, towns decayed.  The hangover of Middle America was so mind-numbing that voters would be unable to tell truth from lie, reasonable promise from pie in the sky, honesty from sleight of hand.  But to these voters the alternative was more of the same cocktail that no longer pleased their palate.  Switching allegiance from the earlier American cocktail of capitalism is not limited to working-class people.  Domestic companies are happy to let our growing suspicions about China’s plans restrict competition to their benefit and Republicans look more like Democrats, reluctant to defend the free market advocacy of the Washington Consensus their economic ideology used to espouse. **

I take the recent retreat of American capitalism from its championing of foreign investments and free trade with all their potential risks and losses to be emblematic of our losing confidence in the model we pushed so hard on the world in the days of our undisputed dominance.  That should teach us something about the interplay of ideological purity, pragmatism and self-interest.  We are now applying Xiaoping’s pragmatism in furthering our own economic interests.  Between faith in a more liberal capitalism and preserving our industries and incomes we seem to choose the latter.  That’s why the fearmongering about the coming of socialism sounds so hypocritical.

*My calculations using Standard & Poor’s data.

** The Washington Consensus was a declaration of 10 principles, including free movement of capital and trade, adopted by the World Bank, the International Monetary Fund, and the US Treasury Department in the late 1980s.  It was intended to restore economic stability and growth to regulated and protectionist economies.  Skeptics equated it to market fundamentalism and a neoliberal agenda while John Williamson of the Institute of International Economics, who coined the term, resented its use to promote unfettered capitalism.