Rethinking American Capitalism

When we are invited to discuss possible reforms to the current economic system, many Americans suspect the talk is about overthrowing capitalism in order to introduce some socialist system.  Needless to say, this is not a good way to start a public dialogue about the state of the present system and the potential it holds for very unpleasant social and political outcomes down the road if it continues as is.

There are several different ways one can jump start the discussion.  I will choose one that appeals to me because it relates to how well we in the US care about social growth and cohesion.  Let’s start with the Social Progress Index that measures the standing of a country with respect to nutrition, health care, education, shelter, personal safety, personal rights, freedom and choice, access to information and other indicators of citizens’ wellbeing.  In 2020, the US slipped to the 28^th place out of 163 countries.  Almost all of the Western European countries – capitalist countries themselves – were ahead of the US.  Next take poverty.  In 2017, the US ranked second worse among the 37 countries of the Organization of Economic Cooperation and Development.  Finally judged by social spending as a percent of GDP, in 2018 the US ranked 16 from the bottom spending less than the OECD average of 20.1%.

A healthy and well-functioning economic system should meet certain criteria.  It should support the production of output and wealth, it should support the fair distribution of incomes and wealth, and it should do no harm, that is, not contribute to social ills and disparities among the population it serves.  The US system does very well with respect to production.  Not though with respect to the other two criteria.  Income and wealth inequality are the highest in the world.  A recent study by the German insurer Allianz shows the US growing its wealth by an average of 13% in 2019 but, as in past years, with the most unequal distribution since most of the gains went to the highest 1% of the population.  Similarly, the Federal Reserve System recently reported that family income, wealth and stock holdings continued to grow faster for the top 10% of households than for any other percentile bracket.

Income and wealth inequality are not the only pathologies of American capitalism.  Wages after inflation have stagnated since the 1970s and this is most pronounced for workers without college education.  Black and non-white Hispanic Americans significantly lag in income and wealth due to long-standing racial inequities.  Unfortunately, economic disparities beget various negative outcomes.  Low-income Americans are less likely to have health insurance.  Lower incomes are associated with less education and the latter is, in turn, associated with more abuse of alcohol, drugs and opioids as well as higher suicide rates.  Less education and lower incomes also lead to more broken families and more children living in single-parent homes.  And, of course, social mobility, that is, moving to higher income brackets, is lower for today’s Americans than it was for their parents and grandparents.  No wonder then the majority of Americans do not think their country is on the right track.

If this is what the data tell us, then it behooves us to ask (a) what is the cause? and (b) what is a possible way out?  My short answer is that we have produced a system without a social purpose.  Advocates of pure capitalism might object to this proposition by reminding us of Milton Friedman’s famous pronouncement of sixty years ago that business has a social responsibility and that is to maximize profits. 

There is no doubt that profits are necessary for businesses to stay viable and, thus, be able to meet consumers’ needs and wants.  But we have also seen that despite a stellar record of profitability achieved by American business over time, this country is afflicted with many serious social problems emanating from the uneven distribution of economic opportunities, incomes and wealth.  The notion that the private interest is aligned with the social interest is just an assumption.  In 2008, it made sense for every trader to dump financial assets as they were losing value fast.  But it was not in the interest of the overall market and society.  The Federal Reserve System and the government (political and social institutions) had to step in to avert the collapse of the whole system.  Chemical companies and fast-food restaurants can be more profitable if they care less for the quality of environment and their customers’ health.  It is society that pays the spillover costs.

Capitalism thrives in markets.  But markets (being mechanisms of exchange) are agnostic when it comes to the social good or purpose.  When a person buys a gun, the market does not care (or know for that matter) whether the buyer will use the gun for a legitimate defense purpose or to commit a crime.  When the labor market facilitates the hiring of a worker at some wage by a firm it has no idea nor does it care whether the worker can live with that wage.

At its beginning capitalism was a new system primarily concerned with the production of goods.  Labor rights and issues of fair distribution of the output were dealt with much later under the pressure of progressive economic and social thinking and movements.  In other words, we cannot divorce the function of the economic system from the political order and the social compact of a society.  If the economic system could operate like a physical system independent of the influence of political order, we would not see businesses spending enormous amounts of money and effort to shape government policies.

Being honest as to what markets can and cannot do is essential for creating a good society.  Markets not only lack a social conscience they can also succumb to endemic imperfections and collapse.  Other times, markets are so concentrated in the hands of a few powerful corporations that can negate the benefits of market competition.  Markets can also fall prey to special interests uninterested in the social good.  Equally unrealistic is to rely on markets to meet the needs we associate with the social safety net. 

The reason the US socio-economic system leaves significant numbers of people behind is two-fold.  First, the economy has been allowed to develop distortions that benefit the few at the expense of the many; and second, public policy, under the mantra of small government, has failed to take responsibility for the needs of those who lack the financial means to access markets for essential services such as health care, education, healthy environment and retirement.