There’s a lot of talk these days about fixing capitalism. However, there’s a problem with much of it—there are so many things to fix that it all becomes a daunting task. The point of view here is simpler. There are a great many things that aren’t happening, because capitalism just doesn’t do them—and we can start by making sure those get done.
At its source this problem comes from our being force-fed the wildly radical idea that the private sector—capitalism—will solve all problems by itself. So even when we realize that capitalism needs to be fixed, we tend to be overly concerned with all the patches.
However, even Adam Smith had no delusions about the limitations of capitalism. As he pointed out:
- The private sector will not police itself.
On the contrary it will do everything possible to corrupt the free market with monopolies and government influence: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” We’re used to hearing “private sector” and “free market” used almost as synonyms. In fact, as Smith recognized, the free market is an ideal that can only be achieved when government holds the private sector accountable.
- The private sector will not provide the environment for its own success.
Smith even advocated a government program of universal literacy, quite a stretch for the eighteenth century and a pointer for us today. This is a serious matter, because it shows how dangerous it is for the economy to punt everything to the private sector.
- Much of what is needed for a successful society is simply out of scope for the private sector.
Capitalism will not provide any service where there is no competitive advantage in doing it. Public health and welfare, environmental questions, basic science, etc. are all out of scope.
Fixing capitalism strictly speaking deals only with the first category. No amount of fixing is going to make capitalism deal with the rest. Those issues are ours to solve.
It’s instructive to think about needs in each category.
- Policing the private sector
Monopolies are still with us and have become an increasing problem due to technology changes and weakened anti-trust enforcement. The same is also true of corruption due to business influence on government. These days no one even apologizes for it.
This is particularly true in the financial sector where banking, for example, has evolved into speculative gambling with losses covered by the FDIC. You can even argue that the financial sector overall has evolved in directions that make it predatory on productive business. After decades of Republican-inspired hands-off attitudes toward business, there is no shortage of serious issues. However fixing all of them makes progress look far away.
Taking a step back, there is a single biggest problem: legal tax evasion. This is a gating item for so much progress that it just has to be dealt with. Even before Trump’s tax cuts (and despite nominal tax rates), American companies paid the lowest effective taxes as a percent of income of any developed country. That was largely a result of multinationals’ ability to move income to tax shelter countries—reducing rates or hiding income entirely. Apple is only one egregious case. The recent tax cuts made matters worse with drastically-reduced business rates, arcane rule changes for overseas income, and the new pass-through income treatment. That pumped up the deficit—thereby hobbling government’s ability to respond to the serious sins of omission in categories 2 & 3.
What’s more, despite the insistent propaganda, taxes are actually not a primary issue for American competitiveness:
– Many studies have shown that in most industries today business profit levels reflect monopoly power to set prices well above historic levels of margin. That’s a trend we can expect to continue. In other words, businesses have considerable financial room to pay taxes.
– Further, as frequently noted, the savings from the tax cuts went primarily into stock buybacks. That is companies decided the best thing to do with the tax cut money was to give it back to their investors in higher stock prices.
Conclusion: Get the private sector (particularly large multinationals) and its investors to pay taxes. Then work through all the rest.
- Providing the environment for economic success
If taxes aren’t the issue, what is? As we’ve noted here before, what makes for success is the technological advantage that has kept us in many areas on top of the heap. That supports both our standard of living and our military strength.
Our technical dominance is based on three factors:
i. The dynamism of our economic system in generating new products and technologies.
ii. Broadly-based government support of research and education
iii. Remaining the preferred destination for entrepreneurs and other ambitious people from everywhere to realize their dreams
Let’s look at the current status of all three:
i. Unchallenged influence of big companies on government has favored established companies over new entrants. In part this is an anti-trust enforcement issue, but it has many other aspects. The demise of net neutrality is one highly-visible example.
On this issue the interest of big business is strongly opposed to what makes for long-term national success.
ii. The administration is actively hostile toward science, government-sponsored research, and broad-based education. This is shown in purging of scientists from government agencies and restricting their influence on public policy. One obvious example is in climate change. Also the new tax law punished major research universities with a targeted tax.
Public investment in research had a major role in the prosperity of the 1950’s and 60’s and kicked off the opportunities of internet today. The same kind of public investment has remade China as a technology powerhouse. But our dedication to research has eroded over time:
Instead we’re waiting for the private sector to do the job, which by definition means catch-up.
The story for education is similar. In the 1950’s and 60’s we were expanding educational opportunities to whole classes of people who had never before had the chance. Now we rank far down on the list for upward mobility. Sudent loan debt tells the same story, and that’s only about the people DID go to college, not about the ones who were deterred by cost and DIDN’T. Finally, educational funding in the states has never recovered from the 2008 crash.
It’s worth mentioning in passing that the value of research is not only for international competitiveness. Basic research is part of the global project of raising human standards of living. Even when one worries about national competitiveness, progress is generally so international that openness is the ante for remaining at the forefront of progress. Current policy to restrict international participation of US scientists weakens the country in the name of national security.
iii. As a final point we need to emphasize the critical role that foreigners and their children are playing in maintaining our national strengths. Many studies have shown their role both in starting new companies and in supplying the technical underpinning that makes for success. As Steve Bannon noted (for his own purposes) such people represent more than half of Silicon Valley activity. Google (cofounded by a foreigner) and Apple (by the son of a foreigner) are only the most obvious examples.
The current xenophobic backlash is wildly off-target. Particularly with the weakened support for research and education, those are the people keeping our place in the sun. (To be clear, an immigration plan that only accepts people with degrees is no counterweight to the nationalist, nativist rhetoric.)
– This area has got to be fixed or we risk losing our standard of living and dominant role. These are traditional US values and as important as ever for US success. It we’re worried about competing with Chinese, this is where the battle will be lost or won.
– If we can get our act together, items i and iii should remain as our advantages going forward. So we shouldn’t be defeatist about a future that is in our hands.
- Spending for the common good
This has been a bastard child for so many decades now, that there is much that needs to be caught up. Here is one short list:
– Infrastructure (Much discussed, but with more sides to it than you might think. See here for a good overview.)
– Climate change (Evidence has become incontrovertible, but we still need a real plan.)
– Universal health care (Needed not only as a benefit but also as an enabler for equal opportunity.)
– Opioid crisis (Much discussed, but with radically inadequate funding)
– Environmental protection (Not a luxury)
– Transitional assistance (Helping people through changes—from technology, globalization, etc.)
There is enough essential work here to pose a major challenge for government. We need to confront the unmet needs of the society, then we need concrete plans, and finally we need to manage major operations with competence and integrity. Despite the propaganda there is nothing unusual about effective, government-sponsored work. However as with any other enterprises, this needs to be scrupulously well-run. Just because good people are running it doesn’t mean there is less risk of corruption. We have to get serious about public enterprise.
That means we have to get past the idea that there is something intrinsically wrong about working for the public good. That’s after all nothing more than the other side of the “private sector will solve everything” coin. We live with the continued juxtaposition of vast under-employment (3.7% unemployment doesn’t change the good union jobs replaced by Walmart) together with vast unmet needs that the private sector won’t address. We’ve got to take the initiative to match one with the other. This is not “make work”. It’s essential work that isn’t getting done, because the private sector won’t do it.
Until we take that initiative, it’s hard to assess where we are as a society. Public enterprise helps in many ways. It helps with inequality and the middle class. It helps with leverage for workers and standards for employment. Many public sector jobs of their nature will be hard to outsource. It makes no sense to talk about abstractions such as Universal Basic Income until we see how things shake out in a fully-functional economy. The future may be less strange or scary than it seems. (This isn’t just about public sector employment; work done by the public sector helps other trends as well. Even in Silicon Valley each job in tech creates 4.3 other jobs as well.)
Conclusion: We need to create the full-scale machinery for government service to do what the private sector won’t.
It’s always hard to foresee the future. I remember when I was in high school, Prince Philip gave a commencement address at UCLA in which he spoke (as world expert!) about leisure. Already then he was thinking that machines would take over work, leaving as us all to spend the rest of our lives at the beach.
That’s certainly not what happened, but there’s still something to be said for the positive spin. Historically technology and even globalization have been good for living standards, except where societies have chosen to deny the benefits to large segments of their populations. Both domestically and internationally we have every opportunity to do this right. We can either organize our economy–and the world order–so that all can benefit, or we can go down in flames of our own making.