Does Capitalism No Longer Work?

27 Jul 2016 3:54 PM | Mike Lillich (Administrator)

By Oren M. Leven-Waldman

First published online in the Yonkers Tribune.

In this most unusual election the Democratic party appears to be moving leftward with a call for a $15 an hour minimum wage, free college for in state residents in families earning less than $125,000 a year, and a variety of other programs to assist those at the bottom and in the middle of the income distribution. Meanwhile, the Republican nominee is calling for greater protection of American industries to protect American jobs from the ravages of globalization. In essence, both sides are rejecting the fundamental tenets of free markets, which have been at the heart of America’s core philosophy of individualism for more than two centuries.

Of course, free markets since the New Deal in the 1930s have not meant the same thing they did during the era of laissez-faire and robber-baron capitalism of the late Nineteenth Century. But adherence to free markets has surely been the defining characteristic of Republican party politics since its inception in the 1850s. Moreover, the regulations sought by Democrats beginning in the 1930s were always with the intent of preserving the foundations of free markets. What we see in this election year raises an interesting question: Have we reached a point where capitalism no longer works?

Clearly those on the Left do not believe that the economy is working for them. Middle class wages have been stagnant for more than four decades now, and inequality has risen. A strict adherence to free market ideology would mean that government does not intervene when the marketplace fails to provide sufficient opportunity for individuals to support themselves and live independent lives. It also means that it does not provide social supports to those who cannot make it on their own, and it does not regulate working conditions or consumer product safety.

If the result of globalization is that the living standard of workers falls because wages also have to fall in order to compete, then so be it. After all, this is the essence of a free market, which also creates the conditions under which individuals can achieve the ultimate in human agency and individual freedom. But those who challenge this free market ideology are really saying that human agency and individual freedom are unattainable under these conditions.

And yet, it would appear that many of the angry voices that are supporting Donald Trump’s candidacy for president are also acknowledging that an economy that no longer sustains a viable middle class because it has failed to provide enough good paying middle class jobs is similarly one that encroaches upon their freedom and enslaves them to the whims of capitalists whose loyalty is no longer to U.S. territory. These voters clearly want to be protected and are rejecting a fundamental tenet of capitalism: free trade.

Although it is true that free trade may appear to be resulting in fewer opportunities in a global economy as the need to compete applies a downward pressure on wages, the real issue, and not altogether unrelated, is that new technology has been the driver of wage inequality as greater skills leads to higher wages at the top and an oversupply of lower skilled workers will lead to lower wages at the bottom. To upgrade everyone’s skills for the new economy would require massive investments into education and training. Even if those investments were made, there is no guarantee that wages would be higher, as an oversupply of more skilled workers would result in more downward pressure on wages.

So let’s ask again: have we reached the point where capitalism no longer works? Is that what voters are telling us? Or are they really saying that it really does not comport to core American values of human agency, personal autonomy and freedom if it only benefits the elites and not the masses? It would appear that they are saying that what we have in the U.S. is no longer capitalism, or even regulated capitalism characteristic of the 1930s, but crony capitalism.

It will be recalled that Marx astutely observed that capitalist markets left to their own devices would implode underneath their own weight. Firms would seek to lower labor costs in order to remain competitive, and as more workers would find themselves too poor to maintain demand for goods and services in the aggregate, the system would come crashing down. With the middle class effectively disappearing under the weight of greater globalism, we can see that Marx’s observations were essentially correct.

Although Marx called for a communist revolution in the name of greater democracy and equality for all, the alternative to the revolution has been Burkean style conservatism: the idea that radical steps need to be taken in order to conserve the traditions of the past. Regulation of the market place and other interventions such as legislated wage floors were considered to be radical steps aimed at preserving the market place.

It isn’t so much that capitalism no longer works as it is the appearance that it no longer works because of the deterioration of labor market institutions and the distortions in the tax structure. Wages for the middle class have stagnated and inequality has risen in large measure because union membership has declined and the minimum wage has failed to keep up with inflation. European countries with more centralized wage setting institutions have lower levels of inequality. Distortions in the tax code have favored economic growth at the expense of development

We would all benefit from a simpler tax code that has two or three flat rates with no deductions. But the elites won’t entertain the idea of tax reform because it would deprive them of the vehicle by which they can purchase votes through the dispensation of goodies. Political elites, after all, need to be reelected and if they cannot appeal to those making large contributions, they won’t be. You will recall when I noted in this space a few weeks ago, the quiescence of low-income voters is purchased with programs that increase their money utility, which in turn allows politicians to pursue policies favorable to wealthier interests — the same interests that will contribute to their campaigns.

But what if the angry voter on both the Left and Right is simply falling through the cracks? Well most democracy models suggest that they will call for a different type of revolution. This could be occurring in some respects with the leftward movement of the Democratic party with the adoption of many of Bernie Sanders’s proposals. And it could be occurring on the right with the embrace of Donald Trump’s protectionism and isolationism. Perhaps the problem is that the voters understand that the elites don’t really care about the middle class, and it is the middle class that is hurting. Contrary to the laissez-faire view that capitalism requires a strict separation between the public and private sectors, it requires a more effective public-private partnership.

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