Capitalism’s Great Reckoning


As the maladies of modern capitalism have multiplied, fundamental questions about the future of the world’s dominant economic model have become impossible to ignore. But in the absence of viable alternatives, the question is how to reform a system that is increasingly at odds with democracy.

This article originally appeared on Project Syndicate

What fate awaits capitalism, and to what extent do our current economic conditions reflect its shortcomings? With deferential references to Adam Smith, and firmly anchored in the high critical tradition of political economy, all three books under review seek to answer these questions. Their authors are all capitalists, resigned if not enthusiastic; they share a conviction that there is no viable alternative system. Thus, whatever its flaws, capitalism must be reformed.

In People, Power, and Profits, Nobel laureate economist Joseph E. Stiglitz, the great chronicler of globalization and its discontents, offers a lucid assault on the economics and policies of the Trump era. In The Future of Capitalism, Paul Collier, an Oxford University economist best known for his critiques of the prevailing approach to development aid, assumes the mantle of the moral philosopher, like Smith in The Theory of Moral Sentiments. He argues that capitalism is “morally bankrupt,” but that it can be redeemed, if only by – somehow – building a new ethical foundation.

Finally, Branko Milanovic, an intrepid economic statistician at the City University of New York Graduate Center, best known for his work on global inequality, provides a contemporary taxonomy of capitalism, dividing it broadly into the “liberal meritocratic” version found in the West and the “political authoritarian” dispensation that has emerged in China and elsewhere in Asia. (Where Japan fits in this dichotomy I could not tell.) His forthcoming book, Capitalism, Alone, considers which species will emerge as the dominant variant of the world’s only viable economic system.

Who Broke It?

Stiglitz hews more closely than Collier and Milanovic to the conventions of mainstream economic thought. A formidable opponent of conservative free-market orthodoxy, he criticizes economics from within, usually by modifying its basic assumptions. Thus, he has shown that when information is asymmetric, key certainties of the mainstream worldview do not hold: competition is imperfect, or markets do not clear. Yet, because Stiglitz’s case makes his case within the framework it targets, those reading his book will not encounter broader critiques such as the late Hyman Minsky’s “financial instability hypothesis,” University of Minnesota lawyer/economist William K. Black’s thesis of “control fraud,” or the new biophysical economics of non-renewable resources and climate change.

Stiglitz does acknowledge that “one can manipulate perceptions and beliefs” – a discovery, which he attributes to “advances in behavioral economics and marketing,” that cuts the heart out of the mainstream notion of consumer sovereignty. I hope that readers won’t consider it special pleading to point out that another economist named Galbraith – my father – made this case more than 60 years ago. Meanwhile, another hot topic that goes unmentioned is Modern Monetary Theory, though Stiglitz does endorse one of its central and most extensively developed policy proposals: the job guarantee.

Stiglitz argues that high inequality is the deadly sin of today’s capitalism, and he traces rising inequality back to the tax and spending cuts of the Reagan era, now replicated under US President Donald Trump. There is truth to this, but it isn’t the whole story. Barely mentioned in his account is the complicity of Democrats: that it was President Bill Clinton who deregulated Wall Street, and President Barack Obama who later rescued the big banks, without pursuing either criminal prosecutions or adequate structural reforms.

Moreover, one can find Republicans in both eras who were more committed regulators of big finance. Under President Ronald Reagan, it was Ed Gray of the Federal Home Loan Bank Board who brought the criminal S&Ls to book, and the most rigorous regulator of the 2008-2010 period was Sheila Bair, the Bush-appointed chair of the US Federal Deposit Insurance Corporation. When Stiglitz complains about Trump “stack[ing] his cabinet with … rich financiers,” one wonders why he doesn’t also mention Robert Rubin, Clinton’s Treasury secretary, who arrived from Goldman Sachs and decamped to Citigroup.

Lost Worlds

Collier’s The Future of Capitalism envisions a return to the “Ethical State,” by which he means the structure of mutual support and restraint that characterized social democracy in its heyday. It’s a brave if nostalgic vision at a time when social democratic parties are in steep decline and hard-edged ethno-nationalism is on the rise.

For Collier, there are two species of intellectual serpent in the capitalist garden: “Benthamites,” as in globalists who espouse a technocratic utilitarianism, and “Rawlsians,” who have “promoted the distinctive identity of victim groups.” He accompanies this thesis with an arresting model – a thought experiment, really – according to which rising inequality shifts the locus of identity formation and self-esteem from the community to one’s own position in the hierarchy of income, wealth, and professional status.

On the top rung of Collier’s ladder resides a super-order – the global elite – that has transcended local, regional, and even national identities. (It seems Collier would not be particularly comfortable at the World Economic Forum’s annual gathering in Davos, though he has been there.) On the lower rungs are those who still rely on community or the nation to understand their place in the world. Having found themselves increasingly marginalized and unhappy, some have embraced ethnic and cultural identities to define themselves in contradistinction to others. From there, it is just a short step to racism and xenophobia, and to the National Rally (formerly the National Front) in France, the UK Independence Party , and the Republican Party in the age of Trump.

What is to be done? Collier proposes a version of the nineteenth-century American economist Henry George’s “single tax” on land, except that his version would especially target the young professionals who cram themselves into high-dollar urban agglomerations and command higher wages by mere virtue of their location. Common to all rich countries, these hubs of globalization, epitomized by Silicon Valley, Wall Street, and the City of London, are unquestionably one of the great social distortions wrought by financialized info-tech capitalism.

Collier’s proposal – a tax on globalism – is a brilliant idea. He proposes that it be used to reconstruct former industrial bastions like Detroit and Sheffield, thereby relying on geographic redistribution to restore the social balance lost under deindustrialization. In this, he is of a similar mind to Stiglitz, who begins his book by lamenting the decline of his hometown (Gary, Indiana) and the plight of all those who were not fortunate or far-sighted enough to leave.

Turning to the economics and governance of the firm, Collier attacks the doctrine of shareholder value and similar justifications for corporate greed. In his view, we should return to a time when companies like Britain’s beloved Imperial Chemical Industries (allegedly) practiced ethical production and marketing. With references to old-style building societies and the revolution in quality control pioneered by Toyota, he makes the case that corporate practices have fallen a long way from placing ethics above the easy dollar.

Collier here is on solid ground. Still – more special pleading – his argument would have benefited from a reference to John Kenneth Galbraith’s “concept of countervailing power” as a means of keeping corporate abuses in check. As I recently pointed out elsewhere, Galbraith’s ethos of the corporation (best expressed in The New Industrial State) remains ascendant over Milton Friedman’s profits-first mantra in important countries, notably Germany, Japan, South Korea, and also today’s China. And not by coincidence, these countries are home to powerful, stable firms that have consistently driven their feckless finance-dominated Anglo-American competitors to the wall.

Research and Reality

This brings us to Milanovic, who presents the future of capitalism as a choice between liberal meritocracy and political authoritarianism. Of the three authors, Milanovic marshals by far the greatest weight of economic research – including his own formidable achievements – and most faithfully acknowledges others’ work. Yet one wonders if findings from orthodox economic models are really the best tool for the task at hand, given that so much of what mainstream economists assert as received wisdom is actually misleading, unfounded, or false.

Consider assortative mating, or “homogamy,” in which individuals marry or form unions with those of similar socioeconomic backgrounds. Along with most economists, Milanovic argues that this tendency has driven up household income inequality. But has it? According to a wide range of studies, household net income inequality in the US rose in the mid-1980s, owing partly to the collapse of stressed families and the rise of impoverished single-parent households. Yet there has been little change in standard measures of household net income inequality since the early 1990s (even in Milanovic’s own figures).

What the favored narrative seems to miss is that families once sustained by one earner are now being sustained at a similar level by two earners. Household wage inequality is thus mitigated, not aggravated, by the additional earner. On this issue, as on many others, economists’ intuitions have been an unreliable guide to realities on the ground.

Milanovic has given ample thought to policies for remedying inequality. He favors increased spending on public goods and services (including education) and social insurance. And he correctly views the estate and gift tax as an underused tool for deflating capitalist dynasties. That is all well and good. But there is an additional point to be made here. In America, the nonprofit sector, which employs about 10% of the private workforce, has long been sustained by wealthy donors incentivized by the charitable deduction, in addition to their fear of the grim reaper.

Socialists are suspicious of philanthropy, and Milanovic also has a keen eye for those who use big gifts to wash their moral laundry. But it is worth remembering that this system channels revenue to universities, hospitals, and cultural institutions that otherwise might not survive, given the stingy and antisocial instincts of right-wing legislatures in our day and age. Milanovic flirts with the recurring fantasy of rolling the estate tax into a more generalized wealth tax to fund capital grants for the young – a scheme that would truly play Russian roulette with the social fabric. It would be better, here and in other reform proposals, to build on what is known to work.

Illiberal Capitalism

Is Milanovic right to define the new cold war between Chinese and American capitalism as a contest between the liberal and the authoritarian, the meritocratic and the political? At a recent conference in Texas, a distinguished Chinese physicist who has long resided in the United States sharply challenged the notion that China is the only “authoritarian.” The true authoritarian, he countered, is actually the petty boss, the small-business owner with his employees under his thumb. And in democracies, money seems to matter more than votes. Is that liberal, meritocratic, or even democratic? Meanwhile, the seemingly closed Chinese system privileges expert opinion – scientists and engineers over bankers and donors. Is that approach to policymaking “political,” or is it something else?

Economists, applying their standard methods from a distance, cannot answer such questions. It is hard to imagine that anyone could, aside from those with deep local knowledge. It seems only prudent, then, not to reduce large, complex countries to invidious caricatures.

That said, one cannot deny that there are major differences between China and the US. For one thing, China underwent a communist revolution in which the land, expropriated by the state, became a source of wealth for local governments. As a result, many Chinese cities and provinces are rich, and now compete with one another to build infrastructure and expand services – while the central government is relatively small. In other words, unlike in any other developing country, the Chinese have already learned, from their own history, what David Ricardo and Henry George sought to teach.

To the late sociologist Giovanni Arrighi, modern China is also a direct descendant of the China that Adam Smith described in 1776. Smith wrote of China as having a vast internal market of small producers linked by rivers and canals, as a society that was preoccupied with internal stability and social harmony, with only minimal concern for the outside world. Notwithstanding its current ambitions for regional, if not global, influence, China is still a lot like that today.

The US, by contrast, seems to many to have become a global hegemon-turned-predator. Driven by the ambitions of a narrow elite and anxiety born of its own competitive decline, it relies on finance, technology, and military force to maintain its position. These sources of power are concentrated in a few super-wealthy locations: New York, California, and Greater Washington, DC – the capital of the national-security state. Much of the rest is neglected.

The concentration of wealth in America has inevitably given rise to vast social, political, and economic inequalities. Or, to quote Smith: “Wealth, as Mr. Hobbes says, is power.” The “American model” that the wider world once admired is now widely questioned. Many among America’s allies now resent our pretensions, and our rivals are quickly becoming outright enemies. America retains a patina of liberal values and meritocratic structures – but can one seriously claim that the reality matches the image, if indeed it ever did?

If this is a fair description, then the future of capitalism cannot be about ensuring the triumph of “liberal meritocracy” over the authoritarian and the political. Nor, in the US, is it a matter as simple as replacing Republicans and Donald Trump with a self-professed liberal and meritocratic leader from the Democratic Party. Rather, the fate of capitalism implicates deeper and longer-term concerns – specifically, with keeping the peace until as the high values of “small-r” republicanism and “small-d” democracy can be restored, at least in the US and in Europe. Only then, perhaps, can progress resume toward the Ethical State for which Collier rightly yearns.

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