Which is the best avenue for a strong economy? Republicans want to free themselves of government regulations and taxation. Democrats want to protect the poor and middle class with a safety net. This is the battle we are seeing in the nation’s Capitol right now.
Which is the best approach? Neither, according to Jerry Z. Muller in his current Foreign Affairs article “Capitalism and Inequality: What the Right and the Left Get Wrong.” Muller’s thesis, and mine as well, is: current capitalist politicians need to accept the fact that a market economy means there will be failures. Society needs to cushion citizens from insecurity and inequality that failure brings and at the same time allow capitalism’s strengths of dynamism to be unleashed to grow the economy.
Let’s define capitalism. According to an Internet search, capitalism is: “An economic and political system in which trade is controlled by private owners for profit.” When I taught basic economics to high schoolers I added the fact that capitalism involves risk of failure. Those with better educations, incomes and connections tend to succeed more often than those who don’t have those advantages. Additionally, certain groups like women and minorities have historically been blocked from advancing by societal norms and biases.
As a result, some are better at making a profit than others. This results in a growing divide between rich and poor. Eventually, according to Muller, democratic governments in capitalist economies have stepped in to ease the insecurity created by the market economy. Government intervention has historically allowed “capitalism and democracy to coexist in relative harmony.”
Beginning in the 1980s, this safety net was reduced due in great part to the “financialization of the economy.” Depression-era regulations were weakened or not enforced as the generation who remembered the Great Depression died off or ceased to have as much influence.
Investment banks gained more power as their profits soared through trading complex new financial instruments like credit default swaps. These documents shifted accountability and risk from the banks to bond holders who purchased them.
Additionally, the increasing power and size of these financial institutions led the fund managers to go for short-term gains rather than long-term planning. These attitudes caused more “churning that increases the likelihood of job losses and economic insecurity.”
Added to this was the rising economic power of nations like China and India with a lower standard of living and a rising educated middle class. American workers with their industrial jobs could no longer compete with these millions of cheaper laborers. As communications and transportation improved, many American jobs were outsourced abroad.
In democracies, average citizens want to protect their incomes and savings with government safety nets like unemployment insurance, government regulation of banks, Social Security and Medicare. Enormous financial institutions’ goals are to increase wealth for the corporate money managers and the economic elite. Something has to give.
Muller warns that capitalism is in danger as the inequality between rich and poor increases.
“Government safety nets that help diminish insecurity, alleviate the sting of failure in the marketplace, and help maintain the equality of opportunity will have to be maintained and revitalized,” he writes
“Major government social welfare spending is a proper response to some inherently problematic features of capitalism, not a ‘beast’ that should be ‘starved.’” In other words, it is in the best economic interest of the economic elites to share some of their wealth with the poor and middle class so that the rich can continue to be rich.
Henry Ford understood this principle in the 1920s by paying his workers an unprecedented $5 a day to produce cars. Unless his workers could afford to purchase the products Ford was producing, he would have no one to buy his cars.
A government-guaranteed safety net protects capitalism from its own destruction. In America the safety net is not going away, nor should it, according to Muller.
The difficulty lies in the fact that unless this partial transfer of wealth from the rich to the poor and middle classes is done wisely, the natural dynamism and creativity of capitalism can also be stifled.
Two forces need to be balanced: capitalism and protection for the middle and lower classes. Too much insecurity hurts all the classes and endangers the economy. Too much power in the hands of one or the other hurts the nation and in the long run no one will benefit.