Capitalism creates prosperity. By channeling energies into production and innovation, it has enabled billions of ordinary people to live better than the royalty of old. But capitalism puts power into the hands of owners, including hard-to-love billionaires and multinational corporations. It’s blamed for widening the gap between rich and poor. Many people equate it with cronyism and the capture of government by special interests. One camp says the solution is to clean up capitalism: End subsidies and protections for businesses, dismantle monopolies and unwind red tape. Another camp says government needs to play a bigger role because the profit motive of capitalists can’t be relied upon to meet society’s needs.
Inequality has gotten both better and worse. Inequality between nations has diminished with the rise of China, India and other nations that have turned to capitalism and free markets. At the same time, inequality between rich and poor within nations has gotten worse. Overall, the bottom half of the world owns less than 1% of the world’s wealth, while the top 1% of adults own 47%. Capitalism and free markets are being challenged by both the left and the right. Two U.S. senators campaigning to become the Democratic Party’s presidential candidate, Bernie Sanders and Elizabeth Warren, argue that the economic system is “rigged” to benefit the wealthy. On the right, President Donald Trump has labeled himself “Tariff Man” and moved to restrict immigration, even though the free flow of goods and people is fuel for growth in capitalist economies. Ray Dalio, the billionaire founder of Bridgewater Associates, the world’s biggest hedge fund, says discontent with disparities in wealth could boil over into revolution.
Capitalism is built on profit-seeking by private owners of property. Individuals and companies own land, machines and other assets, and they hire workers to use that “capital” to create products and services for sale. In theory — and usually in practice — competition for customers induces capitalists to improve. The “invisible hand” of the free market, rather than government, guides who does what. The Scottish economist Adam Smith wrote in 1776, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” The American economist Milton Friedman argued in the 1970s that maximizing profits for shareholders, subject to following the law, should be the only objective of corporations. Corporate boards largely embraced that message. But there has since been a growing movement toward so-called stakeholder capitalism, which demands that companies balance the interests of shareholders against those of employees, customers and society. In August 2019, Business Roundtable, an association of U.S. chief executive officers, endorsed that idea, abandoning its support for Friedman’s view. Germany already requires 50% employee representation on large corporations’ supervisory boards, which make strategic decisions.
The free-market fix for capitalism is more capitalism: Breaking up the tech giants would level the playing field for competitors. Erasing tariffs would benefit the poor, who spend a bigger share of their income on imported products. Loosening limits on the types of homes that can be built would make housing more abundant and affordable. Restrictions on lobbying would give politically unconnected companies a fairer shot. Many of these fixes are supported by people on the center-left such as Warren, who calls herself “a capitalist to my bones.” On taxes, capitalists are divided. Some say lower taxes will spark more growth and prosperity. Others cite high-tax Scandinavia as a model: Unleash private enterprise to create prosperity, and then use taxes and transfers to offset the income inequality that inevitably results. Another approach — either instead of or, more often, in addition to making capitalism work better — is for the government to take over parts of the economy where the capitalist system has failed to provide basic needs. In this vision, the government would build more housing instead of simply giving incentives for private construction. It would guarantee state jobs for people who got laid off in the private sector, averting a decline in employment whenever the economy slows. In the U.S., this viewpoint propels the argument for replacing the patchwork of private health plans that leave more than 30 million people uninsured with government-provided coverage for all. It’s also behind the push for free or debt-free college education to uplift the less advantaged. Those ideas come from the left. On the right, the “national conservatism” movement would rein in free markets by engaging in industrial planning and protecting key industries from foreign competition. The upshot: Some on the left embrace capitalism, and some on the right mistrust it.
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First published Sept. 11, 2019
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