Is Capitalism Out of Order ?

08/09/2017 11:52 am ET

The reception in the US, and in other advanced economies, of Capital in the 21st. century attests to growing concern about rising global inequality. Adding further gravity is the overwhelming body of evidence concerning the soaring share of income and wealth of an elite 1%. In the era of rapid economic growth, prosperity has been widely shared, with all groups advancing, but with the 50% at bottom seeing only miniscule gains.

Lights on ‘reforms’ must be shed, once sold by Ronald Reagan and Margaret Thatcher in the 1980s as “growth enhancers” from which all would benefit. However, their policies resulted in stunted growth and heightened global instability, with growth that did occur mainly benefitting those of the elite 1% primarily because a serious and significant inequality of opportunities was created.

Fundamental issues concerning economic theory and the future of capitalism need to be raised, as large increases in the wealth/output ratio, such as in standard theory, increased that capital and increased wages. Today, however, the return to capital does not seem to have diminished, although wages unfortunately have.

The most obvious explanation is that the increase in measured wealth does not correspond to an increase in productive capital: data seem consistent with this interpretation. Much of the increase in wealth stemmed from an increase in the value of the rent-seeking system. The rise in value can also represent competition among the rich for ‘positional’ goods. But often an increase in measured financial wealth corresponds to little more than a shift from ‘unmeasured’ wealth to ‘measured’ wealth, a shift that actually reflects deterioration in overall economic performance. If monopoly power increases, or financial institutions develop better methods for exploiting ordinary consumers, this will be visible as higher profits and, when capitalised, as an increase in financial assets.

But when this happens, of course, societal well-being and economic efficiency plummet, even as ‘officially measured wealth’ rises. We simply do not take into consideration the corresponding diminution of the value of human capital – the wealth of workers.

Moreover, if financial institutions succeed in using their political influence to socialise losses and retain more of their ill-gotten gains, the measured wealth in the financial sector increases. Again, we do not measure the corresponding diminution of taxpayers' wealth. Likewise, if corporations convince the government to overpay for their products -- part and parcel of how many major drug companies have succeeded in increasing their profitability or receiving access to public resources at below-market prices -- as mining companies have succeeded in doing over the past decades to report financial wealth increases, the wealth of ordinary citizens is not reflected.

What we have been observing in the past decades is wage stagnation and rising global inequality, even as wealth increases; this does not reflect the workings of a normal market economy, of what I call “ersatz capitalism”. The problem may not be with how markets should or do work, but with our political system, which has failed to ensure that markets are competitive, and has designed rules that sustain distorted markets in which corporations and the wealthy can unfortunately keep exploiting others. And no one seems bothered, even avoiding the question of why Europe is accepting immigrants from Syria and Africa.

Markets, of course, do not exist in a vacuum. There must be rules for the game. And these are established through political processes lobbied by highly influential corporate companies. It is not surprising that high levels of economic and social inequality in industrialised countries are increasing, following an economic model and leading to political inequality. Within such a system, opportunities for economic advancement become unequal, reinforcing low levels of social mobility.

Simple changes -– including higher capital-gains and inheritance taxes; greater spending to broaden access to education; rigorous enforcement of antitrust laws; corporate-governance reforms that circumscribe executive pay; and financial regulations that rein in banks' abilities to exploit the rest of society –- would begin to reduce inequality and markedly increase equality of opportunity.

It is a lack of mind set, driven by a constant influx of global fear and anxiety, that drives the 1% to protect themselves so vigilantly. The main question confronting us today is not about capital in the 21st century; it is about democracy in the 21st century, a democracy necessary to balance and equalise global societies.

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