By Dr. Shirley P. Burggraf, Emeritus Professor of Economics, Florida A & M University
(1) When people ask me if "capitalism can survive," I also have to ask: "What kind of capitalism? Laissez faire? Regulated capitalism?"
To survive, capitalism obviously needs to be regulated because of its propensity to crash when abused. Our current US institutional and regulatory systems seriously lag behind reality in at least two additional dimensions--dimensions beyond those of financial derivatives, leverage ratios, and institutions "too big to fail." Capitalism must quickly come to recognize globalization and human capital.
Globalization. Capitalism is increasingly global. It allows for the movement of capital around the world with the click of a computer button. National economies such as "the US economy" exist geographically, statistically, and politically--but much of what they do is driven by factors beyond the control of any one country.
Effective regulation now requires extensive global coordination. This is a daunting prospect given the state of global politics and the limitations of existing international institutions like the UN, IMF, and World Bank.
Human Capital. The single economic resource considered most important, according to dominant economic models, has changed over time throughout history. In feudalistic economies, land was the most key resource. Later, when factories and machines came to dominate the economy, business capital was the factor most key to success.Today, knowledge and skills are the most important resources, the keys to success in high tech service economies. Yet there's little recognition in current economic models--or in public policy discussions--of who the economy's major investors actually are! A skilled labor force has become both increasingly important economically, and increasingly expensive to produce for families. At the same time, child dependency increases in length and complexity while traditional returns to parents (help on the farm and support in old age) have disappeared.
Parental investment in reproduction of human capital--having children, raising them, and supporting their education--still tends to be taken for granted as something that will get done as it always has. Our economy still assumes the existence of a gender caste system that confines women to family work.
When men were released from the European caste system at the end of the Middle Ages, a new set of laws and institutions had to be developed that, according to economic historians, evolved over 200 years and is still an ongoing process. Reorganizing the family economy, where half of the human race has worked throughout history, requires a similar level of attention. We must develop new rules and institutions that support the kind of investment in children a modern economy requires. Right now, advanced capitalism doesn't know how to reproduce itself.
(2) What can capitalism deliver with the most intelligent institutional support and regulations?
Capitalism, which harnesses individuals' energies and abilities in service of their own self interests, can be a very efficient system for getting a lot of work done. It works best when incentives are properly aligned and rules are enforced. Barring major technological innovation, however, no economic system is going to be able to continue on the growth path of the last 200 years in industrial countries. Resource and environmental constraints will ultimately impose limits.
Population decline in the most advanced countries--the ones with the highest consumption--will provide some relief from population pressure. Unfortunately, population decline also makes the invention of technological solutions less likely because they're the ones hosting the most research and technological progress.
The most advanced countries are also reservoirs of parental knowledge, information that must be passed on to the next generation. Not coincidentally, advanced countries are where opportunity costs of parental time invested in children are greatest. Someone has to produce the scientists and technicians capable of inventing and applying technology.
Countries like China and India are increasingly adopting fossil fuel technologies and they aren't going to settle for less output per person than the rich countries. The richer countries are therefore likely to have to make a choice--either make major retrenchments in standards of living to make room for the rest of the world--or burn up the planet.
Given the extent to which 200 years of industrial revolution has made economic growth a human birthright, the global system may be in real danger of burning or blowing itself up. That means we absolutely must find technological solutions, or revise our economic and political expectations for "progress." Please forgive the pun, be we need to outgrow growth one way or another.
(3) What are the alternatives to capitalism? Communism? Democratic socialism?
Communism: The Soviet Union's communist system, starting from a very low economic base, did fairly well initially (as measured by economic statistics, although with considerable compulsion of its citizens). The needs were obvious--infrastructure, power generation, basic factories. Yet communism foundered when more diversity was required, apparently because of information problems.
It's very hard for centralized managers, even the most honest and competent, to access and process enough information to run an economy of much complexity. Centralized control is particularly vulnerable to corruption--wise and benevolent dictators are rare. China is following the same path, although managing to keep state control longer and liberalize more gradually. What controlled economies particularly lack is the entrepreneurship and innovation needed to go beyond the basic stage of development.
Socialism: Some things like national defense, highways, and sidewalks, have to be socialized because of the "free rider" problem. Some things, like health insurance, are difficult for a market system to provide effectively because of the "adverse selection problem." Insurance companies only want to insure healthy, employed people, and many citizens don't want to buy insurance if an employer isn't providing it and they aren't sick. People who lose their jobs because of injury or chronic illness lose their employer's insurance just when they need it. Nobody's insurance is safe unless everyone is insured.
Some things, like schools, have beneficial externality effects that a market system (which only produces what individuals are able and willing to pay for) doesn't take into account. Democracy requires an educated citizenry. There are also issues of fairness, equality, and exposure to the risks of capitalism that cause democracies to choose some level of social insurance through income redistribution. But social insurance does tend to weaken the capitalist incentive system.
There is always room for argument about what governments should be doing, but capitalism seems likely to continue as long as civilization lacks a better alternative. My own questions for the future include:
- Can civilization survive the challenges that economic realities pose for political and social systems?
- Can politicians--who have to get elected locally--think globally and cooperate with the rest of the world sufficiently to regulate global capitalism?
- Can societies that have taken "women's work" for granted for all of human history develop the rules and institutions required to enable the family to compete with the market place? Can they get the resources they need to produce the healthy, skilled labor force modern economies require?
- Can the richest 20% of the human race find technological solutions for the constraints of finite resources, or downsize their definition of "economic progress" sufficiently to maintain a viable peace between the world's Haves and Have Nots?
Editor's Note: A special thanks to Dr. Burggraf for sharing her thoughts on the future of capitalism. The topic came up in a lively book group discussion in August, and she kindly agreed to write her views here for the benefit of our Global Microscope readership. (Thanks, Mom!)
