CAPITALISM – no longer fit for purpose ?
- The vast majority of humanity survive on a few dollars a day.
- The economic boom of the last fifty years has benefited a relatively small elite.
- The fossil fuel driven economy has devastated the planet.
- Capitalism is the most efficient creator of wealth but it has been derailed and it has led to inequality and environmental degradation on a global scale.
- Global warming and capitalism’s favourite progeny – globalisation – has triggered social movements, political discontent and massive migration.
- There are more economic and political migrants seeking greener pastures than at any time in history.
- Increased Government participation in the economy both directly and through regulation is required to temper the excesses of laissez-faire capitalism.
- Degrowth means uncoupling the link between
growth and prosperity.
Adam Smith’s ‘invisible hand’ has been the single biggest driver of the phenomenal economic growth enjoyed globally over the last two hundred years.
Humanity has seen an improvement in it’s quality of life that is unrecognisable from that which prevailed even as recently as the 19th Century. As shown by Steven Pinker[1] any objective measure ranging from infant mortality, to deaths in conflicts, to life expectancy, to average wealth – shows that today mankind is enjoying the best quality of life since our ancestors made those first tentative steps out of Africa many millennia ago.
I would ascribe this to the massive increases in wealth that enabled further scientific development in a virtuous cycle that led to democracy and the market economy.
This economic and political model termed the so-called ‘liberal democracy’ which saw its apogee in the downfall of the Berlin wall, the failure of Marxist Leninism in the late 1980’s and hailed as the ‘End of History’ by Francis Fukuyama has, however, started to appear increasingly brittle.
How so?
In 2006 Nicholas Stern[2] said that: ‘the biggest market failure of capitalism is climate change.’ ‘The science tells us that greenhouse gas emissions are an externality; in other words, our emissions affect the lives of others. When people do not pay for the consequences of their actions we have market failure.’
The extent of climate change is now front and centre of our daily news. Barely a day goes by without a report of another ‘extreme weather event’. These are defined as those weather events that should only occur once every 100 or even every 500 years. These range from record temperatures (on every continent), to floods of a biblical scale (Pakistan), navigable rivers drying up (Europe and China), melting glaciers (Alps) and thawing polar ice-caps.
The other obvious market failure was the bursting of the 2008 housing financial asset bubble. Many smart people have said that the absence of regulations was largely responsible for these failures and I would agree.
It is interesting to hark back to Adam Smith who said that “beneficial market control occurred when merchants in the village were personally connected to the well-being of their neighbors, who lived and shopped in the village. Social and economic cohesion would prevent market failure.” The paradox of globalisation is that we live in both a connected and a disconnected world. We are connected via technology (social media) but we are disconnected from the consequences of our actions.
Corporations that offshored in the early 2000’s such as Apple are now counting the economic and social costs and starting to reverse such strategies. It is time to align the interests of society (the public) and investors.
The other consequence of unfettered capitalism has been the rise in inequality. The primary beneficiaries of market growth in the last few decades have been the elites – the so-called top one percent. According to Edward Wolff, professor of economics at New York University, “The pandemic wealth boom certainly ranks at or near the top of all the wealth booms over the last 40 years.”
While the rich get richer, the poor get poorer. Wages stagnate for the vast majority of the working class and this leads to disaffection and a decline in democratic values. These are also the people who are most likely to be impacted by the extreme weather events alluded to above.
If capitalism (in its current form) isn’t working, what will?
In my view it will take a healthy dose of regulation, increased Government participation in the economy such as ownership of critical public services like healthcare, utilities like water (this failure manifest in the discharging of raw sewage into Britain’s rivers and the sea), power, transport and taxation (especially on carbon). The importance of Government’s role in the economy was highlighted in the pandemic when the USA, the UK and a number of European Governments intervened through massive spending programs to keep their economies ticking over. This was done in conjunction with directives such as lockdowns, social distancing, mask-wearing and vaccine programs. Small Government, big business would not have been able to address the challenges of the pandemic. And you can be sure - there will be more pandemics.
Capitalism needs to be reformed. Free market principles must remain but much greater attention should be paid to all stakeholders in society and not just the shareholders of the corporations. Much of this has already been explored in depth and is being implemented. Larry Fink of Blackrock is a prime mover in this regard.
I would advocate one more strategy that is increasingly becoming de rigueur which is ‘degrowth’. We are where we are because of the indiscriminate use of resources and energy under the banner of ‘free market principles’. In order to reduce the consumption of resources we have to slow down or even stop growth.
This clearly flies in the face of ‘pure’ capitalism of which a fundamental tenet is growth. We have been conditioned into believing that growth is essential – GDP growth, corporate earnings growth, growth in consumption, growth in performance in the classroom (grade inflation) and so on. We now know that this is misguided.
The earth has finite resources and with the exception of Africa, there is a decline in population. This decline means there will be fewer consumers for the goods and services that the market delivers. Ergo degrowth. Contrary to Elon Musk’s views on this (he thinks the population decline is worse than climate change) – the decline in population should be viewed as an opportunity for a review of the global order.
Despite arguments that degrowth will somehow limit progress (for example in the fields of medical science) the counter is - that with the rapid growth in Artificial Intelligence and Machine Learning we will continue to see massive increases in technological advancement and possibly even increases in economic output. Robots don’t get sick and don’t demand wage increases and they will replace the workers that are dying off while increasing productivity. Thus, perhaps a better way of positioning degrowth is that while it should lead to a reduction in resource consumption it can nevertheless maintain or even increase economic output.
This debate is set to rage on. What is beyond question is the manifest failure of an economic model that has devastated the environment, driven inequality and seen the vast majority of humanity experience a decline in living standards and well-being in the last two decades. The rise of authoritarianism (strongmen) and the first invasion of one country by another since the second world war are also products of this new world order. It is time for a reset.
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