How Well is American Capitalism Working?

Tony’s Comments: I’m becoming a Social Capitalist in my old age. On the one hand I embrace capitalism as the most viable economic model for us to follow while on the other hand know that in it’s purest form, it can be as evil and unworkable as communism at the other end of the spectrum.

Given the current polarization of civil discourse, and the fundamental lack of understanding by most people about economics, it’s a given that many people feel threatened and become responsive to politicians whose goal is to incite fear as a motivator.

Somewhere between the extremes of pure capitalism and pure communism is a workable solution that supports the strengths and advantages of capitalism and the concurrent need for society to overcome it’s failings. The solution for all of us is acknowledge that society has an obligation to itself that cannot be realized with pure capitalism.

People who have a knee jerk reaction to the word ‘socialism’ need to be educated. This article by Philip Kotler is a good start.

Philip Kotler | 10/27/2017

The answer to the question depends on who you ask.

If you ask America’s corporate executives, their answer is that American Capitalism is working well and would even work better if there were fewer government regulations and if taxes were lowered.

If you ask America’s middle class, their answer is that American Capitalism worked better in the past but now it is harder to finance a middle class life style given the high costs of sending students to college and taking care of their parents who failed to save enough money for their retirement.

If you ask working-class Americans, their answer is that they haven’t improved their earnings since the 1980s but their expenses have risen dramatically and they can only survive with a credit card and rising indebtedness.

If you ask the 15% of our population living in poverty, their answer is that they can’t find a decent job and they survive on food stamps, food kitchens, clothing handouts, and cheap housing or even homelessness.

Markets, left to themselves, do not always lead to efficient or equitable outcomes. Free-market capitalism can lead to monopolistic or oligopolistic industry domination–witness Google, Facebook, Amazon, and Apple. It leads to a growing concentration of income and wealth. The average income for the top 0.01 percent of households grew 322 percent, to $6.7 million, between 1980 and 2015. As of 2015, the data shows that half of all US income went straight into the pockets of the top 10 percent of earners. Thomas Piketty, the economist, predicts that eventually 60 percent of income will go to the top 10 percent of earners.

American Capitalism is largely Free-Market Capitalism where businesses are in private hands and companies are relatively free to make decisions on what to produce, where to produce, what to pay employees, where to sell, and what intermediaries to use in distributing their products and services. Businesses are subject to some regulations to ensure product quality and safety and no harm to the environment.

Capitalism takes on different forms in different countries. Consider two other forms of Capitalism – State Capitalism and Social Capitalism. Ask: what would work better for the majority of Americans?

State Capitalism

Two examples of state capitalism are Russia and China. Both are capitalist systems without democracy led by autocratic rulers. We’ll focus on Russia here.

Since the Russian Revolution in 1917, the Russian economy operated as a complete Communist economy until recently. The State owned all the land and businesses, decided on the industries to build and operate, and managed the macroeconomic instruments of taxes, credit and the money supply. The State produced most of the jobs, determined the pay, and set quotas for the annual outputs in most product areas. The Communist economy, instead of producing growing income for the proletariat, ended up producing a wider sharing of misery.

The Cold War ended in 1985 when Mikhail Gorbachev assumed the reins of power in the Soviet Union. Gorbachev introduced the policies of glasnost and perestroika to the USSR. GLASNOST, or openness, meant a greater willingness on the part of Soviet officials to allow Western ideas and goods into the USSR. PERESTROIKA was an initiative that allowed limited market incentives to Soviet citizens.

This started a period of Russian Capitalism culminating today in Putin’s Russia. The Russian government controls about 65% of the Russian economy through state-owned enterprises and state owned banks. The Russian government’s role in other industries vary from 50% in oil production, 27% in electronic hardware, 15% in telecommunications, down to 0% in steel production. Putin has promised to reduce the government’s role in the economy by privatizing state-owned enterprises. But paradoxically, Russia is currently consolidating other industries and buying back some privatized companies.

Private business companies in Russia are monitored by numerous federal, regional and local bodies for tax-collecting and law enforcement. Bribery is extensive. There is very low business confidence, especially among small entrepreneurs. Russia now has 96 billionaires. Russian businessmen keep their money abroad even as Russia desperately needs private investment for upgrading industries and infrastructure. The owners of Russian oligopolies keep top state officials on their payroll or make them confidential beneficiaries of their businesses.

This system has not led to producing better lives for most Russians. A few gained extreme riches and the many live with low pay and great uncertainty.

Social Capitalism

The Nordic community – Sweden, Norway, Denmark and Finland – practice a form of capitalism known as Social Capitalism. This includes a combination of free market capitalism with a comprehensive welfare state and collective bargaining at the national level. The four characteristics of Nordic Capitalism are:
· A commitment to widespread private ownership, free markets and free trade. Most of the production and distribution system is in private hands.
· The government supports individual autonomy and social mobility. It support its citizens in developing a healthy lifestyle free of hard drugs and alcohol and positive on exercise and nutritious eating. The government greatly supports preserving the environment and clean air and water.
· The Nordic model involves a tripartite arrangement where representatives of labor and employers negotiate wages and labor market policy mediated by the government.

This type of Capitalism leads to a more educated and satisfied citizens but it comes at the price of higher taxes, especially for the middle class and rich. A common misconception is that the rate of economic growth in the Nordic economies may be lower than it would be with American-styled Capitalism. The irony is that Sweden was just ranked #1 as the best country for business.

What Model of Capitalism Will We Choose?

Robert Reich reminds us that “we can make the economy work for us, rather than for only a few at the top.” Unfortunately, the American economy is rigged “by those with the power and resources to buy the politicians, regulatory heads, and even the courts.”

Obviously, most Americans would not want American Capitalism to drift into the State Capitalism model in Russia or China. It would lead to a great reduction of freedom and worsen the economic life of most Americans.

Should the American economy move closer to the Nordic model of Social Capitalism? Opinions would vary greatly among American groups. The wealthy class would curse this development, especially because it would involve significantly higher taxes and require paying higher wages to American workers.

The middle class might be divided. Their taxes would be higher but their benefits would also be higher. Those who aim to start businesses or achieve high management positions might be happier leaving things the way they are. The American Dream is to acquire wealth. Those middle-class Americans who would prefer a better health care system, a better educational system, free college education and cleaner air and water would lean toward Social Capitalism.

The working class would largely favor Social Capitalism where the government will strive to provide enough jobs for everyone and a living wage. The poor would favor Social Capitalism because the objective is to eliminate the condition of living in poverty.

Bernie Sanders recently posited that higher taxes would lead to lower health costs, higher education and a better environment.

My guess is that over time our free-market ideology will morph into the Nordic model of Social Capitalism. It’s time now to start fixing our Capitalism.

Source article: https://www.huffingtonpost.com/entry/how-well-is-american-capitalism-working_us_59f2c98ce4b06ae9067ab7bc

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2 thoughts on “How Well is American Capitalism Working?

  1. Old Guy

    In the 2016 presidential election the republicans and libertarians took over fifty per cent of the popular vote when their totals are combined. That puts the country as right center or right. We have capitalism and a welfare a state now. Moving any further toward government participation in business will be a hard sale. We are a lot larger then the countries you mentioned.

  2. Tony Kendzior - Financial Planner Post author

    Old Guy – yes, I agree that moving much further toward government participation in business is a bad idea. That should NOT happen. But if you accept that we as a society created the state to further our own ends, both individually and collectively, whether it be to have a military to protect us, or a weather service to warn us about hurricanes, then if follows that the state, the government, of the people and for the people, has a role to play in our welfare and safety. The question then becomes to what extent the state should involve itself for the common good. We already have limited socialism, the most obvious being Social Security. Not just the part you and I contribute to but including disability benefits. Over 8 million Americans receive Supplement Social Security Benefits. Of those, 4.5 million are under age 65 and include hundreds of thousands of children. That’s social capitalism. I argue that right now there is an imbalance in favor of those who have as opposed to those who don’t have. And to the extent the don’t have’s cannot survive without help, then that itself limits the effectiveness and profitability of business interests. If you have no money to spend after paying for food, shelter and health care, you don’t add much to the coffers of American companies.

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