Can "capitalism" really work any more?

Great Debates
1

I hate the word “capitalism.” It was never used until the 20th century. Its use implies that we have rationally and purposely created an economic system. Of course, we haven’t. I prefer the term “legacy economic system” (LES), which I will use here. I see the LES as a congeries of things work and things that don’t. And there are a lot of things that have worked that no longer do. Cite: the economic collapse that began in 2008 and the ongoing struggles of the working class despite rising corporate profits.

I’m going to come out and say that I don’t think we have the answers as to how to fix the mess we’re in. Often people will assume that, if you don’t like the LES, then gasp you’re a communist. No, communism didn’t have the answers either. Right now, the LES is based on a mix of free market and socialistic practices. Among both types of practices, there are things that are working and not working.

My beef is not mainly with free markets. They are pretty nifty, overall. When you regulate them so that companies can’t do crazy or harmful shit, and so that bubbles (real estate), market failures (private health insurance), and various other bad phenomena don’t arise, then they are useful tools.

But free markets, regulated or not, are not the real problem with the LES. The problem is that of the necessity of the return. I don’t see this discussed enough, but it’s really the heart of the matter.

Namely, the problem is that, in the LES, everything is treated as a fungible investment that must provide a better return than the risk-free rate of return, which is that of US government bonds (typically the T-Bill). I went to a decent B-school, so I learned all about net present value, internal rates of return, etc.

Thus, any business has two choices: to pay a dividend such that the stockholders are getting a better yield on the stock (dividend/stock price per year) than risk-free rate or are growing the business such that the growth in value of the stock is better than the risk-free rate. The logic is thus: Why invest in a risky investment that is not providing a return when you can invest in a risk-free investment that does? Unassailable.

Yet all the risk-free rate does is set a theoretical minimum. Even if it didn’t exist, businesses would have to provide a return to their investors. After all, would you buy a stock that you knew would not pay a dividend or grow in value? Of course not.

Typically, businesses try to provide a return by growing instead of paying a dividend. There are a number of reasons for this, one of them being that dividend income is double-taxed. The other main reason is that if businesses get surplus cash, they would rather try to grow the business instead of just paying the cash out to shareholders. CEOs and other powerful executives have every incentive to grow their empires and thus their own salaries. Sometimes, however, businesses get so much cash on hand that they don’t have enough reasonable ways to use it, so they (reluctantly) pay some of it out as dividends. Recent example: Apple.

So the vast, vast majority of businesses out there are trying to grow. Now, I’m an MBA, and this has just been a truism of business: grow or die. That doesn’t mean it’s right, but every CEO out there wants to grow the business.

So here’s the problem: you can only grow so much. Further, to maintain the same rate of growth requires a business to increase the absolute amount of business gained every year. Thus, to grow by 5% when sales are $100,000, you need to get $5,000 more in business; probably theoretically not that hard, since the absolute amount needed is small. But to grow by 5% when business is $1,000,000,000 (1 billion) means you need to go out and grab $500,000,000 (500 million) more in business. That means influencing an entire national or international market by a significant amount, introducing new product lines or extending old, etc. It’s a major undertaking whose success will never be guaranteed. If you succeed, your task will only be bigger next year. That kind of compounded growth is simply not sustainable over the long term.

Thus, the challenge: the set of all businesses in an economy must grow. Certainly, they can beat up on each other and take business away from each other, but doing so doesn’t grow the set.

It would seem that the set of all businesses can only grow via the following:

  1. Population growth. More people consume; more people produce. The entire economy can grow as a result, and the set of all businesses can grow.

  2. Productivity growth. People can produce more and thus consume more. The entire economy can grow as a result, and the set of all businesses can grow.

So here is my honest question. I don’t presume to have an answer, and I have not seen a textbook or essay online or anything that responds to it. Can the LES function when populations level out and productivity growth is only moderate (as it can be expected to be, at best)? (Also, even if productivity were to continue to increase at a high rate, that is useless unless people can consume at a higher rate. Plus, people have to be able to consume the thing for productivity has increased. A productivity increase in the manufacturing of large-screen TVs will put such TVs in every household but do no more than that.)

From what I see, the answer is no and explains a lot of the economic problems we are seeing in the world today, as well as ones we’ve seen in the past.

Regardless of the above question of sustainability, the LES is prone to severe dysfunction. I cite the Great Depression and the current economic malaise. I will also cite the long-term economic malaise in Japan, where the economy has basically been in the shitter since 1989, despite the fact that it is one of the most educated, low-crime, orderly societies in the world (I lived there eight years and saw the malaise firsthand).

Basically, the LES is prone to “all hell breaking loose” when just a domino or two fall. A vicious cycle is created, in which the failure of one business bankrupts its suppliers, which bankrupts more suppliers, which results in massive unemployment, reduced consumption, and further pressure on businesses. All stuff you know.

But I would also argue that natural, mathematically ordained limits to company growth and thus to returns creates the kind of malaise we have seen for a long time in Japan and now, apparently, worldwide.

But as I said above, I am not writing this post to proclaim I have the answer. I’d like to know if I am missing anything. Is there a way it all can work out? That the numbers can add up over the long term without massive growth in population and/or productivity?

(As an addendum, I will say that the Marxist critique, which I think is accurate and interpret as follows, is that the way the LES organically (i.e., no conspiracy necessary) responds to the problem is through the destruction of capital. I.e., capital is literally destroyed or put out of use so that people can start from a lower baseline and start producing those returns again. Let’s turn to Japan as an example one more time. Isn’t it ironic that Japan enjoyed its best growth rate and best economy after it was blown to shit in WWII? From the late 40s into the 80s, it just grew grew grew–and then hit a wall. Now, with infinitely more capital and social resources than there were in 1945, there is horrific malaise.)

2

I did not go to business school, but this seems a very odd post. Evidence that a vast majority of businesses do not pay dividends? This is true for truly growing tech companies, but even mature tech companies like Microsoft are now paying dividends. As part of our retirement planning we have been looking at dividend producing stocks, and there are a lot out there.

Second, and you pretty much say this, but business in expanding markets or with low market share have to grow - in the first place to maintain or grow market share, in the second to get sustainable market share. However mature businesses don’t, so long as they have good profits and good cash flow. I’d bet that most businesses are in the first category, but maybe not by market cap. Some businesses try to grow by moving into new product areas, but the conglomerates of the 70s and 80s show the peril of this approach.

None of this is new, and capitalism has seemed to have done just fine despite it.

3

Businesses are not required to grow. Most businesses are small single person or family owned businesses that are not growing a great deal. You seem to focus only on the small subset of businesses registered on a boerse. But even a business on the stock exchange can be perfectly fine investments as long as it only grows the same as inflation.

Growth is not just more consumption. It is also better or different consumption. Tearing down a coal work to put up a wind-mill farm instead doesn’t necessarily produce more electricity. But it does produce economic growth, during the building phase.

Capitalism, or LES, works fine in economic downturns. One might even say it works best under such conditions, as it tends to lead to greater inventiveness. I expect this time round is no different in that aspect.

4

FWIW, I prefer the term, “Market economy” over “Capitalism”. Recall though that there is more than one variant of market economy: the US is equity based, Germany is bank based and Korea is conglomerate based for example.

I don’t see why it couldn’t function with low population and low productivity growth. Indeed, we had that sort of situation for hundreds of years. Set population growth to zero and productivity growth to moderate and I can’t see any unsolvable problems.

It seems to me that wants will always exceed resources.

Bad example. There’s lots of scope for multiple TVs and computer monitors in the home, the bar, the billboard, etc.

Readily solvable via textbook economics. Which have finally been applied in, of all places, Japan, c 2013. So we’ll see whether Abeanomics provides recovery. It’s an hypothesis test.

You missed global warming though. Readily solvable via CO2 and methane emission charges but politically intractable, or so it seems. That’s the real economy killer IME.

5

Sure, to write the post “right,” I would have to do a lot of research and prove everything point by point. I’m more interested in getting insights.

I heard on business news the other day some incredible statistic. It was something like the number of investment grade stocks in 2013 is half what it was 15 years ago. So the guy was wondering if people weren’t creating a bubble in the stock market again because they have to put their money somewhere to get that return (one big reason is to beat inflation–we haven’t even dealt with that yet).

Re dividend-producing stocks, the question is whether a mature economy could function if it contained only stable businesses that were not growing but were paying out a dividend. Such an economy has never existed. Big companies that pay a substantial dividend in terms of yield don’t seem to be all that common. Microsoft yield is currently 2.8% (cite: Microsoft Dividend Yield Insights | YCharts).

It’s done “just fine”? The Great Depression and the economic collapse happened, but it’s “just fine” for all that? What would “not just fine” look like?

6

I don’t talk about small businesses because most of them are ultimately people just trading their labor for money. Or slightly larger ones managing a labor force to serve a local economic need. Chinese restaurants and car dealerships are not trying to “grow” like a corporation. I agree that such businesses are not affected by the issues I am talking about.

That change would have to produce a return or private investors would not invest in it. Of course, the government may make that change, but that would fall in the category of socialistic interventions.

Wait a sec. If there is a downturn in the first place, then the LES is not working ipso facto.

7

No, we didn’t. The economy was run under vastly different principles in, say, 1700. Before the Industrial Revolution.

But those problems wouldn’t be solved by the LES, is the point.

The point being that productivity growth is specific to the thing produced and can’t automatically boost the entire economy. For example, we’ve had productivity increases in manufacturing over the past several decades but not much in services. E.g., your barber is no more productive than a barber in 1950.

What is? All economic problems?

I was reading about this earlier today (well, yesterday now). Here’s a Slate article for the curious:

Japan’s economy has “improved” so many times since I first went there in 1992 that I don’t know what to think any more. The economic and social malaise runs very deep there. For example, the birth rate there is half of what is needed to sustain the population, and the population is set to decrease by a third by 2060, at which point 40% of the population will be seniors. That gives you a real estate market that is doomed to continue to deflate for the next 50 years or so and a massively shrinking local market. I can tell you that people are not having kids because they feel it’s just too expensive to have them. So, kudos to Abenomics if it can pull Japan out of morgue and into the ICU, but I don’t see see these rather surface manipulations as anything that will restore true health.

8

You can call it what you want it is still the same. Labeling it something is not an argument. The change could also come from other things. Rising coal prices, consumer preferences, etc. Anyway isn’t the whole premise of the OP that the economy is already a mixture of capitalism and socialism?

You can chose to define failure any way you want. Although always requiring an upturn appears rather similar to a demonstration i once saw in New Zealand, where demonstrators demanded that nobody should be below average. Meanwhile the capitalist economy continue to provide livelihood to billions of people above anything previously seen in history. To declare the current state of affairs a failure seems grand from a historic perspective.

9

I don’t know when the term was first coined, but the concept goes back at least to 1776 and Adam Smith’s Wealth of Nations. Possibly much further to post mercantilism.

Yes, one of the things that “didn’t work” was a combination of overly intrusive government influence to encourage home ownership, combined with a lack of regulatory oversight that allowed companies to create elaborate financial instruments based off of the real estate market.

It can. High productivity combined with a population growth rate of zero would tend towards an increased standard of living. It seems to me that the main barrier to continual growth is availability of natural resources.

A bigger question in my mind is how to employ millions of people in age when an increasing amount of work, both low skill and high skill, is becoming automated.

A lack of any recovery at all?

10

There is much validity in your post, but also some over-simplification. For one thing, times of low growth or low profit also are periods of low real interest rates, so the risk-free lower bound on acceptable return adjusts automatically.

But your argument does lead to some correct conclusions which point to flaws in the modern economy:
[ul][li] Apparent economic “needs” encourage population growth, whether that growth furthers real human values or not.[/li][li] In a finite-sum game, the quest of powerful corporations for continued growth will come at the expense of labor or smaller companies.[/li][li] The rewards of rising productivity go to skilled labor and capital owners, so increase the income gap with unskilled labor.[/li][/ul]
I offer no solutions for these problems. But thank you to OP, one of the few on these boards who even acknowledges that they are problems.

11

I’m pretty sure the word “capitalism” was coined by Karl Marx.

12

I question the premise. Most people seem to be of the opinion that the poor have either got poorer or stagnated. The reality is that the last two decades have seen the fastest rise out of poverty the world has ever seen, both in absolute numbers or proportional terms.

Yes this largely down to China (but even there I can remember a time when everyone considered our relationship with China to be exploitative, and that China will never be better off from it, especially not the sweatshop worker).

But now impressive growth has even been seen in stubborn regions such as sub-Saharan Africa. Itself now being “exploited” by china.

But I can appreciate why Americans in particular might see capitalism as failing to get the poor out of poverty – given the US’ level of social mobility.

13

I find it weird when people commingle ideas like this. Capitalism is not synonymous with the economy, nor has it ever been. The economy is not synonymous with society, nor has it ever been. Many times people will look at a set of social ills and assume it is a result of that society’s economy, and thus whatever types of activities and entities and principles govern the economy. They can definitely be related for sure, but society always retains the ability to regulate how economic activity affects society as a whole and can also create programs to deal with social ills directly (social ills that may be influenced by economic activity but aren’t necessarily a product of the economy.)

Capitalism is just a highly effective means to pool investor capital to serve as seed capital for new business ventures. It developed basically because it was needed, and for starting new businesses no other system has proven anywhere close to as effective. But it’s never been the only show in town in any economy of which I’m aware…for example the government has always had its part in the economy of all Western nations that developed capitalist activity. Coöperatives are also fairly old at this point, with I think many in the United States dating back to the 19th century.

14

Here’s a brief history on the term “capitalism”:

Shakester - I think you are close. Apparently it was used as a disparaging term by nineteenth century socialists to refer to Adam Smith’s concepts of “economic individualism”.

In any event, capitalism “works” if you believe that people have an inherent right to personal property and the right to buy and sell their time, assets and fruit of their labor for the best price they can negotiate.

It’s because most people are ignorant. How many Chinese, Indians and poor from other countries has globalization lifted out of poverty? The cite I linked to describes a similar phenomenon with textile and factory workers during the industrial revolution. People assumed poverty was “new” because it was suddenly visible in the form of people working under deplorable conditions. However what most people didn’t realize was that the poor were always there and their condition was much worse.

See I find it weird when people separate “the economy” from “society”. As if it’s some nebulous thing rich people dabble in, like the NYSE. The economy is the mechanism by which all needs and wants of every individual in a society are met.

The “problem” with any economic system is making sure it a) provides a reasonable level of meeting needs and some wants b) maximizes everyone’s productive power and c) is sustainable.

Much of the current problems with Western economies is that they are becoming unsustainable. In order to meet the needs and wants of the people, they are taking out massive amounts of debt. They are also doing a terrible job in maximizing productive power as many Western countries have massive unemployment.

15

I think a more accurate phrase would be “the measurable economy is not synonymous with society”. I do think that it is true – and it’s a very good phrase – that

However, not all economic decisions are truly measurable despite the fact that people still are making essentially the same type of decisions with their happiness and time that they make with their money. All other things being equal, a decision that makes people happier or saves time is a concretely economically better choice than the one that does not, in my opinion. However, it is notoriously difficult to measure these things even though I consider them part of the overall economy.

Another, more concrete, example. Pretend that there was a huge swath of wilderness owned by a rich magnate who never visited it at all (and neither did anyone else.) This rich guy pays minimal property tax on it due to connections. Then, the state purchases and/or condemns the property and turns it into a Wilderness Area, in other words, minimal improvements so it will generate no parks jobs. Yet hundreds or thousands of people still visit it per year, versus no visitors before.

There is less measurable economic activity after the takeover than before because there are no taxes generated from the public land (ignore gas used to drive there). But the actual economy is healthier because more people are able to make the decision to use the land, that they would have otherwise used in a less than optimal manner.

So a big advantage of capitalism is that it is one of the better ways to measure economic activity with a minimum of arbitrary decisions: just look at the dollars. Without capitalism you’d have to arbitrarily weigh each individual economic activity separately. It just doesn’t measure everything.

16

This is a dangerous concept. The economy is the productive activity of a society, it is not all activity of a society. Going to church is mostly non-productive, private relationships are mostly non-productive. Teaching your son to play baseball is mostly non-productive. Swimming in a lake is mostly non-productive. Not all societal activity is part of the economy. I view the economy as the total production and trade of all goods and services. But it’s pretty easy to think of a great deal of activity that falls outside that definition, unless you seek, through sophistic arguments, to expand the definition of “services” “goods” and “trade” to the point of absurdity.

17

As long as technology advances we’re going to continue in the basic pattern we’ve been in since the industrial revolution started (or, arguably, since oceanic trade started around 1500): invest in a new technology that offers new opportunities for profit and economic growth. Computerization is the current wavefront of technology; possibly biotech might be someday. Or if exploiting space resources moves out of the realm of science fiction there is enormous scope for expansion there. Optimizing investment return is the strategy that moves money from moribund industries to fledgling ones. It’s just that currently innovation is relatively slower than it was in the age of mechanization from 1850 to 1950, with computerization the major exception. ROI doesn’t make sense in a steady-state economy but we’re not there by a long shot.

18

Capitalism, or whatever you want to call it, will continue to work until it’s tendency towards producing monopolies reaches the point where the people rise up and destroy it.

19

The problem with capitalism occurs when special interests seek to remove government from the market by reducing taxes and regulation. Capitalism is sustainable only when restrained by the people. Now, that can either be an orderly process, through representative government (regulation and taxes), or a disorderly process through the mob, when they get tired of being exploited.

20

The only monopolies I’ve ever seen are government-mandated. I’ve never seen a lightly regulated market, or even a fairly heavily regulated one, result in a monopoly. I’ve only seen that where the state controls a business directly(such as national oil companies or airlines) or where the state forbids competition to a favored private company(such as utilities in most states).

So if monopolies are the problem, you should really be asking a different question from this thread: Can “government” really work any more?