Market Capitalism: Flawed and Imperfect, but Better Than Any Alternative

I will be speaking at the Center for the Study of Capitalism at Wake Forest University’s Business Summit, the theme for which is “Capitalism in the Age of Polarization.” To prepare, I’ve been studying books, white papers and documentaries about market capitalism and its discontents. What’s interesting is if you throw out the extreme points of view on either end of the continuum, a consensus starts to emerge that aligns with my personal view about the state of capitalism, at least in the United States. This is what that thread of consensus looks like.

Capitalism has unarguably been – and remains – a benefit to the world.

Even the critics of capitalism allow that it has lifted millions of people out of poverty. Here is a sampling of those perspectives:

• “The marriage of democracy and capitalism has arguably been the greatest force for good in history, giving the creativity and enterprise of talented individuals the freedom to generate value in which we can all share.” Roger Martin, When More Is Not Better

• “In 1980, 43% of the world lived in extreme poverty (by the World Bank’s definition), and today the number is about 8%. Globalization has lifted a billion humans out of poverty in just 40 years.” Louis Menand, “The Price Is Right,” The New Yorker

• “There’s a lot of resilience and dynamism in America’s brand of broadly free market capitalism. In 1990 the European and American gross domestic products per capita were nearly neck and neck. Since then, America has surged ahead. American labor productivity increased by 67% between 1990 and 2022, compared to 55% in Europe and 51% in Japan.” David Brooks, “The American Renaissance Is Already at Hand,” New York Times

The data backs up this perspective: The so-called “Misery Index,” the sum of the employment rate + the inflation rate, is lower than at any time since the 1950s.

At the same time, public faith in capitalism has declined and is continuing to erode. 

In spite of all the good that capitalism has done, there is a sense it is no longer effective in today’s society – that either the world has evolved past it or it has become corrupted by the political system:

•  “People do not feel the economy has worked for them.” The Center for the Study of Capitalism at Wake Forest University, Is Trust in Our Economic System Really Decreasing?

• “There has been little or no real income growth for most people for decades. … Prime age workers in the bottom 60% have had no real (i.e., inflation-adjusted) income growth since 1980.” Ray Dalio, Why and How Capitalism Needs To Be Reformed

• “Capitalism Is a fundamentally sound system that is not now working well for the majority of people.” Ray Dalio

• “As economic growth has slowed from 3.2% annually in the first 30 years after World War II to 1.75% in the thirty years since, average median family income growth has dropped from 2.4% to less than 1% over the same periods.” Roger Martin

• “Today’s liberal democracies are the most successful societies in human history, in terms of prosperity, freedom and the welfare of their peoples. But they are fragile. Resting on consent, they require legitimacy. Among the most important sources of legitimacy is widely shared prosperity. A big part of the erosion of trust in elites has accordingly been a long-term relative economic decline of significant parts of the working and middle classes, worsened by economic shocks, notably the global financial crisis.” Martin Wolf, The Crisis of Democratic Capitalism

• “Fewer than 50% of millennials have a positive view of capitalism and their views have apparently darkened over the past five years.” Gallup Poll, “Democrats More Positive About Socialism Than Capitalism” 

Meanwhile, economic inequality is increasing.

The distribution of wealth has moved from a “Gaussian distribution” – i.e., a bell curve, where most of the wealth resides in the middle – to a “Pareto distribution,” with a small sliver of the population capturing almost all the economic gains:

• “Americans whose fathers were in the bottom income quartile have a 40% chance of staying there.” Ray Dalio

• “Capitalism is no longer unambiguously about everybody working hard and getting ahead – it is about the benefit of overall economic growth flowing so disproportionately to rich people that there isn’t enough left for average Americans to consistently advance.” Roger Martin

• “Today, the wealth of the top 1% of the population is more than that of the bottom 90%.” Ray Dalio

• “The result is an increasingly upside-down world, in which a few privileged few benefit in the short term while the long-term interests of the many are sacrificed.” Roger Martin

Oligarchic drift is affecting policy outcomes.

The effects of this consolidation of wealth and power in the hands of a few are being felt in public policy. As a result of this “oligarchic drift,” the “democratic” aspect of democratic capitalism is being gamed by entrenched interests with the resources to influence legislative policy and regulation:

• “While government policies should be intended to serve the many for the long term, they are being gamed by interested parties to ensure that they serve the few in the short term, with damaging impact over the long term.” Roger Martin

• “The small number of winners that held strong monopoly positions seem to be able to shape both the present and the future.” Martin Wolf

• “Both the democratic and capitalist parts of American society offer rich pickings for gamers.” Roger Martin 

Unequal opportunity poses a threat to civil society.

The foundation of U.S. society is based on equal opportunity – that with hard work, ingenuity and perseverance, anyone can succeed and achieve “the American dream.” But if people feel that the economic system is “rigged” to benefit only a select few, they become discouraged from participating in it – and could even root against it:

• “[Capitalism is evolving] in a way that is … producing self-reinforcing spirals for the haves and have-nots. This is creating widening … opportunity gaps that pose existential threats to the United States. These gaps are bringing about damaging domestic conflicts that are weakening America’s condition.” Ray Dalio

• “Inequality is everywhere. … [In the U.S.,] “3 million people in the wealthiest 1% are worth more than 290 million in the bottom 90%. It is the rise in inequality … that poses the most immediate threat to civil society.” Louis Menand

Where I stand.

I believe there is no other realistic intermediate-term solution to the existential issues facing society – no solution that will maintain and/or improve the quality of life of people living today – than the economic growth afforded by market capitalism, powered by a robust financial system and operating within the guardrails of reasonable governmental regulation.

As much as think tanks like Capital Institute or asset manager Jeremy Grantham advocate for regenerative economic models or question – appropriately and provokingly – whether compound linear growth is sustainable on a planet with finite resources, economic growth is the only path forward. And market capitalism has shown itself over the past century to be the best and most effective engine of growth. 

But growth needs to be an engine of opportunity. Opportunity is, after all, a core element of the American dream, enshrined in the iconic phrase in our Declaration of Independence, “life, liberty and the pursuit of happiness.”

That’s ultimately what will underpin capitalism’s legitimacy: To be an engine of opportunity.

Speaking to the House of Commons in 1947, Winston Churchill said about democracy: “No one pretends democracy is perfect or all-wise. Indeed, it has been said that democracy is the worst form of government except all those other forms that have been tried from time to time.” That sums up my point of view about market capitalism: It is not perfect and certainly not all-wise. But it is better than any other alternative mankind has devised. I look forward to an exchange of views with other participants in the Wake Forest Business Summit and will report back on those.

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