Tuesday, January 21, 2014

Capitalism II

It is interesting to speculate on when the current system of capitalism will come to an end. There are both practical and theoretical reasons to believe that this will occur.  On the practical side, capitalism tends to favor lax regulation, lower taxation, greater risk-taking and the concentration of wealth.  Lax regulation encourages increased pollution, unstable financial markets and corrupt business practices.  Lower taxation encourages infrastructure deterioration, which eventually leads to a less competitive economy. Greater risk-taking encourages more business failures and the corresponding waste of resources.  Finally, the accumulated wealth in capitalistic systems is not distributed equally, and wealth inequality often leads to social instability, civil unrest and wars.

On the theoretical side, capitalism is based on a model that has not proven to be accurate. Most economists today believe we have a sustainable system that operates in much the same manner as originally described by Adam Smith: the invisible hand. According to the mythology, businesses provide goods and services in a competitive marketplace, and those that are inefficient eventually go out of business, in a process that leads to greater efficiency, better products and lower costs. Society benefits and becomes wealthier, presumably ad infinitum. A central flaw to this theory is that markets are always inefficient, except possibly over very long time periods that do not fall within the purview of any studies. Inefficiency manifests itself in many ways, but it is most noticeable in financial bubbles like the one we have seen recently. Bubbles occur when people in aggregate pay more for something than its intrinsic worth. In 2008 it became apparent that real estate was overpriced, and world financial markets nearly collapsed. Furthermore, economists do not create models which take into account all of the costs associated with successful businesses. One of those costs that we are barely starting to deal with now is global warming. Economists also fail to account for the social unrest that is likely to accompany extreme wealth inequality. Their field is too narrow in scope to assess which types of government models are best suited to operate in a capitalistic framework. Under the current arrangement in the U.S., there is an ostensible democracy, but corporate intrusions have gradually reduced government control by the people, and it is unclear whether the government will act in the best interests of the citizens. In any case, pure equality is incompatible with pure capitalism, which is inherently based on a system of winners and losers.

Looking at the problems of capitalism positively, there is always the chance that it will gradually defuse itself by evolving into a combination with some form of social democracy that limits its destructive effects.  Some of the governments in Western Europe are like that now.  But it is probably more likely that a clash between capitalism and socialism will persist for some time.  In the intermediate term, much rests on how China evolves politically and economically.  If China adopts a full-fledged capitalistic model, wealth inequality will become more pervasive worldwide and will increase the conflicts between the rich and the poor, both within nations and between nations.

It is difficult to imagine the U.S. warming up to socialism, but if conditions arise that are similar to those that occurred in the 1930's, socialism could become popular again.  I would like to see a socialistic, non-capitalistic world government in the future, but it appears far off at the moment.

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