Sustainable Capitalism

Free-market capitalism is amazingly effective at releasing the energy, ingenuity, and industry of society.  It has repeatedly delivered more and better things to more people than any other economic system that has been tried.  However, it has a serious problem.  Over time, it simply is not sustainable.  Eventually too much of the wealth inevitably accumulates at the top. 

When that happens, the system quits working well because those who need to have disposable income to create demand for goods and services don’t have any.  The quality of life for most is greatly diminished because no one will hire them to produce goods and deliver services that aren’t needed, since most people can’t afford to buy them.  Even opportunities for those at the top are reduced because few have money to buy their products.  This keeps them from doing what they love most: making money. 

Anyone who has played Monopoly or Poker should understand this easily and completely.  Once one person has all of the money, the game is over, and if you play long enough one person will eventually have all of the money.  No other outcome is possible. 

Marriner Eccles, the Federal Reserve chairman during the Great Depression, expressed this very well in Beckoning Frontiers.  To paraphrase: 

As mass production has to be accompanied by mass consumption, mass consumption implies a distribution of wealth to provide buying power.  Instead of achieving that kind of distribution, by 1929-30 a giant suction pump had drawn an increasing portion of wealth into the hands of a few. The other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped. 

This same thing is happening today.  The disparity in wealth between the few who are very rich and everyone else is the greatest it has been since just before the Great Depression in 1928.  Unemployment is high, people are losing their homes, and the middle class is shrinking.

The implications of understanding this inherent lack of sustainability in capitalism are enormous.  Those who claim that the solution to our economic problems is to give the wealthy more money with which to create jobs by cutting their taxes and reducing regulations have it exactly backwards.  Clearly the problem is not that wealthy people and businesses don’t have enough money to create jobs.  They have lots of money.  The problem is that there isn’t enough demand for the goods and services that those jobs would produce to justify creating them.

In order to balance the “giant suction pump” drawing wealth into the hands of the few, capitalism needs a counter-balancing pump that draws some money from the top where it is sitting unproductively and pushes it back through the economy where it can create demand.  Otherwise, the system is not sustainable.  This is referred to as a sustainability pump.

It should be clear that this sustainability pump must not operate on borrowed money and must not result in government handouts to freeloaders.  The government already borrows too much money, and just dispensing money to those who haven’t earned it creates a dependent class of people with low self-esteem, results in enormous resentment from those who have worked hard to earn the money, and ultimately doesn’t help anyone.  People need the opportunity to prosper by having good job opportunities and the resources to take care of their well being. 

It is, however, necessary for the sustainability pump to have a way to draw unproductive money from the top in order to be able to push it back through the system.  It must do this through increased taxes on the wealthy, reduced government waste, and targeted spending cuts.  Closing loop holes so that all corporations will pay their fare share of taxes can also help. 

Many claim that increasing taxes will choke off the very modest recovery that we now have.  They would have you believe that cutting spending is the only viable way to reduce our debt.  However, it is worth noting that one of the biggest factors leading to our current debt is that we have cut taxes to a level not seen since the 1950's.  There have been many very prosperous periods since then with much higher taxes than we have today.

Just as the sustainability pump must siphon money from the top, it must also push that money back through the system in ways that will help the economy be productive.  There are many good ways to do this such as spending on infrastructure, education, research, conservation, clean energy, small business incubators, support for developing industries, health care, housing, public works, public safety, and reduction in those things causing climate change.

There are those who will try to dismiss this idea by labeling it as redistribution of wealth or social engineering, but the enormously skewed distribution of buying power is the heart of the problem.  One percent of the people have more money than they can possibly spend on goods and services.  The other 99% don’t have the buying power that a robust economy requires.  As Marriner Eccles noted, mass consumption requires a distribution of wealth.  He might have added that the broad demand on which capitalism thrives is based upon that mass consumption.   This does not have to be wasteful consumption or environmentally destructive consumption.  As has increasingly been the case in our service economy, much of the demand can consist of services rather than disposable goods, and those goods that are produced can be created in a sustainable and responsible manner.  Nevertheless, adequate demand for goods and services must exist for our economy to work well.

Some will argue that growing the entire economy will help everyone do better, and that should be our focus.  Of course we need to help the economy grow, but that simply won’t happen as long as 99% of the people can’t create their share of the demand our economy needs.  The 1% have been very prosperous during the first part of the 21^st century.  Focusing on the other 99% for a while will make the entire economy work better.

Still others will argue that the government doesn't create jobs; businesses do.  It is interesting to note that many of the people making this argument have government jobs and that government is in fact a huge employer.  However, what is being suggested here is not that we solve our unemployment by having everyone without a job work for the government.  Most of the jobs that would be created by the techniques recommended would be in the private sector.  However, they would be doing projects initiated by the government.  This would not only create jobs, but even more importantly, it would have a huge catalytic effect.  Putting some people to work gives them money to buy goods and services that other people create which puts still more people to work creating a huge leveraging effect.  Thus, the overall impact of providing such a stimulus can be very big.

This needs to be the best country in the world to do business and create jobs because it has a fair tax structure, people with enough money to buy products and services, the best support infrastructure, the best-trained and healthiest work force, the best research, and a safe environment.  This is how we get those exported jobs to come back home.  And the beauty of it all is that we can make capitalism sustainable in the process of creating it.