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If capitalism is broken, maybe it’s fixable

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FOR DECADES Joseph Stiglitz has argued that globalisation only works for a few, and government needs to reassert itself in terms of redistribution and regulation. Today the sources of his ire have grown more dire. Wealth inequality has become a hot-button political issue just as populists are on the march.

In Mr Sitglitz’s latest book, “People, Power, and Profits: Progressive Capitalism for an Age of Discontent,” he expands on his left-of-centre economic prescriptions. He believes that capitalism’s excesses can be tamed by the state providing a “public option” in areas like health care or mortgages when the market flounders.Get our daily newsletter

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As part of The Economist’s Open Future initiative, we conducted a short, written interview with Mr Stiglitz about his ideas. It is followed by an excerpt from his book, on what he calls “the transition to a postindustrial world.”

The Economist: You argue that right-wing populists aren’t wrong—capitalism is indeed rigged. How so?

Joseph Stiglitz: It’s rigged in the obvious sense: some—the rich and powerful and their children—have better opportunities than others, enabling the perpetuation of advantages. There is not the competitive, level playing-field described in textbooks: in sector after sector, there are a few dominant firms that create almost insurmountable barriers to entry. Too many become wealthy not by adding to the size of the nation’s economic pie, but by seizing from others a larger share, through exploitation, whether of market power, informational advantages or the vulnerabilities of others.

The Economist: How did we get into this mess? Is it all the Republicans’ fault, or can you place a pox on the Democrats’ house as well?

Mr Stiglitz: There has always been a battle: those with power and wealth want to maintain and augment it, even when it comes at the expense of others. They have resisted attempts to redress the imbalances, whether through antitrust laws, progressive taxation and expenditure policies, or labor legislation. But in a series of progressive reforms from the late 19th century through to President Johnson, progress was made in each of these arenas and America created the first middle-class society.

Then, with President Reagan, a new ideology came to prevail: leave everything to the market, the economy will grow, and everyone will be better off (what is called “trickle-down economics”). Instead, growth slowed and incomes for the vast majority stagnated. Some Democrats also bought into these ideologies, with accompanying policies of unfettered globalisation and financialisation.

Since Trump, however, the splits between the parties have grown ever larger, with the Republicans arguing for policies that would increase inequality and slow growth, as they increase the profits and power of corporations and further eviscerate that of workers and ordinary consumers.

Regulations to restrain banks and to protect the environment are being stripped away, taxes on ordinary Americans are being increased as those on corporations and the wealthy are being reduced, profits of pharmaceutical and health insurance companies are being increased as millions of more Americans are being left without health insurance. Life expectancy in America is, remarkably, in decline. And wages, adjusted for inflation, for people at the bottom of society remain where they were 60 years ago.

The Economist: You offer a wide range of solutions. Are there one or two that you see as a linchpin?

Mr Stiglitz: At the core is a new social contract, a new balance between the market, the state and civil society, based on what I call “progressive capitalism”. It channels the power of the market and creative entrepreneurship to enhance the well-being of society more generally. This will entail rewriting the rules of the economy, for instance, to curb market power of our 21st century tech and financial behemoths, to ensure that globalisation works for ordinary Americans, not just for corporations, and that the financial sector serves the economy rather than the other way around.

It entails increased government investment in technology, education and infrastructure—advances in science and technology and our ability to cooperate at scale. They are why our standards of living and life expectancies are so much higher today than they were 200 years ago.

With climate change providing an existential threat, both public programs and regulations have to be directed at creating a green economy. Essential in our ability to ensure that a middle-class life is accessible to most citizens will be a “public option,��� a government alternative, for instance, in the provision of mortgages, retirement security and medical care.

The Economist: Behind your reforms is a bigger role for the state. But if government is dysfunctional, endowing the state with more economic power is like giving a toddler a power-drill: who knows what damage will ensue? Aren’t you worried that your solutions fall flat if the system that caused the mess is incapable of managing the fixes?

Mr Stiglitz: All humans, and all human institutions, are fallible. That is true both in the private and public sectors: look at the devastation wrought by private banks in the 2008 crisis, a loss of GDP (from what the economy would otherwise have produced) cumulatively now estimated in Europe and America to be in excess of $10 trillion.

But government can and has worked well in many places, including in America. Both social security and Medicare have far lower administrative costs than private firms providing comparable services. Modern economics has made us sensitive to the underlying incentive problems in both the public and private sectors, providing tools to enhance efficiency and accountability. Oversight—including systems of checks and balances and an active free press—are essential, and this is again true, both in the private and the public sector.

The Economist: In an environment of post-fact politics, you marshal a lot of evidence to support your views—which counts for zilch if the political terrain disdains evidence. So how can your reforms stand a chance of being adopted, unless you go to battle armed with narrative, emotion, superficialities and a dash of embitterment?

Mr Stiglitz: I’m a Midwestern optimist—a position that is perhaps hard to maintain in the face of what has been occurring. I believe, however, that the vast majority of Americans can be moved by reason and evidence, but I also believe that “emotions” are also on the progressive side. There is something distinctly un-American about our un-level playing field, with 20% of American children growing up in poverty; or with so much power concentrated in the hands of so few firms—power that they repeatedly abuse.

Polls show that the vast majority of Americans support the policy positions which I advance in the book, and they want a restoration of true democracy. We have to curb the power of money in our politics and end the systematic attempts at disenfranchisement. Political engagement of the kind we saw in 2018—and the increasing awareness of young people of how much is at stake—hopefully is setting the stage for the return of the country to its progressive ideals.

Facilitating the Transition to a Postindustrial World
Excerpted from “People, Power, and Profits: Progressive Capitalism for an Age of Discontent” by Joseph Stiglitz (Allen Lane, 2019)

The US, like most countries in Europe, has been struggling to adapt to deindustrialization, globalization, and the other major shifts in its economy and society. This is another area where markets need the help of the government. Facilitating transition after the fact is extraordinarily costly and problematic. We should have done more to help those who were losing their jobs to globalization and advances in technology, but Republican ideology said no, let them fend for themselves. Government must anticipate the broad strokes of future structural shifts. Adapting our economy to climate change and to the changing demography are just two of many challenges of “transition” facing our economy and society in coming years. New technologies—including robotization and artificial intelligence— represent further challenges.

Recent and earlier episodes of such changes have generated one important lesson: the market on its own is not up to the task. There is a simple reason already explained: those most affected, for instance, those who are losing their jobs, are least able to fend for themselves. The changes often imply that their skills are less valuable. They may have to move to where the jobs are being created—and house prices in the growing parts of the country are often far higher. Even if, after training, their job prospects might be good, they don’t have the resources for retraining, and financial markets will typically only advance them the money at usurious interest rates. They lend at normal interest rates only to those who have good jobs, a good credit history, and good equity in their home—in other words, to those who don’t need the money.

Thus, there is an essential role for government to facilitate the transition, through what have been called active labor market policies. Such policies help retrain individuals for the new jobs and help them find new employment. Another tool for government is referred to as industrial policies, which help restructure the economy into the directions of the future and assist the creation and expansion of firms, especially small and medium-sized enterprises in these new sectors. Some countries, like those in Scandinavia, have demonstrated that well-designed active labor market and industrial policies can create jobs as fast as jobs get destroyed and can move people from the old jobs to the new. There have been failures, but that is because sufficient attention has not been paid to what makes for successful policies.

Place-based policies

As government pursues labor market and industrial policies, it needs to be sensitive to questions of location. Too often economists ignore the social and other capital that is built into a particular place. When jobs leave a place and move elsewhere, economists sometimes suggest that people should move too. But for many … with ties to families and friends, this is not so easy; and especially so since with the high costs of child care, many people depend on their parents so they can go to work. Research in recent years has highlighted the importance of social bonds, of community, in individuals’ well-being.

More generally, decisions about where to locate are not efficient. Too many people may want to crowd into the big urban centers, causing congestion and putting strains on local infrastructure. Among the reasons that factories moved to rural areas … was that wages were low, public education ensured that workers had enough skills nonetheless to be highly productive, and our infrastructure was sufficiently good that it was easy to get raw materials into the factories and the finished goods out. But some of the same forces that had led to low wages are now contributing to the problem of deindustrialization. Wages were low in part because of lack of mobility—with perfect mobility, wages (skill-adjusted) would be the same everywhere. But this lack of mobility is key to understanding why deindustrialization is so painful.

In short, we need policies focusing on particular places (cities or regions going through stress), in what are called place-based policies, to help restore and revitalize communities. Some countries have managed such policies extraordinarily well: Manchester, England, the textile capital of the world in the nineteenth century, has reinvented itself—with help from the UK government—as an educational and cultural center. It still may not be as relatively prosperous as it was in its heyday, but it is instructive to compare Manchester with Detroit, which the United States simply let go bankrupt.

Government played a central role in the transition from agriculture to a manufacturing economy; it now needs to play a similar role in the transition to the new economy of the twenty-first century.

Social Protection

One of the most important detractors from individual well-being is a sense of insecurity. Insecurity can also affect growth and productivity: individuals, worrying about whether they will be thrown out of their house or lose their job and only source of income, can’t focus on the tasks at work in the way they should. Those who feel more secure can undertake riskier activities, often with higher payoffs. In our complex society, we are constantly confronting risks. New technologies may take away jobs, even if they also provide new ones. Climate change itself presents untold new risks, as we have recently experienced with hurricanes and fires. Again, large risks like these and ones associated with unemployment, health, and retirement, are risks that markets do not handle well. In some cases, like unemployment and health insurance for the aged, markets simply do not provide insurance; in other cases, like retirement, they provide annuities only at high costs, and even then, without important provisions—such as adjustments for inflation. That is why almost all advanced countries provide social insurance to cover at least many of these risks.

Governments have become fairly proficient in providing this insurance—transaction costs for the US Social Security system are a fraction of those associated with comparable private insurance. We need to recognize, however, that there are large gaps in our system of social insurance, with many important risks still not being covered either by markets or by government.

[…]

Conclusions

Changes and reforms are necessary to achieve a more dynamic economy, growing faster, an economy that serves people, and not the other way around. Many of the policies are hardly novel—variants of these policies have worked successfully in other countries. It’s not the economics that are difficult. It’s the politics.

Even if we get the politics right and succeed in achieving the reforms described here, attaining a middle-class life may still be difficult: even families with reasonable jobs may not be able to have an adequate retirement or afford to send their children to college. Just as, traditionally, farmers helped each other raise a new barn, and just as families pull together in times of need, our society works best when everyone works together. The positive agenda of restoring growth for all is part of the broader ambition of making a middle-class life accessible to all.

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Saoirse McHugh: We need to talk about capitalism

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N HER FORTNIGHTLY column for TheJournal.ie, Saoirse McHugh of the Green Party writes about what we can do as individuals in the face of climate chaos.   

A most ludicrous situation is taking place in which we are disrupting weather systems we have relied on for centuries, poisoning drinking water, destroying habitats that provide food and fuel and pushing ourselves outside of the relatively stable climate we have enjoyed for the past few thousand years.

Despite all of this, most of our media and the great majority of our politicians refuse to talk about the reason why I believe this is happening. What is driving us to continue down such a grim and unpredictable path? The answer is capitalism.

Extracting profit from resources (often privately owned) and labour only to reinvest in further extraction has wreaked havoc on our world. The accumulation of profit as a shaping force in society leaves so much unaccounted for and undervalued.

In general, there is no cost given to implications such as resource use, pollution, and (much and all as I don’t like the term) ecosystem services such as air and water cleaning, pollination and nitrogen cycling.

When these are factored into cost it can have an alleviating impact, but of course the natural world does not trade in dollars and no amount of money can ever compensate for species extinction, coral reefs dying or the damage caused by oil spills like the BP Deepwater Horizon oil spill in 2010.

The need for growth and the relentless expansion into and enclosing of new commons, such as carbon use and genetic information, means that capitalism is entirely incompatible with a finite planet and a just world.

Despite all this it is rare to hear our economic system discussed openly in Ireland outside of a few groups or lone politicians. It has developed the impression of being outside of our control, almost like some God imposed this system upon us.

When the conversation comes up politically, our elected representatives shy away from it and speak in vague terms about prosperity and growth. They do not delve into the idea that not only do we have the power to begin changing our economic system, but we have a moral and environmental imperative to do so.

‘But look at North Korea and Cuba’ 

I am not fully sure why there is such hesitancy to speak about capitalism. Is it because decades of American television have well and truly damaged the ability to talk about it without somebody bringing up the Soviet Union and communism?

I myself have had so many conversations where capitalism comes up and is met with: “But look at North Korea and Cuba, look at how many people died in Soviet Russia.” No doubt atrocities occurred in countries which were under a different economic system.

However, that argument ignores and minimises the atrocities that have been carried out in capitalist countries. The suffering and destruction capitalism has caused and is continuing to cause in the world is immeasurable.

It is a system with its origins in colonialism and to this very day there is a massive extraction of wealth from previously colonised countries. The social, physical, and economic violence used to keep these relationships in place is beyond comprehension and much of it has become accepted as normal.

It is ridiculous to talk about environmentalism without talking about capitalism, yet many people do so. Not only is it a part of our lives but it is the system within which we all operate.

It is all that most of us have ever known and for that reason people tend to avoid the conversation, perhaps for fear of looking radical or outside of the world of common sense.

The promises of green growth or sustainable capitalism are tempting, yet I fear that every year spent chasing these will-o-the-wisps is a year lost while continuing to worsen our predicament.

There will be no climate justice until we move to a different economic system. We need to halt the extraction of wealth from previously colonized countries and, more than that, repay and compensate these countries as fully as possible.

Obviously, it is not just capitalism that damages the environment. There are discussions of petroleum-based socialism and of communism focused on growth, which are extremely damaging too but we have arrived at a time where capitalism is the dominant economic model.

There is no point in skirting around the issue, we need to transform our economies and recognise that any politician who is not engaging in the conversation about our economic model and ways to change it is wasting everyone’s time. 

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Letter: Socialism may not be the cure but capitalism is the illness

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Socialism may not be the cure but capitalism is the illness. All Hanson offers is more of the same prescriptions that brought us to climate change, inequality, huge government, corporate and private debts, erosion of our infrastructure, a health care crisis, international turmoil, etc.

How about some ownership and something new? If we redefine the goal as sustainability instead of growth, universal equity in services and opportunity, building community instead of dominance, and building a world for the seventh generation in the future, then we must acknowledge that capitalism as we have known it is broken.

Rather than try to pigeonhole the opposition with a derogatory label, let’s find a way to utilize human character to fulfill the promise of a better world for all living creatures both now and in the future.

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Let’s restore our values, do away with capitalism

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One of the worst things that colonialism, apartheid and capitalism did to our people was to destroy the black family structures, the writer says.

In this past decade, we witnessed a degeneration of politics across the spectrum, with social media, notwithstanding its use, becoming the worst platform for corrosive politics.

We also witnessed moral degeneration and character assassination as influenced by capitalism.

The moral degeneration in SA is very high and that directly reflects the politics of our country.

This open letter is an invitation for us, more especially ANC and Alliance partners, to think critically about who we are as a society and perhaps champion ways in which we can restore some of the values that we have lost.

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One of the worst things that colonialism, apartheid and capitalism did to our people was to destroy the black family structures. And one of our loopholes as the ANC from 1994 onwards was not to restore our values of ubuntu and revive the black family unit.

Twenty-five years into democracy, it is in our hands as ANC to dissociate ourselves with capitalism because capitalism is an evil that causes the corruption we are seeing now.

It is capitalist ideas that are behind killings of our comrades.

Capitalism is an inherently evil system that thrives on hate, jealousy and inhumanity.

Viwe Sidali, Duncan Village, East London

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