“American capitalism has evolved time and again, and we may be poised for another such shift,” said a recent McKinsey article, Rethinking the future of American capitalism, by James Manyika, Gary Pinkus, and Monique Tuin. “Capitalism has contributed to significant gains in economic growth and prosperity throughout its history. But at a time of growing public discontent about rising inequality, heightened competition from economies with different models, and existential threats including from climate change, capitalism in its current form - and American capitalism in particular - may face its most serious test.”
Adam Smith, the 18th century Scottish philosopher and economist, is generally considered the father of free-market, free-trade capitalism. Smith is most famous for The Wealth of Nations, published in 1776 and generally regarded as the first work of modern economics. He’s also well known for his famous metaphor of the invisible hand - “the free market, while appearing chaotic and unrestrained, is actually guided to produce the right results by this so-called invisible hand.”
Smith believed in a balanced approach to capitalism. On one side is the fierce competition and self-interest inherent in open, free markets. On the other, - as he wrote in The Theory of Moral Sentiments, - is the sympathy and community support that’s required to achieve beneficial results in well functioning, stable societies.
Over the years, American capitalism has evolved in keeping with changing economic conditions. Keynesian economics, named for British economist John Maynard Keynes, was the prevailing economic model from the 1930s to the 1970s. It was a pragmatic, mixed model of capitalism, based on a predominantly private sector economy but with an appropriate role for government. In the post-WW2 years, in particular, the interests of business and society were closely aligned, resulting in both high profits and decent livelihoods, - making it possible for large portions of the US population to achieve a middle class life-style and aspire to what we think of as The American Way of Life.
The 1970s saw a shift toward neoliberalism, a model of capitalism which advocated a nearly universal trust in the inherent wisdom of markets, and a highly circumscribed role for government policies and regulations. This shift was influenced by the views of the Chicago School of Economics, especially those of Milton Friedman - its most prominent member. In 1970, Friedman published an essay in the NY Times, The Social Responsibility of Business is to Increase its Profits, where he argued that business concerns beyond making profit, - such as “promoting desirable social ends,” or “providing employment, eliminating discrimination, avoiding pollution and whatever else,” - amounted to “preaching pure and unadulterated socialism.”
The Chicago School was highly influential in US economic policy over the next several decades, especially with former president Ronald Reagan and Federal Reserve Chairman Alan Greenspan. Many business leaders also embraced these views.
“Today, we may be poised for another such shift,” said the McKinsey article. “American capitalism faces the question of the nature and degree of change necessary to ensure growth and prosperity for all in the 21st century… Will the future of capitalism involve tweaks, reforms, or wholesale change?,” the article asked. To help answer this important question, it briefly recapped the strengths of American capitalism, as well as the challenges it faces.
“America’s brand of capitalism - the version that has been in place for the past half-century or so - has delivered unmatched economic growth and prosperity. GDP per capita has more than doubled over the past 50 years, while personal consumption expenditure per capita has almost tripled, and there have been significant improvements in longevity and leisure.” Our capitalist model is largely centered on the private sector. Over the past 20 years, for example, business has accounted for 83% of technology investments, 76% of R&D and 81% of labor productivity growth.
However, the American model faces growing challenges, especially deteriorating outcomes and prospects for many individuals. The social contract, that is, the implicit agreements and expectations that govern the relationship between individuals and institutions, has changed considerably over the past few decades, with individuals having to assume significant greater responsibilities for their economic outcomes.
While opportunities for work and employment rates have risen, outcomes vary considerably across socioeconomic groups and geographies. Those with a college education, have particularly benefited from this evolution. However, the bottom 60% of the income distribution are facing major economic challenges, leading to an uncertain future and a general loss of trust in institutions. In addition, we’ve seen the rise of geographic inequality, as talent, wealth and economic activity has concentrated in a relatively small number of superstar cities, while many towns and rural regions have been left behind.
“Economic mobility has slowed, and the middle class that has been much celebrated as critical to the American economy has been especially squeezed,… For workers, average wages in the United States grew by only 0.9 percent annually from 2000 to 2019. Labor market polarization toward high- and low-wage employment eliminated one million middle-wage American jobs. Median wages for middle-wage jobs grew by just 1.1 percent over that time, while median wages for high-skill and low-skill workers grew faster, at 7.3 percent and 5.3 percent, respectively.”
Further adding to the fraying of the social contract is the declining investment in public goods relative to what’s needed to have equality of opportunity and to help everyone to fully participate in the economy. “Federal spending on education, infrastructure, and scientific research fell from approximately 2.5 percent of GDP in 1980 to less than 1.5 percent of GDP today. At a time when technology and other forces drive a greater need for workforce retraining, the share of workers receiving employer-sponsored training fell, while public funding for worker training and other labor market interventions has also declined.”
“The magnitude of the economic shock brought about by the COVID-19 pandemic creates an opportunity to reconsider how well the current model works and the extent to which it is fit for the challenges and opportunities of the present and future… Whether and to what extent America’s model of capitalism will need to adjust to growing challenges and new economic and technological possibilities remains to be determined.” The article lists eight key questions whose answers may help guide what’s next for American capitalism:
- How can we broaden the strengths of US capitalism so it can become more inclusive and fully benefit the growth and prosperity of all Americans?
- What mix of market-based and non-market-based interventions can best provide opportunities and improved outcomes to all its participants while preserving the innovation and competition that’s needed to drive growth and prosperity?
- Given the continuing importance of technology and globalization, how can capitalism evolve to ensure that the majority of workers can prosper through access to quality jobs, income and dignity?
- What safety nets and transition support are required to help those more at risk of being left behind as the economy continues to advance?
- How should the concentration of economic returns by superstar firms, sectors, and cities be addressed, so we can continue to benefit from their breakthrough innovations while mitigating their negative impact on competition and inequality?
- How can market-based interventions and incentives be applied to help address the challenge of climate change with the required speed and scale?
- What should be done to ensure that American capitalism remains competitive and resilient in the global economy, and what can be learned from other systems of capitalism?
- How can we ensure that American capitalism makes sufficient investment in public goods, including education, health care, public infrastructure and fundamental R&D?
“[T]he American model of capitalism works is not set in stone and can evolve, as it always has, to meet the new opportunities and challenges,” notes the article in conclusion. “Business leaders, policy makers, social institutions, and individuals will all play a role in shaping the American model of capitalism in the 21st century.”
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