The American system of market-based capitalism is in trouble. And the reasons are not the ones commonly cited. The trouble is not that the financial system came close to collapse in the fall of 2008: We have experienced panics before, and the ability of the political and regulatory authorities to cope proves that the financial system is resilient and capable of being coaxed back from the brink of disaster.
Nor is it the long, deep recession that proved resistant to a variety of stimulative policies: We have experienced recessions before and recovered, as we seem to be doing from this most recent cyclical decline.
Nor is it the increasingly unequal distribution of incomes (a trend that might be on the verge of reversing). Again, we have survived periods of wild spending by the increasingly wealthy and simultaneous pressure on the living standard of others, with faith in our capitalist system intact, despite the fleeting popularity of alternative models, ranging from fascism to National Socialism to communism and, more recently, China’s despotic central direction of the economy mixed with market incentives.
Nor is it the fact that the political system underlying our economic system is underperforming: We have seen that several times in the past, one of those periods resulting in a civil war, another in runaway inflation, and market capitalism as the system best suited to Americans’ needs has endured.
All of the problems sketched above proved to be less of a threat to market capitalism than they were sometimes feared to be. The current threat might in the end prove similarly overstated. Let us hope so. For what we are living with now is an economic system that has come loose from its moorings. We have lost what Adam Smith called interest in the happiness of others, though we derive “nothing from it except the pleasure of seeing it.”
Yes, we remain a generous, philanthropic society, with the very rich funding efforts to combat many of the nation’s and the world’s problems. Yes, we have woven a safety net to prevent those who cannot trade their labor for a decent wage from going hungry and homeless—a net that many consider too porous, but a net nevertheless. Yes, we have developed a progressive system of taxation that in effect takes from the rich to give to the poor.
And yet, and yet. We cannot dismiss the charge that in some sense our economic system is stacked against the less powerful. An increasingly concentrated banking system evicts people from their homes based on faulty paperwork and after peddling securities that were touted as reducing risk by bundling very risky mortgages into one very risky package, which the rating agencies then rated highly pursuant to a remuneration system that rewarded the agencies only if they gave wondrous AAA ratings. Unions successfully lobby to make summer internships largely unavailable to college students, reducing their chances to gain experience that would enhance their career opportunities. Monetary policy aims at enriching owners of homes and stocks at the expense of small savers and pensioners, for whom zero or near-zero interest rates are a curse, whatever their effect on boosting economic activity. Fiscal policy conjures a tax system that places a lesser burden on the incomes of billionaire hedge fund operators than on their secretaries, as a distinctly unsocialist professional deal-maker repeatedly points out. Powerful lenders manipulate the legal system so as to deny troubled borrowers, unable to match the massive resources lenders have available, the relief to which they are entitled. Pharmaceutical companies fight to retain pricing systems that make their wonderful products, on which they are surely entitled to a generous return, less affordable to those who might benefit from them. Automobile manufacturers conceal easily fixable but lethal faults in their products on the assumption that individuals injured by these defects cannot cope with the well-staffed and funded legal departments of the manufacturers. Corporate boards approve compensation systems for executives that are often only remotely connected to performance. When a bank CEO messes up so badly that his institution fails some of the Federal Reserve’s stress tests, his board reduces his compensation—from $14.5 million to $13 million.