Think:Act Magazine "Journey to the future"
The trouble with capitalism
Unrestrained capitalism could be catastrophic for business as we head into the next few decades
by Farah Nayeri
Illustrations by Alberto Miranda
The sobering statistics below point to one unmistakable fact: A tiny group of individuals has been swallowing an increasing share of the planet's wealth at the expense of everyone else. Income inequality is one of the consequences of capitalism, an economic system that, in large parts of the world, is the only game in town.
Capitalism is predicated on maximizing profits and delivering value to shareholders. And in the last few decades, corporations and investors in the West have done just that. They have put those aims ahead of all else – including the well-being of their workforce. Governments have largely stood back and kept taxation and regulation at minimal levels to allow business and finance to go about their activity. The prevailing attitude has been that markets are to be left alone, because they know best.
Yet in the decade and a half since the 2008 global financial crisis, capitalism has started to be called into question, even by those who profit from it the most. The billionaire Warren Buffett has repeatedly asked that he and other very high net worth individuals be taxed more, noting that his secretary is taxed at a higher rate than he is. Fellow billionaire Bill Gates has acknowledged that companies "need to take a long-run view of their interests and not just focus on short-term profits," and that when it comes to capitalism, "we should do more to curb its excesses and minimize its negative aspects."
Beyond the billionaires themselves, the voices clamoring for a different and more humane economic system are growing in number and intensity. The consensus seems to be that after decades of American-style, free-market, laissez-faire capitalism – during which shareholders reigned supreme, markets ruled the roost, and workers were regularly laid off to shore up the bottom line – the time has come to inject doses of what one might loosely define as socialist practices into Western economies. In other words, the time has come to tax the wealthy, regulate corporations, compensate wage earners more fairly and spread the gains more evenly.
Criticism of capitalism is particularly acute in Europe where French economist Thomas Piketty, in his global bestseller Capital in the Twenty-First Century, has denounced income inequality as a primary cause of social injustice. Another skeptic of the system is Mariana Mazzucato, a professor of economics at University College London. She points to alternative models of capitalism as practiced in Germany, Scandinavia and Japan, where companies are under no obligation to maximize short-term profits, where they pay their executives less and where they are accountable to a wider set of stakeholders, including employees. Yet some of the loudest critics of American-style capitalism are to be found in America itself.
One such longstanding antagonist is Professor Richard D. Wolff, who taught economics at the University of Massachusetts at Amherst until 2008 and is now a visiting professor at The New School university in New York. His views are suddenly in tune with the zeitgeist. "I have done more public speaking, and had more invitations from the most legitimate sources you can imagine, in the last six years than in the previous 50," he says. Born in Youngstown, Ohio, Wolff says he was the son of a steel worker whose factory was once the city's nerve center: It produced the steel that was then used by car manufacturers in Detroit to make the automobiles that were a shining symbol of postwar American prosperity.
The professor recalls that for a long time, the ethos in America was as follows: "If you work hard, and keep your nose to the grindstone," you will get a good job and earn enough money to "get this bundle of things which should make you happy." Yet in the last 40 years, that promised bundle had been "increasingly shrinking and withheld from the average American person," he says. And this was happening not in an economically disadvantaged nation, but in the United States, the world's richest country. That's because a few decades ago, American corporations were given incentives to "make a lot more profit by going to China or India or Brazil." They also automated their production capacities using computer robots and artificial intelligence – drastically reducing the need to hire living, breathing American workers. The result was "a 1-2-3 punch to the working class," says Wolff.
The pandemic added insult to injury. Between the first month of 2020 and the middle of 2021, roughly 18 months, more than 80 million people in the US lost their jobs, meaning half the workforce. Some were only unemployed for a few weeks, but others were jobless for the duration of the pandemic. It was a "terrible crash" that was second only to the Great Depression. Add to that the mismanagement of the pandemic, inflation and high interest rates, and you get a situation that is likely to lead to "spectacularly disruptive, explosive social effects."
According to Wolff, the "[the US has] peaked: The American Empire is now in decline." The solution? Introduce far more democracy into the community of shareholders. Under the current system, 10% of shareholders hold 80% of the shares. The rule is one vote per share. Switching to one vote per shareholder would be so much fairer, Wolff argues. "I want to convert the businesses of this country, factories, offices, into one-person, one-vote democratic communities," he says. "I believe you will get decisions that are radically different about our economic life if you do that."
How did American corporations come to place the interests of shareholders above all else? The foundations of that philosophy were laid down in the 1970s, when a team of economists, including Milton Friedman, envisioned a bigger role for corporations in society. They identified profit maximization as an objective that should be achieved at all cost, in a free market, with minimal government intervention. The man who turned that philosophy into a mantra, not just for himself and his company but for all of corporate America, was Jack Welch, chairman and chief executive of General Electric for 30 years – the man who, on departure, collected a severance payment of more than $400 million.
In his book on Welch, The Man Who Broke Capitalism, David Gelles describes the late executive as "hungry for power and thirsty for money" and "an ideological revolutionary who focused on maximizing profits at the expense of all else." Under "Neutron Jack," he writes, GE went from "an admired industrial behemoth known for quality engineering and laudable business practices'' to "a sprawling multinational conglomerate that paid little regard to its employees and was addicted to short-term profits." Because Welch got rid of more than 100,000 employees while at the helm and went on to be named "Manager of the Century" by Fortune, he became a model that other US corporations and chief executives followed: by dedicating themselves to the cause of short-term profit.
Today, it's getting "harder and harder to ignore how destructive this way of doing business is, especially for the workers," Gelles says. "I am not calling for an end to profit," but to "how those profits are distributed." He recalls how different things were at General Electric in 1953, when the company had one of its best years ever. In the annual report, management "talked proudly about how well the company did," and described as a positive development the fact that "the payroll was maybe the largest ever." The message to investors was that it was a "great thing" to be able to pay workers and suppliers well, because it contributed to the company's prosperity and delivered to investors "a reasonable return."
Gelles says he is not advocating a cancellation of capitalism, nor does he believe companies should say: "We don't care about profits anymore." Rather, companies needed to focus on delivering sustainable, long-term returns: to explain to their shareholders that it is in their interest for the company to take care of its employees, that it would reduce turnover costs and training costs, and that regulating executive compensation is also a "good thing."
To Branko Milanovic – a senior economist at the Stone Center on Socio-Economic Inequality at the City University of New York – it is "factually incorrect" to describe the present as a "crisis of capitalism," because there are no efforts inside the world's big corporations, or within Western governments, to overhaul the system and make any noticeable reductions to income inequality. "It's been at least 10 years that inequality has become the main focus of conversation," he says. "But no policies were put in place." Admittedly, during the Covid-19 pandemic, inequality diminished as governments made "huge transfers" to citizens, "but that was a one-off situation of total emergency."
There are two reasons why income inequality persists, he explains. First, it reduces social mobility, even for the middle classes. Rich families transmit their advantages to their next of kin through top-quality schooling and connections, which then lead to very high salaries and the inheritance of large amounts of money. That makes it harder for people who weren't born into similar privilege. Secondly, the contemporary political space and political discourse are dominated by what he calls a "plutocracy" – meaning "people who have money."
Money was everywhere, he says: in politics, in the media, in academia. It allowed the super wealthy to "control the political process and also the narrative." As an example, he mentions the ownership of The Washington Post, the US's second-most influential newspaper, by Jeff Bezos, founder of Amazon and one of the richest men in the world. "This is mind-boggling when you think of it, and yet it's not even mentioned," he says.
The approximate average annual income (purchasing power parity) of the global bottom 50%. The average for the global top 1% is approximately $335,000 – or 112 times higher.
Source: The World Inequality Report 2022
The total household wealth held by the top 1% of North America, based on the sum of financial and nonfinancial assets. The disparity is lowest in Europe (25%) and highest in Latin America and Russia/Central Asia (46%).
Source: The World Inequality Report 2022
Rich people's pronounced influence on politics, in turn, made governments unwilling and unable to perform tasks that they ought to be performing: taxing the big corporations, the CEO compensation packages and the polluting companies; subsidizing and incentivizing the move toward green technologies, and so on. "That's why we are in a vicious circle," he explains.
What if capitalism were to power ahead in its current form, ignoring the yawning income gaps and brutal inequalities? The capitalists would be "committing a kind of economic suicide," replies Wolff. "They cannot continue to do what got them to this point, because it will be counterproductive," he says. It would be the equivalent of "killing the goose that is laying the golden eggs."