2017 and THE PARADOX

By constantly destroying the status quo, capitalism provides a powerful force for making societies wealthier. It does so by making scarce resources more productive. But some are always harmed in this process.

Companies that fail, industries that vanish, and jobs that disappear are inherent parts of our growth system. The economy in the U.S. has been experiencing these negative aspects of the evolutionary nature of capitalism since 2007. The saving grace comes from recognizing the good that comes from the turmoil, which is difficult if you have lost your job and house. Over time, societies that allow capitalism to operate grow more productive and richer; their citizens see the benefits of new and better products, shorter work weeks, better jobs, and higher living standards.

Herein lies the paradox of progress. A society cannot reap the rewards of the evolutionary nature of capitalism without accepting that some individuals might be worse off, not just in the short term, but forever. At the same time, attempts to soften the harsher aspects of free markets by trying to preserve jobs or protect industries will lead to stagnation and decline, short-circuiting the march of progress. Capitalism’s mantra of no pain, no gain is not easily absorbed when a family needs to be fed. The process of creating new industries does not go forward without sweeping away the old way of doing things. This where we are in 2017.

Entrepreneurs introduce new products and technologies with an eye toward making themselves better off—the profit motive. New goods and services, new firms, and new industries compete with existing ones in the marketplace, taking customers by offering lower prices, better performance, new features, catchier styling, faster service, more convenient locations, higher status, more aggressive marketing, or more attractive packaging. In another seemingly contradictory aspect of free markets, the pursuit of self-interest ignites the progress that makes others better off.

Producers survive by streamlining production with newer and better tools that make workers more productive or eliminate jobs. Companies that no longer deliver what consumers want at competitive prices lose customers, and eventually wither and die. The market’s “invisible hand”—a phrase made famous by Adam Smith in the Wealth of Nations–shifts resources from declining sectors to more valuable uses as workers, inputs, and financial capital seek their highest returns.

Through this constant threat to the status quo, capitalism provides a powerful force for making societies wealthier.  Are we willing to allow this to happen?

There is nothing necessarily bad about this. Big firms can be more innovative than startups if given the right incentives. But today’s (2017) incentives favor a static balance. Many big firms thrive because of government and regulation. The cost per employee of red tape—endless form-filling and dealing with health-and-safety rules—is significantly higher for companies that have a few dozen staff than for those with hundreds or thousands. In theory, a capitalist economy depends upon owner-entrepreneurs to lend the dynamism to fuel growth. Today capitalism exists without capitalists—companies are “owned” by millions of shareholders who act through institutions that employ professional managers whose chief aim is to search for safe returns, not risky opportunities.

What has grown from this toxic brew is a wave of populism that is rapidly destroying the foundations of international and domestic order, thereby producing a far more unstable world. One of its many dangers is that it is self-reinforcing. It contains just enough truth to be plausible. It may be nonsense that “the people” are infallible repositories of common sense, but there is no doubt that liberal elites have been smug and self-serving. And populism feeds on its own failures. The more that business copes with uncertainty by delaying investment or moving money abroad, the more politicians (i.e. Donald Trump) will bully or bribe them into doing “the right thing”. As economic stagnation breeds populism, so excessive regard for the popular will of the people reinforces stagnation. Sounds familiar.

High-tech companies are overhauling a larger slice of the economy, including shopping and transport, which should be good for growth (though it also means power is being concentrated in the hands of a few big firms). Is Amazon a mere flash in the advancing darkness or is it developing the new normal? The only new businesses they seem to spawn are small retailers who want to use AMZN’s distribution system which leads to even lower job growth. The US Post Office may ultimately be saved by FEDex and UPS as the latter use the former more in the delivery of small packages.

The rate of productivity growth across the rich world has been disappointing since the early 1970s, with only a brief respite in 1996-2004 in the case of the United States. Here our population is ageing fast and growing slowly. Meanwhile, the fruits of what growth there is, gets captured by a miniscule section of society. And those who succeed based on merit are marrying other winners and hoarding the best educational opportunities.

At the same time democracy is becoming more dysfunctional. Our form in the USA has overspent to give citizens what they want in the short run (whether tax cuts or enhanced entitlements) and has neglected long-term investments. On top of that, lobbyists and other vested interests have by now made a science of gaming the system to produce private benefits.

The first act of our new Congress was to render by rule the ETHICS watchdog useless by having it report to those it was watching.   Thank heavens for twitter.  Donald Trump tweeted that this was a bad idea.  (Our new President may prove very good for the Twitter stock price).  Government can spend to improve infrastructure which is badly needed and this will help the economy.  But then it needs to back away.  It will be hard for those of us who want a better environment, want equality in the work force, are appalled by racism and want better health care.  Regulations are killing economic growth.  Concern for little known creatures must be put aside for pipelines needed to fuel growth. Water and air quality standards should remain because that involves health.  Populism won’t lead us to a better America, but compromise and free markets will.