Opinion

Lawrence Summers

Why isn’t capitalism working?

By Lawrence Summers
January 9, 2012

Americans have traditionally been the most enthusiastic champions of capitalism.  Yet a recent American public opinion survey found that just 50 per cent of people had a positive opinion of capitalism while 40 per cent did not.  The disillusionment was particularly marked among young people 18-29, African Americans and Hispanics, those with incomes under $30,000 and self-described Democrats.

Three elections in a row in the U.S. have been bloodbaths by recent standards for incumbents, with the left side doing well in 2006 and 2008 and the right winning comprehensively in 2010.  With the rise of the Tea Party on the right, and the Occupy movement on the left, this suggests far more is up for grabs than usual in this election year.

So how justified is disillusionment with market capitalism?  This depends on the answer to two critical questions. Do today’s problems inhere in today’s form of market capitalism or are they subject to more direct solution? Are there imaginable better alternatives?

The spread of stagnation and abnormal unemployment from Japan to the rest of the industrialized world does raise doubts about capitalism’s efficacy as a promoter of employment and rising living standards for a broad middle class.  This problem is genuine. Few would confidently bet that the U.S. or Europe will see a return to full employment as previously defined within the next 5 years. The economies of both are likely to be constrained by demand for a long time.

But does this reflect an inherent flaw in capitalism or, as Keynes suggested, a “magneto” problem (like the failure of a car alternator) that can be addressed with proper fiscal and monetary policies, and which will not benefit from large scale structural measures? I believe the evidence overwhelmingly supports the latter. Efforts to reform capitalism are more likely to divert from the steps needed to promote demand than to contribute to putting people back to work. I suspect that if and when macroeconomic policies are appropriately adjusted, much of the contemporary concern will fade away.

That said, sharp increases in unemployment beyond the business cycle—one in six American men between 25 and 54 are likely to be out of work even after the U.S. economy recovers—along with dramatic rises in the share of income going to the top 1 and even the top .01 per cent of the population and  declining social mobility do raise serious questions about the fairness of capitalism. The problem is real and profound and seems very unlikely to correct itself untended. Unlike cyclical concerns there is no obvious solution at hand. Indeed the observation that even Chinese manufacturing employment appears well below the level of 15 years ago suggests that the problem’s roots lie deep with the evolution of technology.

The agricultural economy gave way to the industrial economy because progress enabled demands for food to be met by only a small fraction of the population, freeing large numbers of people to work outside agriculture. The same process is underway today with respect to manufacturing and a substantial range of services reducing employment prospects for most citizens.  At the same time, just as in the early days of the industrial era, the combination of substantial dislocations and greater ability to produce at scale is enabling a lucky few to acquire great fortunes.

The nature of the transformation is highlighted by the 50-fold change in the relative price of a television set of a constant quality and a day in a hospital over the last generation.  While it is often observed that wages for median workers have stagnated, this obscures an important aspect of what is occurring. Measured via items  such as appliances or clothing or telephone service where productivity growth has been rapid, wages have actually risen rapidly over the last generation.  The problem is that they have stagnated or fallen measured relative to the price of housing, health care, food and energy or education. As fewer and fewer people are needed to meet the population’s demand for goods like appliances and clothing, it is natural that more and more people work in producing goods like health care and education where outcomes are manifestly unsatisfactory.  Indeed as the economist Michael Spence has documented, a process of this kind is underway; essentially all employment growth in the U.S. over the last generation has come in non-traded goods.

The difficulty is that in many of these areas the traditional case for market capitalism is weaker. It is surely not an accident that in almost every society the production of health care and education is much more involved with the public sector than the production of manufactured goods.  There is an imperative to move workers from activities like producing steel to activities like taking care of the aged.  At the same time there is the imperative of shrinking or least slowing the growth of the public sector.

This brings us to the charge that the governments of industrial market capitalist societies are bankrupt. Even as market outcomes seem increasingly unsatisfactory, budget  pressures have constrained the ability of the public sector to respond.  How and when–and not whether–basic programs of social protection will be cut back, is now back on the table.  The basic solvency of too many capitalist states seems in question.

Again the problems are very real.  While I believe more than most that the U.S. government will be able to borrow on very attractive terms for a long time, if as I fear private borrowing remains depressed, there is no denying that the current path of planned spending and planned revenue collection are inconsistent.  And Europe is teaching us that markets can take significant fiscal problems and make them catastrophic  by becoming too alarmed too rapidly.

At one level the answer here is simply to insist on more political will and courage.  But at a deeper level, citizens of the industrial world who believe that they live in progressive societies are right to wonder why increasingly affluent societies need to roll back levels of social protection. Paradoxically, the answer lies in the very success of capitalism which has made the opportunity-cost of an individual teaching or nursing or administering that much more expensive.

When outcomes are unsatisfactory, as they surely are at present, there is always a debate between those who believe that the current course needs to be pursued with increased vigor and those who argue for a radical change in direction. That debate  is somewhat beside the point in the case of market capitalism. Where it has been applied it has been an enormous success.  The challenge for the next generation is that while that success will increasingly be taken for granted and indeed will become an increasing source of frustration in these pinched times, its success cannot be matched outside the market’s natural domain.  It is not so much the most capitalist parts of the contemporary economy but the least—those concerned with health, education and social protection–that are in most need of reinvention.

Comments
101 comments so far | RSS Comments RSS

Quite easy Larry . . systemic corruption – if the young and disadvantaged don’t buy into the hope that they can work for a better life and actually achieve it because the playing field is somewhat level, capitalism works. Unfortunately the recent “edition” of capitalism – that you helped construct by the way – does not offer this hope. When the institutions that we know are taking a piece of us every day actually get bailed out at our expense? when politicians can legally front run their own legislation? I could go on – surprised someone as “brilliant” as you prefers to plead ignorance via articles such as this. Cowardly really.

Posted by Hinch | Report as abusive
 

It is laughable that Larry Summers is lecturing on capitalism – for he is one of the main villains in the current financial mess. Along with the past several presidents (present one included)and members of congress, having the crooks at GS, et al running the government, for the benefit of a few (Summers included)and then feigning wonder in why real Americans despise the government, financial institutions and capitalism, is just a continuation of the award winning show that these people have been acting out for the past thirty years. The audience is no longer buying tickets to the show. Everyone now wants to see a new play, with different actors – starting with Summers.

Posted by mutt3003 | Report as abusive
 

The problem with capitalism is that it has transitioned from being our servant to being our master. Workers have become slaves to the dog-eat-dog economy it has spawned in which far too many workers are competing for too little work.

This has happened because economists have failed to recognize the inverse relationship between population density and per capita consumption. Per capita consumption data from around the world and for a wide range of products proves that per capita consumption declines as societies grow more crowded beyond some critical population density. Since per capita consumption and per capita employment are inextricably linked, the result is worsening unemployment and poverty.

And it is disparities in per capita consumption that drive global trade imbalances. When two nations grossly disparate in population density attempt to trade freely with each other, the work of manufacturing is spread evenly across the combined labor force. But the disparity in consumption remains. The result is an automatic shift of manufacturing jobs to the more densely populated nation, and an automatic trade deficit and rising unemployment for the other. Population density is an extremely consistent predictor of the balance of trade.

In spite of this, and because of economists’ steadfast refusal to ever again give credence to the notion that there may be a problem with never-ending population growth, we continue with our attempts to use population growth to stoke economic growth, making matters worse. Nothing will improve until the field of economics pulls its collective head from the sand and looks beyond the narrow confines of Malthus’ theory to consider what other consequences of population growth there may be.

Pete Murphy
Author, “Five Short Blasts”

Posted by Pete_Murphy | Report as abusive
 

Those of us who have knowledge of your career and it’s many ” questionable ” decisions have one question for you ” how do you sleep at night ” ?

Posted by jvg1964 | Report as abusive
 

Remember how you treated Brooksley Born Larry? Or your head in the sand approach to the excesses of wall street in 2005-2006? And the money that led to it?

Only the fringe hates capitalism, every man and woman has a right to their own business, and 95% of Americans understand that.

Its the crony capitalism that permeates our leadership that stinks, and the bailouts to huge entities on the backs of the working poor. One day someone will write the history of financial crisis, and you Bernanke, Geithner Rubin and Greenspan will certainly be the villains.

Posted by billt568 | Report as abusive
 

The problem in the USA is simple. What we’ve got now isn’t the post war capitalism we all grew up with. It’s a predatory monster where the government regulations that should protect the integrity of the system have been watered down and ignored. The Tea Partiests have it exactly backwards. Government is not the problem, it’s the application of radical, out of control, no rules business practices that has left us in the current morass. The truth is there for all to see. And make no mistake, when such a large fraction of our young people lose faith in their ability to succeed and thrive in such an environment the nation is in for real trouble down the road.

Posted by IntoTheTardis | Report as abusive
 

Capitalism works. Capitalism where rule of law is ignored, and winners are cheating – not so much.

Posted by gordo365 | Report as abusive
 

Most comments here are right on. “Capitalism isn’t working” because this isn’t capitalism.

Capitalism runs itself. It means the market decides who wins with superior products and services. In the current system, the government provides the public’s money to support industries that have no business being in business (solar, ethanol, etc), or companies that made such poor decisions that they don’t deserve to be in business (GM, large financial companies, etc).

Rewarding bad decisions with a cashier’s check is not capitalism. Giving bail-out money to a successful company’s competitor is not capitalism. Saving union jobs by bailing out a company’s failure is not capitalism. Creating laws or regulations that will only be enforced on your political opponent’s donors is not capitalism.

Posted by standsomemore | Report as abusive
 

I was going to take some shots at Summers, but others here have better stated most of the points I would make. But, Larry, try, if you can get out of your shallow perspective clouded by your own self-perception of brilliance, to look cross-culturally. Capitalism is winning, across the board. ‘The rise of the rest’ is being done in a capitalist fashion, though they are experimenting with the flavoring. Good on them.

We have a leadership problem, you’re part of it.

Posted by ARJTurgot2 | Report as abusive
 

Mr. Summers:

Capitalism as part of the national polity is seen by many as suspect because of the distortions foisted upon the economic system by the financial markets. Wall Street is where the money (read “salaries”) is. Plus, the $2 billion or so in corporate funds that are squirreled away on the sidelines (where they reap substantial margins in non-manufacturing investments that do little for job growth) is also part of the problem. Another is the replacement of the Glass-Steagall regulatory framework by the Gramm–Leach–Bliley Act in 1999, an effort that was cheered on by you and the likes of Goldman-Sachs. Of course the end result has been the unbridled greed of the banking “industry,” which continues on today, despite recent attempts to strengthen the regulatory environment.

Posted by 121kipper | Report as abusive
 

What it really boils down to is not playing by the rules. THAT’S IT. Its like playing a game of football where the rules are set, but nobody plays by them. When one team doesn’t convert on 3rd down the officials say “ummm lets give them 5 downs” and when they don’t get the first down, we change another rule. The game would be madness, there would be no winners. Or perhaps in todays trend of striving for “fairness” both teams should win. It reality though capitalism is based on some losing and some winning. If you work hard you can have a good life. Its just some people do not believe what they have is good. That is an argument about culture though.You do not need to have a house, great car, and an Iphone to be happy. try an apt/condo, normal car and a normal phone. Its about learning to live within our means and not hating people because they are more successful. You get what you earn in a capitalist society. That maybe insulting to some and encouraging to others. I am not well off, i struggle in life, but I can honestly say I haven’t done “everything” right. I screwed around and now I am paying the price. Second chances are hard in this society, but if I had done myself right in the beginning I would be well off and fine. Like the phoenix, captialism survives through rebirth. The idea that some will fail and from the ashes emerge a stronger, more dedicated person/business. Its just that some people don’t understand that, and seek for nobody to fail ever. Its like a festering wound that you do nothing about because you don’t want to lose the leg. Well your killing the whole body by putting off the envitable.

Posted by Blinkin | Report as abusive
 

Unchecked population growth stokes economic as well as many other serious problems on the planet. The issue spans all countries. It leads to a western population that increasingly looks like the characters depicted in “Idiocracy” (growing pool of under educated, unable to compete for jobs against less expensive overseas workers). It burdens our social welfare system with legions of single parent / teen parent children (1/2 of all US children receive WIC services!). Low income (no income) households have poor likelihood of upward mobility for the children, perpetuating a cycle of poverty and increasing financial burden on society. In the 3rd world, overpopulation causes literal starvation and ill health for humans, and rapid destruction of ecological preserves (reducing atmospheric replenishment and robbing animals of habitat critical for their survival). Our unchecked population growth is killing our national budget, our way of life, our environment, the animal kingdom and indeed many of us.

Posted by R.M.E. | Report as abusive
 

Larry Summers poses an interesting question regarding the validity of capitalism: is it an inherently flawed model? Or, can it be managed by proper fiscal and monetary policies? While Mr. Summers states his believe that it’s really an issue of proper management, he misses the opportunity to reflect on himself and his own industry. Financial markets operate mostly by a simple rule: if you find a way to make money, do it for as much as you can for as long as you can before:

1) Others catch up with you (like LCTM using mathematical models to exploit derivatives markets in the 1990s)

2) You take on too much risk, and basically light yourself on fire and the village around you (like the recent mortgage crisis of 2008) or

3) The government steps in and limits your ability to exploit the market (like Goldman Sachs and their nano-trading shenanigans this past year).

The inherent flaw of capitalism is that, if left unbridled, it can be a savage beast that eats the class of consumers who provide demand for products, or simply just eat itself.

A later point regarding the shift from manufacturing to services, in which Mr. Summers makes a great leap of logic is:

“As fewer and fewer people are needed to meet the population’s demand for goods like appliances and clothing, it is natural that more and more people work in producing goods like health care and education…”

This rise in efficiency did not cause the expansion in the education and health care industries, it was companies exporting manufacturing abroad to reduce costs, and other individuals seeing an opportunity to tap into a potentially profitable sector with constant demand, i.e. the demand for products like cars may fluctuate, however people always get sick and need to see a doctor. As a result, we have seen a huge growth in this industry and a reason why our economy is suffering under such high health-care costs.

Mr. Summers argument on why capitalism isn’t working starts off on good-footing, however he quickly wanders from a logical path and gets lost in the weeds.

Posted by Ahumbleopinion | Report as abusive
 

Capitalism is inherently unfair. After all what is fair about eliminating your competition and trying to become monopolies to have total price control, yet that is the ultimate in capitalism.

What has really happened is a gross failure of government regulation to level the playing field to give new companies equal access to markets. And, that has only been caused by Republican (GOP) Presidents and GOP Congressional control used in turn to eliminate economic regulations (as in the GOP repeal of laws and regulations put forth during the Great Depression to prevent it being repeated), or to underfund the regulatory agencies, especially the ones that regulate the economy to make them impotent.

For example, the SEC settles too many cases for pennies on the dollar simply because they lack the funds to hire enough lawyers to bring the cases to court, and companies trying to evade regulation and consequences for ignoring them know this and take advantage of it to bargain for low fines relative to the gains received from illegal behavior. All this achieves is creating incentives for more widespread cheating.

The economic regulators should have unrestricted funding based on their ability to collect penalties both for the government and investors. Like the operation of many state Insurance Commissioners the funding of these agencies should be from a surcharge on relevant transactions to recover the cost of operations. The SEC for example should be funded by a surcharge on stock transactions and bank regulators should be funded by a surcharge on lending whether to the Federal Reserve in excess of mandatory deposits or to customers. The U. S. Treasury regulator function should be funded by a surcharge on all global dollar transactions. Mining inspections should be funded by a surcharge per ton of mined materials extracted. And other regulatory agencies should similarly be funded by the industries they regulate. All that each needs otherwise is a revolving line of credit or funding to support changes in regulatory agency needs between annual surcharge adjustments.

Congress and the President will always have the joint means to cap spending in one way or another if regulatory agencies get carried away, but that should not be easy under House and Senate rules. Each body should collaborate to form a joint Senate-House committee to oversee after the fact the use of surcharges. Though, the truth is regulatory agencies have their own incentive to limit spending since rapid growth in their activity can make them targets for oversight and ot create job instability within agencies. People do not join government to have their jobs come and go every year.

Posted by SeniorMoment | Report as abusive
 

Two points:
Capitalism is about property of the means of production and of freedom to run a business. Is this not working any more?
What should be the alternative?

Work and jobs: isn’t it one of the successes of capitalism (or of technology) that less work is required to produce the goods and services sold (and bought) on the market?
But productivity gains may become a social failure when all the available workforce is no more needed.
Should capitalism set itself the goal to employ people rather than to develop, produce and sell goods and services in an efficient way?

Posted by mderouge | Report as abusive
 

Let me guess — unmitigated greed?

Posted by Gordon2352 | Report as abusive
 

It’s not about Capitalism; it’s about fairness. Capitalism was considered fair, or mostly fair, up until the bank bailout. That, and the perception of gross favoritism by the government on behalf of the banks tipped the balance against the belief the system was working for everybody. The bank bailout is the very origin of the Occupy Wall Street movement. Astonishingly, bankers and wall street types are still in denial about this.

I suspect even communism would still exist if there had been at least a perception of fairness. Social welfare states exist in countries where there exists a belief in the fairness of their government (e.g. Sweden). Why is the discussion about economic systems when it should really be about corrupt practices committed by real individuals and real corporations?

Posted by BobinBudapest | Report as abusive
 

Looking forward, Larry Summers is correct. And it would be good to improve/reduce the cost of healthcare. There are good ways to do that with sufficient political will, which is a big if.

The important thing is that there is a significant change in economics that is similar to the shift from an essential agriculturally based economy to a industrial economy. The good thing then was that the efficiencies that ended the agricultural economy also supplied jobs in the industrial economy. Today, the move from an industrial economy to a service based economy doesn’t have the same advantage.

I would say, and it is my own opinion, that modern macro economics is based on industrial economics and the stimulations to the economy expressed do not exist for a service based economy.

Take tax breaks. When manufacting was based nationally, then giving manufacturing tax breaks during a slow down worked because businesses could retain more of their workers. With no manufacturing here, then tax breaks do nothing because businesses are market based and their manufacturing is abroad, so jobs are not saved.

In the macro economics model, money is pushed into the market to stimulate growth. This is usually done through passing it through the industrial complex. When Reagon invaded Panama to remove a corrupt government they planned to also push millions of dollars into the Panama economy to stimulate growth. But when they got there they found that the Panama economy was based on a bunch of services and there was no place to put the money. Macro economics has the same problem today in America.

Is there a macro economic model for a service based economy?

Posted by ktech3 | Report as abusive
 

A big problem is the banks are encouraging small business to finance with credit cards, often over 20 percent interest and variable. We have lost the personal banker relationship prevalent in the past.

Posted by Robb007 | Report as abusive
 

Capitalism is not working because you and your thug constituents central planning failed. You were a big part of this and you have audacity to say that you feel that planned monetary actions can right the capsizing ship. Shame on you.

Posted by RSDallas | Report as abusive
 

As someone mentioned, the reason why capitalism isn’t working, is because this isn’t capitalism! Innovation or delivering a quality product or service is rewarded in a properly run capitalistic society. Otherwise, the company should fail, not receive a bailout. The consumer brings the demand, so the consumer should have the power. Right now, the corporations have the power and the ability to merely take money from the consumer via bailouts and subsidies (not to mention change the rules to benefit themselves and drive out competition, ultimately hurting the consumer (see Monsonto and others).

Posted by HolyChrist | Report as abusive
 

The practice of capitalism is doing exactly what it is designed and structured to do. In the absence of BASIC morality (Truth, Honesty, Integrity, Humanity….) nothing else matters other than creating profit (making money) and then distributing this wealth to “STAKEHOLDERS” who quickly adapt through narcissistic acquiescence. Once the systemic greed becomes exposed and realized, the “CUSTOMERS” (who are not “STAKEHOLDERS”)are left holding the bag and or eliminated. Sooner or later there is nothing left to “FEED” off of and the system cannibalizes itself into chaos and implodes.

It is everywhere…Business, Work, Politics, Religion, Sports, Journalism…your neighborhood HOA!

Posted by reuters55 | Report as abusive
 

Of course, the biggest argument FOR bailouts is that it saves jobs. However, what is the result? The survival of mediocre or failed products by badly run companies. Is that how we compete in a global economy? Is that what we want?

Posted by HolyChrist | Report as abusive
 

The gist of capitalism is that it improves the lot of the average person. From a global perspective metrics such as average income, poverty, literacy, age, number of children, etc. have vastly improved in the last 30 years and continue to improve after the “financial crisis”.

Capitalism is humming on all engines as 7 billion people are moving forward. Sure a small subset of people in the US and Europe may see living standards decrease a few percentage points but all this doom and gloom is ridiculous. Capitalism always produces winners and losers on the theory that at least the losers have choice. If Larry cant straight up and look at stats and see the world is better in 2012 than 2008 he’s transformed into a full US politician versus an academic.

Posted by John2244 | Report as abusive
 

Why isn’t capitalism working?

You mean why are we losing to communist China? Dismantling of the regulations. Just like the most affluent neighgorhoods in any given city are also the most tightly regulated (with self-generated covenants and rules)…so are the most economically fit nations.

Sweden = high regulations, strong economy.

Haiti = no regulations, no economy.

The GOP plan is to basically turn America into Haiti. Where we’re all customers of someone else’s products.

Posted by AlkalineState | Report as abusive
 

Summers states that health, education, and social protection (military?) are eating our lunch money. The cost of housing, healthcare, food and energy, and education have increased in relation to our paychecks. The simple (simplistic?) path is to remake our society to reduce the costs that are causing problems.

Regarding education: The Kahn Academy demonstrates that math and science can be taught using videos and software. Given this technology we should be able to teach the population with far fewer instructors. It is probable that the same is true of history, social studies, and most other areas short of English composition and art. Many consider the most important part of education to be the socialization process. Teachers could organize the development of collaboration skills while computers teach subject areas. Use nationwide exit exams from high school to give colleges and employers means to compare applicants. The average grade should be 50% correct. Current tests are too dumbed down to differentiate real achievers from the students who did the minimum to get an ‘A’. Scores could be a matrix showing strengths and weaknesses in sub-topics.

Regarding health care: The healthcare industry is focused on reducing costs, which is a good start. Unfortunately, the demand and incentives for increased care overwhelm the pressure to reduce costs. My understanding is that the majority of health care costs stem from life style choices. Reward the folks who make healthy choices with substantially reduced health insurance premiums (i.e. if 75% of health care costs are self-induced, then give a 75% reduction in premiums). Couple this with free consults from nurse practitioners who advise folks on how to get into the healthy premium program. People who choose the expensive approach can only blame themselves. In addition, high users of healthcare should be visited by nurse practitioners. At some point I would like to see individuals pay an extra co-pay when their health care is excessive (statistics show that health is about the same or reduced when procedure is used) so patients will participate in lowering health care costs.

Housing prices increase to the amount people are willing to pay. Americans live in increasingly large houses with fewer residents, generally to place themselves in more prestigious locations. Government can’t address this; the American people have to decide if they want to devote their resources to housing.

Energy has to be rethought from inside out. Cars are 20% efficient. Too much energy is wasted in heating. Buses go empty when there are traffic jams. Mass transit should be more convenient and comfortable than driving in traffic (e.g. clean with a wifi hotspot, tables and cool music). Personally, I would like to see energy prices increase until the pain is sufficiently high for folks to seek new solutions.

Food: Food prices depend heavily on energy. Little can be done about this. One thing that can be done is to discourage the practice of using corn to make ethanol.

Military: Overall, this topic is too large to discuss here. (as if the others aren’t) Give the Pentagon freedom to reduce its costs, without interference from congress. Veterans aren’t the only ones who have sacrificed for their country and we all will have to make sacrifices to get through this. Health care co-pays should be means based. Again there have to be incentives to live a healthy lifestyle. Retirement payments shouldn’t start until the employee turns 68 (or whatever the current social security age is).

Income inequality: The tax code should be modified to remove special interest. Capital gains and dividends should be taxed at the same rate as regular income. As pressure is released from the equity bubble I expect that hedge funds will not be as profitable. The facebook and Google types who make their living through genuine creativity should continue to be rewarded. CEO compensation is another issue.

I’ve brainstormed for years, trying to think of employment solutions in light that productivity gains have lowered the need for workers. The only solution I have thought of is to provide farming communities for those at the end of their resources. Homes for all where all work to provide food. Sunlight, fresh air, honest work, and companionship. High maintenance foods can be grown for sale at a premium price. At the faith based version, guidance for spiritual development. There are worse ways to live a life.

Posted by zoebisch | Report as abusive
 

While I like the thesis of the article, the rest doesn’t really ring true. Of course our political system is a democratic republic, our financial system is capitalistic. It can be argued that we do not need to lose our sovereignty or our identity to forgo the capitalist financial system model. China is dabbling in the opposite, a communist government with a faux capitalist financial system.

Capitalism is only as good as the morals of the participants (e.g. shareholders, board members, employees, customers). Capitalism in and of itself is simply an unbiased aggregation of private transactions. We should not blame capitalism for our failures, we must blame ourselves. It’s our own weaknesses that will cause the suffering of the masses.

Posted by SeaWa | Report as abusive
 

By any sensible definition of capitalism, China (and indeed any other successful country in the world for that matter) is capitalist ie. private ownership of the means of production with the motivation of generating a profit. The centrally-planned decision making of communist governments are responsible for some of the worst economic disasters of the 20th century (millions starving in USSR and China).

What we are experiencing is not a failure of capitalism but a rebalancing of: unsustainable indebtedness in the West and imbalances between the western world and the developing world. The closer one comes to true capitalism, an individual consumes as much as they produce (whether they be in China, India or the US) and it is not surprising that those that are most disillusioned with capitalism are those that are least able to compete.

The only point I do have sympathy with is the disproportionate influence big business has on governments and the excessive powers governments have over the liberty of the individual. Governments are the only entities in our soceity that can legally extort wealth from us.

Posted by McJefferson | Report as abusive
 

It’s about the government not being representative of the people. Taxation without representation is tyranny. The minimum wage is oppressing people and keeping them below the poverty line. It is much worse for service industry professionals whose employers are allowed to pay them much less than the minimum wage because they claim that they earn tips. That is unfair. Why should they have faith in capitalism?

Even if people had capital to invest they are double taxed on their income and capital gains. The banks are crippling our economy charging exhorbitant ATM fees to withdraw cash from our own accounts. That’s your capitalism at work.

Posted by Angerfist | Report as abusive
 

If the politians were freed from their PAC masters and ignorance they would realize that tort reform is the key to solving the health care problem. Doctors must pay too much for malpractice insurance because everyone (even felons) are allowed to sue anyone else. We need to end contingency fee litigation and go to a loser pays all costs in any lawsuit. We need to limit suit benefits to $250,000 or 25 times their annual income.

Drug costs in the U.S. are due to 5 years of FDA mandated testing before drugs can be released in the U.S. Allow drug companies to release drugs immediately. They are the ones who are responsible if their drugs do harm anyway.

Immigration is easy to solve as part of social protection if everyone in the U.S. was required to carry a passport or U.S. ID card at all times.

Posted by Angerfist | Report as abusive
 

@McJefferson – “The closer one comes to true capitalism, an individual consumes as much as they produce ”

This completely disregards the community nature of the human animal. We work together, we share, and our efforts can result in a direct or indirect contribution. To think that each individual who consumes X should also contribute X is a recipe for disaster. It would be more fair to let each consume what they must and each contribute what they can. Yes, that means in any given snapshot in a capitalist day that the rich should pay more than they consume while the poor pay less. In fact, being rich is stored consumption. They can also borrow, which is another form of consumption. In that sense, rich actually consume MORE than they contribute.

Posted by SeaWa | Report as abusive
 

Angerfist offers: “…tort reform is the key to solving the health care problem. Doctors must pay too much for malpractice insurance because everyone (even felons) are allowed to sue anyone else.”

Poor doctors and pharmaceutical companies. My heart goes out to them.

Actually, when you consider that people like Ron Paul and Michael Jackson’s doctor are delivering babies, it becomes clear that if anything….. the controls are there for a reason.

Posted by AlkalineState | Report as abusive
 

I agree with several other posters who claim that the problem is not with capitalism, rather the problem is regarding a financial system in which the elite players are not subject to the law or rules or mores regarding honor, integrity and decency.

The recent fraud that led to a near death experience for the world’s economy enriched the elite players by millions or tens of millions of dollars each… year after year after year.

When the fraud was discovered, the greatest harm was shifted to citizen taxpayers. Those who should have been stripped of all their assets via RICO prosecutions and subsequently imprisoned quickly set about trying to do everything they can to prevent regulations that might save America from their wild ventures in the future.

A pox upon them!

Posted by breezinthru | Report as abusive
 

Any politician currently running for office should read the comments posted here. The theme of “lack of fairness” is undeniable. Capitalism is valuable to our society only if it is fair. Government regulations should promote a fair and balanced playing field for all market participants, customers included.

Posted by changeling | Report as abusive
 

Your premise is wrong, Larry; capitalism is working very well for those who are in a position to play it to its logical conclusion, the buying and selling of political power.

Posted by borisjimbo | Report as abusive
 

SeaWa writes: “This completely disregards the community nature of the human animal. We work together, we share, and our efforts can result in a direct or indirect contribution.”

The human animal also engages in infanticide and gericide when food supplies are short. This has been documented in multiple tribes around the world, over multiple centuries. So…. should we trust the animal within us? Or should we grow to become something a little more….. gasp…. civilised.

Posted by AlkalineState | Report as abusive
 

Yes, the problem is of systemic corruption. Particularly the ability of Government to become subordinated to the will of organizations which are for sale to the highest bidder rather than tied to one ethnic, racial, or cultural group. The Government behaves more like a Chamber of Commerce than a national institution.

Perhaps it is international capitalism that has failed rather than the notion of free markets subject to predictable law. Something has failed and failed badly. It is very difficult to allocate the failure between capitalism and government.

The failure is bad enough and deep enough that the system will have to change. The question of to what is not really relevant at all. It is not a planned change but rather a catastrophic failure. This last point is what capitalism’s friends do simply not seem to understand. Change is coming whether you like it or not.

Posted by txgadfly | Report as abusive
 

Reuters
Please update Mr Summers pic-you have him looking like he’s 25; when we’ve seen him on tv he looks more like a robust(or is it rotund) mid 50′s. Also are there no great economists or great thinkers that can be found anywhere but Harvard or Princeton?
What about someone from Nebraska or New Mexico or Oregon. Remember there are 50 USA states each with great teaching centers. We get so sick of hearing from those that got us into the mess explain why we are in the mess. We love you Reuters but expect more from you.

Posted by Conservastore | Report as abusive
 

Traditional healthy capitalism is balanced with community needs while the current form of ugly-headed capitalism is self-seving and reckless at balancing community needs. The latter just starves the (consumer) goose that lays golden eggs.

The 18-29 age group regardless of race or income status wants a decent job locally but finds the current capitalism favoring cheap labor in the form of – offshored labor, H1B labor in US and illegal immigrants in US.

Just give it time and the needed change will come from this self-correcting system in the form of a social revolution with the use of simple and effective social media tools by the community-sensitive public at large.

Till then, dicing these statistics will give something (a job) to do.

Posted by Mott | Report as abusive
 

@SeniorMoment,

Capitalism is NOT inherently “unfair”. It’s promise is that of equal opportunity and not equal achievement. No government has ever achieved the latter, although Communism came very close to making poverty and hopelessness universal. You mix up the game of “Monopoly” (which would not be popular were it not “fair”) with economic system of Capitalism, a “pure” form of which exists no where. There is a very simple single “rule” for success…find a need and fill it! Absent undue government interference, always works, aways will.

If you would throw out and abandon the single economic “system” that has demonstrated the capacity to create a bigger economic pie (when all alternatives merely re-divide an economic poe of fixed size), what would you propose as an alternative to replace it? Do you REALLY believe our federal government has the insight necessary to change the terrain of the “playing field”, much less even KNOW what is level or not? Few bureaucrats have legitimate experience in business, but ALL think they know “best” for the country. Sounds to me like you come from such a background.

The SEC does NOT lack “…the funds to hire enough lawyers to bring the cases to court”. I’m not a lawyer, and I can file a case without one. Yes, current costs can be prohibitive but the solution is not more and more lawyers. It is to make the system more like Small Claims, where lawyers are not permitted.

Why should the government OR the people have to argue right and wrong in what is, essentially, a foreign language if we are all ultimately to be helt to a common standard…that “igniorance of the law is no excuse”? If that be true, all laws and statutes MUST, by definition be understandable by the average lay citizen if he/she is presumed competent to understand same sufficiently to be properly accountable for non-compliance. If judges were today, as in the past, accountable for enforcing the law AS WRITTEN and according to established precedent, the number of lawsuits would plummet (everyone would know, basically, the difference between right and wrong) as would the demand for the legal profession (which today occupies an obscene percentage of our Congress and our Supreme Court). Talk about conflict of interest!

The very idea that “…economic regulators should have unrestricted funding…” is ludicrous. I would, however, agree to a strict cost/benefit arrangement to assure regulations are properly interpreted and adequately enforced, such as those pertaining to Medicare and Medicaid fraud. Such can be assurred without being totally open-ended as you suggest.

I utterly and totally reject your suggestion that “…regulatory agencies have their own incentive to limit spending…”. I challenge you to identify a single agency that is today of less people and/or expense to “prove” the actual existence of such incentive.

People whose work product is primarily inconvenience and expense for producers seem utterly without a clue as to how to justify to taxpayers their own position at the public teat. That may well be impossible in most cases, and probably why their union is necessary to protect jobs of questionable benefit and excessive benefits.

Posted by OneOfTheSheep | Report as abusive
 

Capitalism, as originally proposed by Adam Smith, was a free trade system that would result in both profits and the pubic good being satisfied.

However, few people realize he also added a cautionary note to the effect that those who would corrupt the system for their own gain would destroy it.

The problem is that those who practice “capitalism” today are EXACTLY those who Adam Smith warned us about.

That’s why capitalism isn’t working.

It is really as simple as that.

Posted by Gordon2352 | Report as abusive
 

A convenient truth is that not everyone needs to work full time. Full employment is not necessary for the production of sufficient goods and services for everyone. Not everyone needs to work full-time, but everyone needs money to buy these goods and services.

A solution: The Federal Government would expand Social Security to make unconditional payments of $13,628 each year to every adult US citizen to provide a modicum of financial independence to everyone. This program can be financed entirely by cutting existing federal welfare associated programs and changing the federal personal income tax to a flat rate of 18% but allowing no deductions. This $2.975 trillion per year program would not add to nor reduce the federal deficit. Other potential avenues for federal deficit reduction such as Defense, Medicare, Medicaid, foreign aid, wealth taxes or gas taxes have not been preempted. The figure of $13,628 per year per adult was chosen because after 18% income tax it yields $11,175 per adult, which would amount to the 2011 Federal Poverty Level (FPL) of $22,350 for a family of 4 (2 adults plus 2 children). The numbers can work. See http://www.federalincomesupplement.com for detailed calculations.

It is different from welfare or unemployment as it is paid out to everyone. There is no stigma. It is not lost by working. It is different than a negative income tax because it is issued as a separate payment similar to how Alaska pays oil dividends to each resident. It can be characterized as a birthright, a common share of America that pays a dividend, or as an inheritance, or as a trust fund.

Posted by ChristianM | Report as abusive
 

Capitalism stopped working ever since the end of the cold war. During the cold war the capitalist West was trying to prove not only to produce better cars but also happier workers. After the demise of the USSR the western society has became a society in which the winners take all. The winners are the 1 per cent. The earnings of super sportsmen, stars and the captains of corporations have skyrocketed; the average workers have seen their incomes going nowhere and lost ground to workers from the developing countries. Some states in the U.S. have even passed laws to prevent “disadvantaged” citizens to vote; this was inconceivable during the cold war. I guess a competition for the ideology supremacy make capitalists kinder.

Posted by jlpeng | Report as abusive
 

@Pete_Murphy: “because of economists’ steadfast refusal to ever again give credence to the notion that there may be a problem with never-ending population growth”

Are you joking? The rest of your comment makes SOME sense to me, but this path is very well-worn in the annals of economics and sociology. The perils of overpopulation are overplayed, especially at a time when most of the industrialised world is experiencing population stagnation or decline, and most of the third world is experiencing unsustainable population growth.

There’s a proven negative correlation between material wealth and population growth. This correlation applies both within and between populations.

What are your solutions?

From Mr. Summers’s article:
“Indeed the observation that even Chinese manufacturing employment appears well below the level of 15 years ago suggests that the problem’s roots lie deep with the evolution of technology.”

We’re living in technologically and industrially advanced times in which the 1% or the 0.1% can get vast and disproportionate returns out of miniscule efforts on their part, and while a few politically well-connected and patronized persons can extract ill-gotten gains on an industrial scale while others starve…

http://www.bbc.co.uk/news/magazine-16472 310

Do we want a balanced and harmonious society?

Do we reject the notion that humanity should divide into castes of perpetually wealthy and idle aristocrats vs. castes of perpetually impoverished workers? With 10% of society living the high life inside gated communities and country clubs (a lifestyle they could not sustain without their working-class servants); while the other 90% live as prisoners in an industrial waste-land, too poor to visit family, educate themselves into greater productivity or maintain the health necessary to be useful to society for extended periods of time, their only function in society being as an underclass for the rich to draw upon to do their bidding, while the rich play all the peons and their machines off against each other?

I reject this notion.

The solution must include:

INCREASE taxation of the wealthy and INCREASE support for the honest, hard-working poor through universal education and healthcare – which will be a benefit to rich and poor alike.

There is no measure in which this policy would not make American society more fair. There is no policy that lacks these vital ingredients, that can do the job.

Capitalism was right for the 20th Century, at least for the West while they had the Soviet Union and various other flavours of socialism to keep the capitalists acting in good faith.

With Bolshevism defeated (leaving the old military-industrial complex to either stir up new conflicts or face long-term decline), and with economies-of-scale on the rise in all industries and businesses; we’re on seriously shaky ground thinking that our 20th Century system is still fit for purpose today.

The grandchildren of the wealthy will suffer in poverty with the rest of us, if they do not repent. They’ll find themselves one day, on the wrong side of that iron fence…

Posted by matthewslyman | Report as abusive
 

@AlkalineState: Excellent, insightful and concise remarks!

Posted by matthewslyman | Report as abusive
 

The problem is twofold. First, it is institutionalized corruption, not capitalism that is eating away at the system. Second, it is the way people like yourself–the financial elite who have mastered the rules of the game. You’ve obfuscated the lines between capitalism and corruption, between utility banking and casino banking, between genuine democracy and accountability with deregulation and corporate interests.

Posted by K-dub | Report as abusive
 

Capitalism not working?

Everyone I know, no matter their career or lack thereof has, a home with air conditioning, multiple cars, a cell phone (usually a smart phone), multiple computers (usually wireless), multiple video games, a Wii, and since most Americans are overweight being fed doesn’t seem to be an issue either. Nor are decent clothes, shoes (usually name brand sneakers), the list is endless. Am I ignoring the bottom 1% or so that are truly and realistically impoverished? Yes. But they’d exist no matter what grand Utopian “ideal” society existed. Furthermore, as per usual the truly needy aren’t the ones protesting. The vast majority of whiny protestors are the spoiled rotten delerious outcome of a permissive and overtly self-centered society that has convinced itself every roadblock they encounter in life is someone else’s fault.

Posted by GLK | Report as abusive
 

Larry Summers…should not be paid to write anything of this sort. If you want the truth go ask Chomsky…not pawns and idiots. I don’t expect you will but it would be a welcome change and bring some balance to the debate. Larry can tells which way he sees the US economy going and we’ll place bets on the opposite side. . .

Posted by Pablito | Report as abusive
 

“Markets have inherent and well-known inefficiencies. One factor is failure to calculate the costs to those who do not participate in transactions. These “externalities” can be huge. That is particularly true for financial institutions.
Their task is to take risks, calculating potential costs for themselves. But they do not take into account the consequences of their losses for the economy as a whole.

Hence the financial market “underprices risk” and is “systematically inefficient,” as John Eatwell and Lance Taylor wrote a decade ago, warning of the extreme dangers of financial liberalization and reviewing the substantial costs already incurred – and also proposing solutions, which have been ignored.

The threat became more severe when the Clinton administration repealed the Glass-Steagall act of 1933, thus freeing financial institutions “to innovate in the new economy,” in Clinton’s words — and also “to self-destruct, taking down with them the general economy and international confidence in the US banking system,” financial analyst Nomi Prins adds.

The unprecedented intervention of the Fed may be justified or not in narrow terms, but it reveals, once again, the profoundly undemocratic character of state capitalist institutions, designed in large measure to socialise cost and risk and privatize profit, without a public voice.

That is, of course, not limited to financial markets. The advanced economy as a whole relies heavily on the dynamic state sector, with much the same consequences with regard to risk, cost, profit, and decisions, crucial features of the economy and political system.” some balance to the debate…

Posted by Pablito | Report as abusive
 

Capitalism like Communism is only good on paper, in real life communism robs you of initiative and capitalism makes the cake crumbles go up instead of down.

Posted by azereta | Report as abusive
 

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
  •