“No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable.”
-Adam Smith, Wealth of Nations
In Anatomy of a Depression I explained the proximate cause of the ongoing depression. Of course, when I correctly predicted the current economic trainwreck, I gave much too optimistic an impression by exploring only the most immediate source of the present trouble – that is, an extreme inequity in the distribution of income which has led to an economy driven by untenable consumer borrowing. That’s plain old-fashioned Keynesian economics. Conceivably we could salvage the economy, at least for a while, by redistributing wealth (the pork stimulus won’t work, as you already know because I explained it in Why the “Stimulus” Will Fail). But the underlying problems go deeper than Reagan’s tax cuts for the rich: for several reasons, capitalism itself is no longer viable.
I can already hear the whining: “Those Commie Pinko Socialists have been saying for a hundred years that capitalism was obsolete, and they were wrong! Capitalism has to last forever, because it’s still around!” Bullshit. The Commie Pinko Socialists were right. Capitalism was obsolescent more than a hundred years ago. Economic history ever since the Industrial Revolution has been a history of struggling to find solutions for the problems caused by capitalism. In the first Great Depression, in the Thirties, it failed completely and did not recover. Capitalism isn’t dying; it’s long since dead.
But what about the boom period of the Forties, Fifties, and Sixties? Didn’t FDR save capitalism from extinction? No, he didn’t; what he did was put the terminal patient on life support. The American economy since the New Deal has been modeled on Mussolini’s Corporatist plan – a close partnership between industry and government, with a huge chunk of GDP directly ordered by the government and the rest tightly regulated. Sometimes it’s hard to even tell where the government ends and the corporations start. It’s a sweet deal for the big corporations, who are supported by government contracts and subsidies, protected by regulations that smother competition, and bailed out if they somehow manage to fail anyway. Even the big unions get in on the action, skimming a share from the surplus provided by the remainder of the workforce that is still productive.
What keeps this government/corporate Frankenstein going is war. The high spending and high taxes (or prodigal borrowing) necessary to keep the masses employed have to be justified to the sub-literate public and the greedy corporate execs. “Emergency” economic measures may be acceptable during a collapse, but as soon as things have recovered somewhat, people start complaining about the impositions of “big government”. The underlying problem, though, has not been solved; massive government spending is the only way to keep aggregate demand high enough and stable enough to sustain the economy. Without it, any flicker in public confidence could lead to a swift and total shutdown.
World War Two was a necessity for America, as FDR realized; support for the New Deal couldn’t last much longer. Soon after the war was over, the economy had come apart again, and a new war (Korea) had to be found. After that, the economy slid again but the Korean war was replaced by escalation of the Cold War, which provided a good excuse to keep military spending high even in peacetime, and then there was Vietnam on top of that. Times were good; except for a couple of brief interludes where military spending declined, the economy soared for three decades. But it wasn’t a capitalist economy; it was a wartime corporatist economy.
Then some misguided people with insufficient knowledge of macroeconomics got the heretical idea that wholesale killing with no compelling political justification was a bad thing, and, even worse, that colossal peacetime preparations for total war were unnecessary and even dangerous. The Vietnam stimulus plan was cancelled; the economy went in the crapper and finally collapsed. It only recovered (sort of) when Reagan reinvigorated the Cold War stimulus plan. After it broke down again in 2000, it had to be restarted with the Iraq stimulus plan…
There are a couple of problems with this way of doing things, aside from the fact that we can’t seem to keep the American economy functioning without bombing anyone. One of them is that Reagan’s regressive tax cut not only left the government ultimately insolvent but undermined the effectiveness of the system. Another is that we’ve created a monstrosity of government that has made democracy meaningless. But even if we were to continually fight big enough wars to keep things moving, and tax the rich enough to prevent the gradual concentration of all wealth in a few hands, it wouldn’t keep us afloat much longer. The historical conditions that enabled capitalism (even our bastardized modern corporatism) to create so much wealth (and it did, indeed, create a vast amount of wealth) are disappearing.
Capitalism is based on certain fundamental assumptions, some of which are no longer valid. Among them are:
- Competition among producers. Most of the purported benefits of capitalism come from competition, both between businesses and workers. Competition is supposed to regulate business profits, eliminate products that people don’t want, and encourage workers to be productive. In reality, genuine competition between businesses is a rare exception (competing advertising is not competition in any useful sense). Monopolism and collusion are problems that have long been recognized but never successfully dealt with. Even workers sometimes manage to beat the principle of competition by forming unions, allowing them to leach off of a non-competitive industry or the government (i.e., the taxpayers). But should we even want businesses to compete? The pressure of short-term competition encourages them to do irresponsible things ranging from long-term degradation of the industry to deliberate environmental contamination. The modern world requires a level of integration and planning that are inconsistent with ruthless competition.
- Boundless growth is both possible and desirable. Continual growth is necessary for capitalism to work. A growing economy creates new industries that haven’t been monopolized yet, invents novel products that people will buy even though they don’t need them, and provides opportunities even for people who aren’t already rich and connected. Without growth, there are never enough jobs, competition disappears from the stagnant economy, and only the rich can get richer. But it should be evident to any sane person that growth cannot go on forever, at least not without a declining population to compensate. The Earth can only handle so much waste, only produce so much food, only provide so much energy. Every technological fix we find for an environmental problem or resource limitation creates more problems. Even when solutions are found in time, there is no guarantee of them being used. (See Hippies Cause Global Warming for example.) If we try to sustain infinite growth in a biosphere that isn’t growing at all, sooner or later we will make a fatal stumble. But even if we don’t, do we really wish to live in a world every square foot of which is overrun with people, superfluous consumer junk, and waste?
- Consumption is unlimited. Implicit in the concept of capitalism is the assumption that people will always want to purchase more stuff, no matter how much they already have. However, most people (in the West) now have everything they actually need to live, and many people have so much crap that new crap has little marginal utility. It takes hundreds of billions of dollars of advertising every year to keep people buying, and most of them can still very easily cut their purchasing dramatically (for instance, if they are uncertain of the future and want to save). This is why a depression like the current one can happen so swiftly – the whole card castle depends on nearly everyone spending money as fast as they can borrow it, but there’s little or no real need for much of the spending and it can stop at any time. The mere expectation of hard times can cause total collapse.
- Human labor is valuable. Capitalism is a cycle of production and consumption in which people freely exchange their own production for that of others; that is, they are only able to consume if their production is valued by others. This system worked great in the era when human labor was the key factor in production (i.e., before machinery) and was relatively scarce (i.e., before modern medicine) – it was certainly a huge improvement over the slavery that preceded it. But in the modern world, most human labor has very little value. The supply of people in the world is much larger than could ever be efficiently employed, and most kinds of labor can readily be replaced by machines. The price of labor in the world market accordingly can be no higher than the cost of mere subsistence; any deviations from this are due to national markets being protected from competition against nearly-free Asian labor, and these protections are crumbling. Once, automation was widely believed to be the future of manufacturing; now, an endless supply of arbitrarily cheap labor has mired us firmly in the sweatshop era.
Better-educated workers are not a solution to this problem. A large supply of skilled workers would just drive the cost of skilled labor down to the same starvation level. Even now, the high incomes of the most intensively trained professions (medicine, law, engineering) are maintained only by artificial barriers to entry (see Education is Class Warfare) and strictly rationed education. If we produced more doctors and engineers, this would have some benefits, but if every human capable of absorbing the education received it, doctors and engineers would be reduced to the same poverty as garment workers and without eliminating the surplus of the latter. There are just too many people, and technology is getting better and better at replacing even skilled labor.
Another problem with capitalism is that it deals poorly with what economists call “externalities”. These are costs or benefits of an activity that aren’t automatically charged to the person who causes or benefits from them; it is often infeasible to allocate them at all. National defense is an example; it is very difficult to say who benefits from it or how much. No one is going to mail in a check for what they think it is worth to them, and there is no way to just cut off the national defense service to your house if you don’t pay. Roads and public education also provide major externalities. Pollution is a negative externality – it is not practical for a company which causes some pollution to negotiate with every person who might ever be affected by it to pay them what they think fit to put up with it. Government intervention is required for externalities to be accounted for. When externalities were a minor aspect of the economy (i.e., when things were simpler and nobody cared about pollution), government interference could be minor. In the modern world, however, externalities make up a huge share of the economy, perhaps most of it.
In the future, the limiting factor in production will no longer be the supply of human labor, or even the supply of capital; it will be factors in the natural environment: energy, land, and above all the need to preserve a livable environment. In fact we have already reached the point where environmental factors should be limiting, even though some countries (China) allow horrendous pollution. The ever-escalating consumption that capitalism demands cannot be sustained or allowed, nor can unrestrained competition, nor are these things even possible under capitalism without massive government interference. We need a different solution, one that can provide a bearable life to the people who inhabit this planet while preserving it for many future generations.
What about isolationism? Except for oil and tropical fruit, America is capable of producing everything it needs, yet we import most of our manufactured goods, with dire economic consequences. If we banned the imports we don’t need, and expelled the illegal aliens, we could have full employment – for a while. We’d still be dependent on the whim of the public to keep buying unnecessary junk, and we’d run down our environment that much quicker with more manufacturing – infinite growth would still not be possible. And after a generation or two, better automation might bring back mass unemployment anyway.
What about an economy based on services and intangible (intellectual) products? If people were content to consume mostly software and entertainment, a lot less waste would be generated. Unfortunately, it’s really easy to steal intellectual property – so easy that some people think it isn’t stealing, just like some people think there’s nothing wrong with helping themselves to your wallet if you’re careless enough to drop it. Most people are never going to be good enough at anything creative (or at programming) to be paid for it anyway, and people can abruptly stop buying such things just as easily as they can any luxury goods. Most services are far from necessities, too, or are needed only in relation to consumer goods, or require exceptional talent. The only services that people will reliably purchase are medical. Could we build an economy in which most of the population works full time just to make sure no one-in-a-million disease goes undetected and everyone who is too fat to stand up has their own personal bed pan changer? Maybe, if you don’t mind the slack-jawed girl who got through high school by copying your homework being your operating room nurse – but I’m not exactly looking forward to the world where all of society’s efforts go to extending the average lifespan by three weeks, the only employment for most people is nursing homes, and most of the gross national product is controlled by insurance companies. I think we can do better than that.
If they were given a choice, many people would likely prefer less work and more leisure to achieving the maximum possible throughput of disposable consumer goods. The main goal of technology and capital in the past has always been to produce more junk, but higher productivity could just as well be used to reduce work. Manufacturing less superfluous crap would alleviate a lot of our environmental problems, it would stabilize the economy against sudden lapses in the crap-buying behavior of consumers, and it would give people more time to educate themselves, exercise, travel, get drunk, or whatever they want.
If the amount of available labor were reduced or restricted, it would make labor scarce and valuable again. This alone would stop many abuses by employers, who could no longer be guaranteed of replacing any employee at will, but without protecting abuses by workers (which current labor laws do, when they are enforced). The distribution of income problem which has led to the present crisis would be solved by a combination of higher wages and paying people not to work. (We already do the latter, but we try to pretend it is somehow based on “need” or “merit”, which is pure baloney because no one is a worse judge of need or merit than a bureaucracy.)
Paying people to not work would reduce the oversupply of labor, remedy the distribution of income, and stabilize the economy without frantic unsustainable growth. It could replace many existing programs that subsidize non-work, such as welfare, unemployment benefits, disability, and perhaps social security retirement. Unlike those programs, it would be fair, because everyone would have equal access to the benefits. There would be no need to pay armies of “social” “workers” to recruit “clients”. Every American would be guaranteed at least a minimum survival level of income, and they could decide for themselves whether they should work. With labor scarce and valuable, there would be a strong incentive to work for those able. Production could be limited to what is environmentally acceptable, without depriving tens of millions of Americans of their livelihood; there would be no need for gratuitous wars to accelerate public spending.
Limiting the length of the work week would help stabilize the supply of labor; shorter hours would encourage more people to take jobs while preventing the more ambitious from creating an excess labor supply through sheer overwork. The so-called forty hour week is a joke; employers can and do demand as many work hours as they want, and overtime pay is no penalty because they just pay a lower base rate to make up for it. Workweek length should be an absolute limitation, or at least there should be a penalty to discourage overtime (a surtax, for instance).
A simple guaranteed income plan would solve the distribution of income problem and stabilize the economy without the need for any “stimulus” spending or monetary shenanigans, ever again. It would cost a lot, certainly: the simplest and fairest way to do it would be to make a payment to every adult citizen, without trying to find out who is really unemployed and who is cheating the system by working “off the books”, and without punishing anyone for working. That would cost two or three trillion dollars a year. But there is no doubt that we can afford it; after all, we are already affording a basic living to almost everyone. Taxes would have to be higher, of course, but the subsidy would outweigh the tax increase for most people. The rich would have to pay more, but that is far overdue anyway.
[By the way, don’t believe any liar who tells you that high taxes on the rich will ruin the economy. Some of this country’s biggest booms have happened when the top rate was 91% or even higher.]
Here are some other things we need to do to fix the economy:
- End competition with impoverished foreign workers who breed like flies. That means high tariffs or outright import bans targeted at countries with low standards of living – not tariffs designed to protect particular industries. It also means getting rid of illegal aliens, if necessary by closing and mining the Mexican border, and banning the employment of legal aliens. Eliminating imports would also mean we’d quit paying the Chinese to pollute the atmosphere.
- Provide free training in useful occupations to those with the necessary aptitude. It’s a stupid ideological pretension that people should pay for their own education; the benefit to society outweighs the cost so it’s a common sense investment (provided of course that people are trained in useful things like teaching, medicine, or auto repair, not fripperies like drama and journalism). We also need to reform higher education to make it less wasteful, and lower education to make it effective – but that’s a different topic.
- Fix the broken healthcare system before it devours us. We don’t need to spend more on healthcare; that only makes the problem worse. We can have better medicine for a lot less money – maybe I’ll explain how sometime.
- Abolish labor unions. They prevent businesses from having the flexibility they need, and all they accomplish is allowing freeloaders to be grossly overpaid – largely at the expense of real workers and taxpayers. The workers who actually need protection are never unionized.
- Get rid of regulations like the notorious Americans with Disabilities Act that are supposed to promote social justice. They’re a huge burden and more often abused than not. If the supply of labor is kept proportionate to the demand, workers will have the bargaining power to take care of themselves as they see fit.
Capitalism was once a great economic system; it would have been perfect 300 years ago (i.e., before it was realized). Capitalism industrialized the world and gave us enormous wealth – including luxuries like education that enables us to find better solutions now that capitalism has died. It’s been gone for eighty years now; with dramatic but simple reforms we can replace its bastard child, the corrupt corporatist quagmire that we facetiously call “free enterprise”, with a functioning, stable economic system that will provide for the needs of all, preserve the environment from the consequences of profligate consumption, remove the economic imperative for continual warfare, and give us a solid foundation for adapting to future change.