We need to talk about capitalism

This piece was originally featured in The New Common Sense newsletter from our Economy and Society Initiative. Read more from this edition.

The many failings of the political and economic paradigm known as “neoliberalism” are, by now, all too familiar. However suited it may have been to address stagflation in the 1970s, neoliberal policy has in the decades since fostered grotesque wealth inequality on a scale not seen since the Gilded Age, while leaving pretty much everyone below the top 10 percent (and especially workers) worse off, exacerbating racial disparities, and hindering our ability to deal effectively with crises like climate change. The 2008 crash exposed these and other flaws and inspired some to begin rethinking the relationship of government and markets to society—an effort given fresh energy by the COVID-19 pandemic, which elicited a range of (successful) public actions at odds with longstanding neoliberal bromides.

But powerful interests remain attached to neoliberalism’s free market fundamentalism, which has served them well, and they are not about to let it go. Regrettably, the reemergence of inflation has given them the hook they needed, and they have seized upon it not merely to criticize the Biden Administration’s spending, but to condemn any and all efforts to change how we manage political economy as “socialistic” efforts to destroy capitalism.

The causes of today’s inflation are many and complex, though we have tools to deal with it and are applying them. Especially because that’s so, we mustn’t let the need to address temporary economic fallout from COVID and the war in Ukraine become an excuse to derail a long overdue process of adapting governance for a 21st century economy and society. And we definitely shouldn’t let specious rhetorical moves get in the way.

Neoliberals accomplished many things in the 50 years their ideology has been dominant, but none more impressive than their linguistic success in equating a very particular, very narrow conception of capitalism with capitalism itself—as if any deviation from their approach to government and markets is perforce not capitalism or against capitalism. But capitalism, properly understood, requires only that trade and industry be left primarily in the hands of private actors, something no one today seeks to overthrow.

Within this omnibus prescription is room for countless forms of governance, with different roles and relationships among private business, government, and civil society. To take obvious examples, there is nothing about “capitalism” that requires Milton Friedman’s dictum that the sole function of corporate management is to maximize shareholder profits, or Robert Bork’s that the sole purpose of antitrust law is to promote consumer welfare. Nor is there anything that makes it more problematic for owners of labor to band together in unions than it is for owners of capital to do so as shareholders.

Such illustrations suggest a larger point, which is that “capitalism” leaves a great deal of room for government action and regulation—creating possibilities for mixing and matching limited only by imagination and choice. The system of mercantilism that dominated political economy in the 18th century, which encouraged protectionism to promote domestic industry, was no less capitalism than the laissez faire system that succeeded it in the 19th century. When economic, social, and technological change caused that system to collapse in the early 20th century, the alternative introduced by John Maynard Keynes—which called for government intervention in markets to mitigate instability caused by fluctuations in demand—was still capitalism. FDR’s New Deal was a form of capitalism, as are the social democracies of Northern Europe today.

In all these systems, production remains in private hands and market exchanges are the dominant form of economic activity, with government playing different roles as the times and needs of society dictate. So much is inescapable since markets are created and bounded by law and there is no such thing as a market free from government. This is no less true for neoliberalism than it is for social democracy. It’s just that in the neoliberal construction, what matters is that markets operate efficiently as to price, and the role assigned government is constrained to regulating as needed for that purpose.

In actual practice, of course, neoliberals have supported a great deal of regulation beyond securing efficient markets. This too is inescapable as a practical matter. Economic power inevitably begets political power, and a philosophy that celebrates acting to maximize one’s own wealth just as inevitably sees that political influence wielded to favor economically powerful groups over less powerful ones.

But put that aside: Life is messy, and no philosophy or paradigm is ever perfectly realized in practice. Instead, let’s consider the neoliberal conception of capitalism for what it aspires to be: one in which the role of government is limited to maximizing freedom for efficient private exchange. Neoliberals simply need to acknowledge that that’s all it is: a conception of capitalism, not the only one.

Indeed, if we take today’s neoliberals at their word, Adam Smith was not a capitalist, because he believed people should not act only out of self-interest, and he assigned politics a necessary role alongside economics to promote the moral progress he saw as society’s true aim. Even more striking, to listen to today’s neoliberals, Friedrich Hayek—the father of their movement—was not a capitalist, inasmuch as The Road to Serfdom is chock full of social welfare programs of a type today’s neoliberals revile as “socialistic” and “anti-capitalist.” (I sometimes wonder whether these champions of neoliberalism have actually read Hayek or looked only at the bowdlerized Reader’s Digest version.)

The point is not that neoliberals are hypocrites. It is that they are myopic, purblindly treating an intellectual paradigm that may have been suited for a particular context and time as reflecting universal unchanging truths. In The Spirit of the Laws, Montesquieu observed that a successful system of government must be compatible with the “spirit” of its people—meaning it must fit a nation’s cultural, political, social, and economic conditions. As these conditions evolve (something that happens whether willed or not), so too must governing institutions. Someone might think democracy the best of all possible systems as an abstract matter, but it would still have failed in, say, 13th century England. Democracy emerged only as the conditions that produced feudal government deteriorated, bringing new conditions that turned out to be conformable to popular government.

Montesquieu’s insight is applicable not only to formal legal systems; it applies equally to systems of political economy and economic management. The genius of capitalism has, in fact, been its capacity to evolve in the face of changing cultural, political, social, and economic conditions: finding new ways to preserve the energy, innovation, and opportunity that private enterprise at its best can offer, while adapting to new circumstances and changing expectations. In this way, mercantilism gave way to laissez faire, which gave way to Keynesianism, which gave way to neoliberalism—each a capitalistic system of political economy that served for a time (for both better and worse) before yielding in the face of material and ideological changes to something more suited to a transformed context.

We are plainly in the midst of such a transformation today—driven in part by the consequences of neoliberalism (e.g., fallout from a global free trade regime, vastly increased wealth inequality, etc.), but by other changes as well: global warming, demands to address festering racial disparities, the rise of populism and loss of faith in elite institutions, new technologies that have changed how markets operate, and more. As in past transformations, these developments have been accompanied by alarming political and social disruption, with the outcome up for grabs. Communism and fascism each found substantial footholds in the 1930s, just as revolutionary ideologies attracted adherents in the 1960s. Today, as faith in neoliberalism crumbles, we observe people in much of the world drifting toward toxic forms of ethnonationalism—think, for example, of Trump, Brexit, Bolsonaro, Modi, Orbán, and Putin, among others—with China’s version of political economy in the wings as an alternative. These are terrible options, but we’re not going to forestall them by exhorting people to stick with a neoliberal system in which they have already lost faith. Change is happening; the question is whether it will be change for the better.

If capitalism is to survive, then, it will need to adapt—as it has adapted in the past. We need to recognize and acknowledge the ways its neoliberal form has failed or is failing and address the legitimate and important demands of those this form of capitalism has excluded or forsaken. Alternative possibilities abound: how capitalism should change is something we can and should debate and experiment with. In fact, the only position that makes no sense is the one protesting that any change is “anti-capitalism,” as if Milton Friedman and his colleagues achieved some perfect, timeless wisdom in the 1970s.

This is not a left-right issue, at least not if that means “left” and “right” as defined by 20th century struggles and frameworks. Like other dominant paradigms, once established, neoliberalism was embraced on both sides of the political divide—Clinton and Obama were both faithful neoliberals of the progressive type—and our left-right arguments have been arguments within its overarching premises. But thoughtful people on both the right and the left have now begun questioning neoliberal orthodoxies: Yes, competition is a powerful motivator, but so too are collaboration and cooperation—especially since people think of themselves and act as members of groups and not as atomized individuals. Yes, growth matters, but so too does its distribution, as both an ethical and a practical matter. Fortunately, producing a more justly distributed growth need not depend on redistribution if instead we construct our markets to produce fairer outcomes in the first place—something we can do without impeding growth using different rules for antitrust, labor, corporations, and the like that value fairness alongside efficiency. If we truly value opportunity, meanwhile, we need to provide everyone with basic tools needed to flourish in a capitalist system—things like education and decent health care—which means acknowledging the enormous body of empirical evidence disproving the neoliberal fantasy that unregulated markets will do this on their own.

In the end, markets and governments are both just tools—devices to provide citizens the physical environment and opportunities for material success needed to flourish and live with dignity. At some point, neoliberals—conservative and liberal alike—lost sight of this and began treating the market almost as an end in itself. With their gaze in the wrong place, they failed to see how their version of markets was not working for more and more people. We’re now living with the consequences of their blindness, and we need to rebuild and do better. Before it’s too late.

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