Does Capitalism Have a Future?

In the early days of the Occupy Wall Street movement — when it seemed more driven by legitimate grievance than by bizarre and sometimes dangerous street theater — occupiers were often seen holding a sign that, for many, encapsulated their message. It read “Capitalism Is Dead.” It was just the kind of unequivocal, defiant proclamation one would expect from a would-be revolution, but it was nothing new.

Since the 19th century, capitalism has been pronounced dead or dying many times. Limited liability corporations were supposedly going to kill it by allowing risk without a threat of real failure. Pensions were going to undermine the incentive to save. Government agencies like the Food and Drug Administration were going to limit free choice in the marketplace. In 1980, after years of stubborn stagflation, a Time magazine cover story famously asked, “Is Capitalism Working?” Ironically, the ensuing decades brought an economic golden age, fueled by an increasingly vehement belief that free markets, unfettered by government interference, will self-regulate.

Then came the Great Meltdown of 2008, and the coroner’s inquest about the demise of capitalism resumed with vigor. In recent years, countless blogs, along with The New York Times, The Washington Post, The Financial Times and even the normally reserved McKinsey Quarterly have all perseverated about the future of capitalism. A 2011 poll by the Canadian firm GlobeScan pronounced the capitalist ideology on the wane almost everywhere in the world except China, Brazil and Germany. In the United States, the number of Americans who agreed that the world’s best bet was the free-market system had fallen from 80 percent in 2002 to 59 percent in 2010.

A strong case can be made, of course, that our current problems emanate not from the capitalist system itself, but from the perversion of it through unfair practices, poor governance, and the bad behavior of a few. “The Occupy protesters are not wrong in indicting our system today for unfairness, crony capitalism, insider dealings and corruption,” said Arthur C. Brooks, president of the American Enterprise Institute. “However, the overwhelming majority of Americans believe fairness means rewarding merit, even if that means some people have a lot more than others.”

George M. Taber, the editor who wrote the 1980 Time magazine cover story, recently told Knowledge@Wharton that he still agrees with the conclusion he offered 30 years ago: “For all its obvious blemishes and needed reforms, capitalism alone holds out the most creative and dynamic force that any civilization has ever discovered: the power of the free, ambitious individual.” However, he added, “Well-intentioned, but unwise, changes in the nature of American capitalism could do damage that will be felt for decades.”

Nevertheless, a growing chorus of voices are suggesting the system has outlived its relevance and effectiveness. Even capitalist icons like Microsoft founder Bill Gates and competitive strategy guru Michael Porter have lately been calling for change. Gates has been talking about the need to engage in “creative capitalism” by acting on our “primal impulses to do good.” Porter has been promoting “shared value,” arguing that “creating societal benefit is the best way to create economic value for the firm.”

While Gates and Porter essentially propose to overlay the existing system with mandates for social responsibility and sustainability, others believe the system is broken and needs an overhaul. At a 2011 symposium called “New World, New Capitalism” in Paris, French President Nicolas Sarkozy, former British Prime Minister Tony Blair and German Chancellor Angela Merkel each made presentations on the need for fundamental change. Nouriel Roubini, professor of economics at the Stern School of Business, contended in a recent blog post that Karl Marx “was partly right in arguing that globalization, financial intermediation run amok, and redistribution of income and wealth from labor to capital could lead capitalism to self-destruct. To enable market-oriented economies to operate as they should, we need the right balance between markets and the provision of public goods.”

In that same vein, there has been a revival of interest in Keynesian economics, which advocates significant government and public sector involvement in the private sector economy and warns that without it, inadequate aggregate demand could lead to prolonged periods of high unemployment — a scenario that we have certainly observed in the past four years.

Still, all of the hand-wringing about the death, health or reform of capitalism raises an important question: has the unfettered “free market” that so many devoutly extol or revile ever really existed?

“The truth is there never has been absolute freedom in free markets. There have always been codes of conduct,” said Greg Pytel, an international business consultant. William Galston, a senior fellow at the Brookings Institution, agreed: “[Although] markets are the principal drivers of economic activity, this activity takes place within a system of public rules. Regulatory institutions are not antithetical, but rather essential to a capitalist system.”

What’s more, it would be difficult to find a modern capitalist economy that did not rely to some extent on transactions that occur outside market dynamics, such as unemployment benefits, public pensions, social security and the public provision of education, health care and other services.

Indeed, early proponents of the virtues of markets, including Adam Smith, did not expect the market mechanism or the profit motive to, by themselves, create optimal outcomes. According to Amartya Sen, a professor of economics and philosophy at Harvard, “Smith’s economic analysis went well beyond leaving everything to the invisible hand of the market. He was a defender of the role of the state in providing public services, [and] he was concerned about the inequality and poverty that might survive in an otherwise successful market economy.”

Smith also argued that insufficient regulation of financial activities would lead to illegitimate practices, over-speculation and excessive risk-taking — an argument difficult to refute in light of recent events. In Sen’s view, “If we were to look for a new approach to the organization of economic activity that included a pragmatic choice of public services and well-considered regulations, we would be following rather than departing from the agenda that Smith outlined.”

In the final analysis, as economist Richard Wolff has noted, “Social systems don’t come into being in a self-aware manner.” Capitalism has never been a planned system, but rather an emergent one. As such, it is governed not by consistent practices, but by evolving practices subject to consistent rules. The essential rule of capitalism is not that markets should be free from regulation or augmentation, but that individuals should be free to compete in fair markets.