This article originally appeared in Real Clear Markets on January 16, 2019.
Steven Pearlstein, the pulitzer-prize winning business columnist for the Washington Post, has written a book that provides a trenchant critique of contemporary capitalism in the United States. In “Can American Capitalism Survive,” he has dug beneath the surface of contemporary discontents in a carefully researched new book. After decades of slow growth, rising inequality, political polarization, and declining public trust in most of our institutions, including big business, a fundamental look at how our economy works is in order. One doesn’t have to agree with all of Pearlstein’s arguments to welcome his valuable effort to unpack why the existing rationale for capitalism is flawed. To be sure, he often wears his idealism on his sleeve, and his recommendations are, to my way of thinking, less convincing than his diagnosis, but we are badly in need of new ideas that challenge the reigning paradigm of how the economy works.
Let me take his critique of capitalism one element at a time.
His first point is that markets don’t always produce optimal outcomes. Every economics 101 student knows that the invisible hand and self-interest can deliver many benefits but that self-interest by itself cannot deal with the larger issue of what kind of society we want to live in. Markets are amoral. They cannot be left to decide what benefits should be provided to the least well-off, what kind of environment our children will inherit, and what kind of guard rails are needed to maintain competition and prevent unchecked economic power from influencing the political system.
His second point is that wages don’t always equal productivity. In fact, wage growth has lagged well behind productivity growth in recent decades, wage levels for workers with comparable education and experience vary sharply across firms—a result that shouldn’t occur in a competitive economy—and more and more of our national income is going to shareholders rather than to the workers that helped to produce it.
His third point is that we don’t have the kind of equal opportunity enshrined in our founding documents and in our continuing belief in meritocracy. We don’t get to pick our parents, our genetic endowments, our neighborhoods, or our early schooling. Today’s high levels of inequality may beget even less opportunity in the future and may even slow economic growth once it reaches the point where its incentivizing effects are offset by its negative effects on social trust, productivity, and political stability.
His final point is that fear of modest redistribution, on the grounds that it will undermine economic growth, is misplaced. He admits that too much redistribution could have adverse effects and that socialism is not the answer. Moreover, liberals have never defined just how much redistribution is enough. Still, the idea that there is always and everywhere a trade-off between equity and efficiency is just plain wrong.
In sum, and in Pearlstein’s own words, “greed is not good, people aren’t always worth what they are paid, opportunity is not equal and more fairness won’t make you poor.” Overall, the book lands devastating blows on the intellectual foundations of neoliberalism. What should replace it is far from clear.