Euro Crises put Contemporary Capitalism at a Crossroads

By Peter Lindfield, published in the Telegraph-Journal 12th June 2012

Contemporary European capitalism has had a relatively short run. It combines generous health and social benefits with shorter working hours than in North America and an emphasis on long vacations and early retirement. With high levels of productivity and income distributions that avoid excessive inequality, the European model of capitalism would appear to be the ideal balance of competitiveness and social stability.

In a post-financial crisis world, the possibility of fiscal meltdown in Greece, Spain, Portugal and Italy has become frighteningly real. We have come to question the sustainability of the European model. But the failure of these economies in conjunction with an extended global recession has cast a long shadow on the future of capitalism itself.

Successive versions of capitalism have been extraordinarily successful for more than two hundred years since the beginning of the Industrial Revolution. The dismal poverty that is still prominent in some parts of the world has been all but banished in much of the West. This is in stark contrast to the catastrophic experience of Marxist and socialist states, especially in the twentieth century. Today there is no agreement on what a viable replacement for the contemporary Anglo-American paradigm would look like.

A more state-centric variant of capitalism exists in China, where industrialization and massive investments in technology have transformed that country in less than thirty years. The Chinese capitalist model features ferocious competition among export firms, and government intervention is widespread and pervasive. Its social safety net is substantially weaker than the typical Anglo-American model.

But rather than viewing China’s model as superior to the Anglo-American paradigm, it is important to remember that Chinese political, economic, and financial institutions are still evolving.

In fact, it is the long global successes of capitalism that have thrown a spotlight on the looming structural flaws of the current economic system.

First, we continue to be faced with a widespread financial crisis on a number of fronts. Ongoing, relentless technological innovation has conspicuously increased economic risks where purely market-based solutions appear to be unable to address the global transformation that is taking place.

Financial systems themselves have inadequate regulations, with too little focus on excessive accumulations of debt. A prominent example is health care, where many countries are struggling with the moral dilemma of how to maintain incentives to produce and consume efficiently without producing unacceptably large disparities in access to care. The current pricing of health care does not encourage a more equitable relationship between equality and efficiency.

Second, Western economies have consistently failed to effectively price public goods such as clean air and water. There is little political will to establish a sufficiently high global price for carbon to motivate firms and individuals to internalize the cost of their environmental activities. There is widespread consensus that economics and the environment are inextricably intertwined, but the failure of Western states to conclude global climate change agreements is indicative of this pricing challenge.

Third, capitalism increasingly is producing unacceptable levels of inequality. At sub-national levels, tax systems have failed to provide a greater measure of redistribution of income without creating unnecessary distortions. The growing gap is partly a byproduct of capitalism’s tendency to aggregate at the national level. But it is clear that in many nations, regional disparities are growing, despite some governments’ reliance on equalization systems. We have yet to find the tools to curtail this vicious circle without stunting national growth.

There is no doubt that conventionally measured economic growth with the central implication of higher consumption cannot be sustained as capitalism’s core objective. The challenges of climate change, health care and financial instability are becoming more prominent, while political institutions remain unable to address them. In a few decades, we may look back on this era as the turning point in the history of capitalism.


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Filed under Environment policy, Government transformation, Health Care, Uncategorized

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