The Future of Capitalism Chapters 1-2

"We are like a big fish that has been pulled from the water and is flopping wildly to find its way back in. In such a condition the fish never ask where the next flip or flop will bring it. It senses only that its present position is intolerable and that something else must be tried." Anonymous Chinese saying.

Thurow begins by telling us that capitalism is the only system that works to produce rising standards of living. It's competitors (fascism, socialism, and communism) are gone. However, the assumed outcomes of capitalism (growth, full employment, financial stability and rising real wages) are disappearing just as capitalism's competitors vanish. We are in a new environment with forces that are driving the economic system in new directions. These forces together with new technologies are producing a new economic game with new rules that require new strategies to win.

Thurow uses the concepts of plate tectonics from geology, and punctuated equilibrium from biology to illustrate the dynamics of the new economic world. The economic system seems static (like the earth's surface), but small cumulative changes create economic earthquakes. For example, the distribution of income and wealth seem static, but declines in real wages of non-supervisory workers have radically altered the distribution of purchasing power. In evolutionary biology, punctuated equilibrium refers to sudden changes where the dominant species dies out to be replaced by some other dominant species. Our economic system (and the world) is in a period of punctuated equilibrium caused by the simultaneous movement of five economic plates. These include:

A technology shift to an era dominated by man-made brainpower industries, (Chapter 4)

An era where there is no dominant economic, political, or military power (Chaper 7).

The five economic plates move (somewhat like the earth's continental plates) on a fluid mixture of technology and ideology. In periods of punctuated equilibrium, ideologies and technologies do not match. Capitalism depends on an ideology where the individual has the right and the duty to make as much money as possible. Societies flourish when their beliefs and technologies are congruent, but decline when they become incongruent.

Capitalism needs what its internal logic says it does not need, long term investments in research and development, education, and infrastructure. In a capitalist system, government needs to represent the future to the present. But this is the opposite of what it is doing. Where brainpower is the only source of competitive advantage, corporations should be integrating their skilled workforce more tightly into their organizations, but they are doing the opposite.

Democracy and capitalism are in conflict. Democracy believes in "one man, one vote", i.e., equality of political power. Capitalism, on the other hand believes in letting the market rule which produces large inequalities in economic power. A state-funded social safety net and other social investments are needed to make them more compatible. But social investments such as education are being crowded out by pension and health benefits for the elderly. The ideology of protecting the vulnerable (the old, the sick, the poor, the employed) is being replaced by a revival of survival-of-the-fittest capitalism.

The purpose of this book is to help the reader understand the movement of the underlying forces (movement of the economic plates) that lie below the surface of our economic system so that they can understand what is happening to them, chart a new direction, survive and thrive in the new economic game.

In a capitalist system the distribution of income and wealth determines what is produced, who gets paid, and who will consume the goods and services produced. Although there were narrow wage differentials during World War II resulting from government wage and price controls, wage inequality started to rise around 1968. By the 1990's inequalities were rapidly rising in every industrial, occupational, demographic and geographic group. All of the gains went to the top 20 percent of the workforce with 64 percent going to the top 1 percent. Average Fortune 500 CEO pay grew from 35 to 157 percent of the average production worker. A winner-take-all society had emerged.

Average median earnings for white males working full time fell 14 percent from 1973-1992 while real per capita GDP rose by 29 percent. Only the top quintile of the workforce experienced real-wage gains. Something different was going on in the American economy. The rising tide was no longer raising all boats. The old remedy (education) became a defensive necessity. Real household incomes were better because American females came to the rescue. By the mid 1990s over half of all employed women were providing at least half of their household's income.

Two and half million jobs were eliminated by corporate downsizing in the 1980s and early 1990s including both blue collar and white collar workers. Some of this decline occurred because of outsourcing. Some of it occurred because firms removed the traditional hierarchy (flattened out) and pushed the decisions down to the lowest level where the emphasis shifted to teamwork. Efficiency wages were replaced by the fear of being fired. Firms began to rely on a contingent workforce composed of part-timers, temporary workers, and contract workers who worked for lower wages. Many positions became dead-end jobs with little chance of obtaining health, pensions and other benefits.

The term Lumpen Proletariat (from Carl Marx) refers to those with so little productivity that they are not wanted by the private economy at any wage rate that would provide them with a normal standard of living. Most advanced industrial economies include a floating group of these people we call the homeless. There are also millions of young people who have no obvious means of economic support. In addition, there are more men in prison or on probation in the U.S. than unemployed men. This situation has developed because the economy does not need, want, or know how to use a large group of its citizens.

Family structures are disintegrating nearly everywhere. Births to unmarried mothers have soared. Divorce rates are rising along with female heads of households. In the U.S. 32 percent of men twenty-five to thirty-four earn less than is needed to keep a family of four above the poverty line. The family no longer provides a social welfare system. People do not work as a family. Children need parents, but parents do not need children. Nature makes mothers, but the social system has to make fathers and today's societies no longer make men into fathers. The one-earner middle-class family is now extinct. Changes have occurred within capitalism that have made the family and the market less and less compatible.

In the U.S., the poor do not vote, so the expectations of the middle class are what matters. But the middle class is scared. The era of annual wage increases is over. Government is withdrawing from its role as provider of economic security, and corporations are treating workers as outside contractors with fewer and fewer fringe benefits. This reality has changed perceptions. The percentage of the population that believes the country is run to benefit the rich increased from 29 percent in 1964 to 80 percent in 1992. The data support these perceptions.

Other countries face similar economic changes with somewhat different results. Rising inequality has also occurred in Europe where wages for low level workers were falling and the wage gap between the top and bottom levels was rising. But European social legislation made it nearly impossible to fire workers. Workers demanded and received rising wages and benefits. To offset the rising labor costs corporations stopped hiring which lead to higher unemployment rates than in the United States. This trend was exacerbated by anti-inflationary policies that produced high unemployment.

The Japanese have protected their workers with lifetime employment and a system of private unemployment insurance. But its corporations have paid a steep price in terms of profitability. The Japanese variant of capitalism is essentially a profit-free economy.

The distribution of income has changed. Customers with middle-class incomes have fallen. Some have moved upscale, while most have moved downscale as their incomes have fallen. Upscale stores (Bloomingdale's) and downscale stores (Wal-Mart) are doing well. Middle-class stores (Sears, Macy's) have lost market share or gone out of business. While the young have falling real incomes, the income share of the elderly has doubled in the last two decades. The elderly are the economic winners. This shift in purchasing power shows up in the success of the cruise line industry, electronic home shopping, and television programming and advertising. Capitalism and the winners can easily adjust to changes in incomes. For the losers it is more difficult.

No country (other than those experiencing a revolution or military defeat) has had such a broad increase in inequality as has occurred in the United States in the past two decades. The pattern of real wage reductions with rising per capita GDP is a new economic phenomenon. The purpose of the next six chapters is to show why.

I developed the graphic below to compare the changes in real wages provided by Thurow with some recent data developed by the Congressional Research Service. Real wages for males at the bottom income levels have declined over the 40 year period from 1979 to 2018 while real wages have increased significantly for those at the top. Overall, women have done much better than men with the exception of Black and Hispanic women at the 10th percentile. Also note that those with college degrees have made significant gains while those with a high-school diploma or less have lost real income at all levels. Wage inequality continues to increase.

Go to the next Chapter. Thurow, L. C. 1996. The Future of Capitalism: Chapter 3: Plate One: The End of Communism. William Morrow and Company. (Chapter 3)

Buchanan, M. 2002. Wealth happens. Harvard Business Review (April): 49-54. (Buchanan describes a universal law of wealth based on a network effect that appears to have some important implications for economic policy). (Note).

Martin, J. R. Not dated. A note on comparative economic systems and where our system should be headed. (Note).

Milanovic, B. 2019. Capitalism, Alone: The Future of the System That Rules the World. Harvard University Press. (Summary).

Oser, J. 1963. The Evolution of Economic Thought. Harcourt, Brace & World, Inc. (Summary).

Piketty, T. 2014. Capital in the Twenty-First Century. Belknap Press. (Note and Some Reviews).

Porter, M. E. and M. R. Kramer. 2006. Strategy and society: The link between competitive advantage and corporate social responsibility. Harvard Business Review (December): 78-92. (Summary).

Porter, M. E. and M. R. Kramer. 2011. Creating shared value: How to reinvent capitalism and unleash a wave of innovation and growth. Harvard Business Review (January/February): 62-77. (Summary).

Thurow, L. 1996. The Future of Capitalism: How Today's Economic Forces Shape Tomorrow's World. William Morrow and Company.