Chapters 14 and 15
Study Guide by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida
The Future of Capitalism Main Page
Chapter 14: A Period of Punctuated Equilibrium
Human capital (skills, education, and knowledge) has become the dominant source of strategic advantage in the twenty-first century. Although physical capital is still necessary, the technologies that give a firm competitive advantage are now in the minds of the firm's employees. Human capital differs from physical capital in three ways:
1. Human capital cannot be owned, repossessed or sold,
2. Human capital investments require a longer time horizon than permitted by capitalism, and
3. The investments needed to generate man-made brainpower industries have to be made in a social context foreign to the individualistic orientation of capitalism.
Capitalist individuals maximize consumption and leisure in the present. Education is a lumpy investment with big returns to the early years and big payoffs for a college degree, but very small payoffs for the years in between. If education were viewed marginally, one year at a time, no one could justify investing in those middle years. Private capitalist's time horizons are too short to accommodate the time constants of education. For poor and middle class parents, investments in the education of their children is irrational. A vague concern for the welfare of children is not enough to offset the realities of the market incentives to focus on the present. This is why no country has ever become literate or even semiliterate without public education.
Even though public education violates every principle of capitalism, what is irrational for individuals is very rational for society as a whole. Public education is a social investment that capitalism needs to survive but cannot and will not make for itself. Capitalism's biggest weakness is myopia. In the past, long term government investments have been made to rescue capitalism (the GI Bill in the 1950's and the National Defense Education Act in the 1960s). But these investments are being cut back. State universities are relying less and less on public money and more and more on tuition from students. Business firms have an even shorter time horizon than parents when it comes to on-the-job training since they worry that once trained, employees will leave for higher-paying jobs elsewhere. Apprenticeship programs, common in Germany and Japan are conspicuously absent in the United States. At a time when business firms should be building closer relationships with employees, they are doing the opposite. The system is evolving toward less commitment and less skills investments just as more skills investment is needed.
Infrastructure and Knowledge
To spread and accelerate economic development, infrastructure has to be built ahead of the market. But capitalist infrastructure can only be built behind, with, or slightly ahead of the market. For this reason, American economic growth has depended on government investments (The National Road in 1815, the Homestead Act, land grant colleges, public airports, atomic energy, the internet). But in the United States public investments in infrastructure have been cut in half over the past twenty-five years. Most of the investments in infrastructure cannot be justified from the perspective of capitalism, so it has been hidden and justified as national defense. Examples include the interstate highway system justified by a need to move mobile missiles rapidly in wartime; the man-on-the-moon program justified as part of the military race with Russia; and the internet that would be a bomb proof wartime communication system.
Healthcare is another area too important to be left to the market, and it has been the other cover for public research and development spending. The generous funding for the National Institutes of Health generated the imagination and financial support needed to create the biotechnology industry.
Today capitalism isn't getting what it needs for its long-run success. Government must play a central role in supplying the human skills, technology, and infrastructure needed for the success of capitalism in the twenty-first century. Government should be representing the interest of the future to the present by making the necessary investments that capitalism cannot make for itself. But instead government is doing the opposite. Government is borrowing funds that could be used to invest in the future to increase consumption in the present.
An Era of Shorter Time Horizons
Perhaps short-term thinking is built into the human genetic behavioral code. In the United States from 1973 to 1993 public spending on research and development, infrastructure, and education fell from 11 to 6 percent of GDP. Effectively governments are reducing future growth to support current consumption. In the private sector, time horizons are becoming shorter with a growing elderly population that has no future, a media that focuses on present consumption, consumer credit markets that lend for consumption purposes, welfare benefits that discourage savings, and private firms that use high discount rates in investments decisions. About two thirds of the U.S. decline in savings rates from 8 percent in the 1960s to 4 percent in the 1990s was due to negative savings by elderly citizens. Part of the reason for this decline in savings is related to private and public pensions, social security, and Medicare. Wide spread availability of consumer and mortgage credit and home equity loans also promote consumption rather than savings. Anyone can have anything they want and pay for it later.
Nowhere is capitalism's short-term thinking more acute than in the area of global environmentalism. Any action now to reduce global warming or ozone depletion will affect the environment fifty to one hundred years from now, but have little noticeable effect on what happens today. Using capitalism's decision rules, the appropriate decision is to do nothing since the net present value of the benefits of climate action to be obtained in the distant future is zero. Eventually a generation will reach a point where they cannot survive in the earth's environment, and by then it will be too late. Capitalism will have produced a collective social suicide.
The Missing Ingredient - The Future
In capitalism there is no concept of the distant future. Technology just appears and capitalists invest to benefit from it. There is no social context of individual preference formation in capitalism, although preference shaping has been identified as a primary goal of child rearing, education, religion, advertising, legislation and criminal punishment. Also missing from capitalism is a basis for demanding self-constraint unless individual actions harm someone else. Capitalism's underlying theology of consumption is at odds with what capitalism needs to succeed. Investments in physical infrastructure (highways, water, sewage, electricity) and social infrastructure (public safety, education opportunities, research and development) are necessary for economic progress, but none of these investments are called for in the theology of capitalism. Although the public sector has come to the rescue, capitalism's excuse for government involvement has been some sort of military threat.
The capitalism of comparative advantage did not need government funding for research and development. The location of natural resources and capital-labor ratios determined economic activity. But capitalism based on man-made brainpower industries depends on building a leading edge research and development system, a workforce with the skills required to master the new product, production, and distribution technologies, and a world-class communication and transportation infrastructure. Can capitalism invest in the human capital, infrastructure, and research and development if needs to flourish, or will it continue to get rich in the short run and refuse to make the social investments needed for its long-run success?
There needs to be a balance between public and private and between consumption and investment. History shows that the all public model (communism) and the all private model (feudalism and the implicit model of capitalism) do not work. A society based on all consumption or all investment also does not work. To work, capitalism will have to find a balance in each of these areas.
Questions that need to be answered include:
1. How can capitalism function when the most important type of capital cannot be owned?
2. How can companies get employees to work together in teams that focus on the team's self interest rather than their own self-interest.
3. Who will make the long-run investments in skills, infrastructure and research and development necessary for capitalism to flourish in the future.
4. How can a system of radical short-run individualism emphasize the long-run communal interest?
Chapter 15: Operating in a Period of Punctuated Equilibrium
Although the death of communism and socialism leaves capitalism with no active alternative, dissatisfaction and hostility is growing everywhere as those with falling economic prospects focus their fears on immigrants, while religious fundamentalists want to take control of the political process to install their own versions of truth and certainty. Free market conservatives may ally themselves with religious fundamentalists, but religious fundamentalists do not believe in free markets in goods and services any more than they believe in free markets in beliefs and ideas. They want to control what can be produced and purchased in the market. As pointed out in Chapter 12, neither ethnic separatism nor the fundamentalist's religious values are the solution to the problems capitalism is facing.
Governments are in trouble everywhere in the world because dramatic changes have occurred in the distribution of income and wealth over the past twenty-five years, and nothing has been done to reverse it. The social contract between middle-class workers and corporate America no longer exists, and the social welfare state is in retreat. A return to free market survival-of-the fittest economics is what happens when people are confused. Eventually the middle class will demand that the political process act to stop the reductions in its benefits and standards of living. A new capitalism has to be invented.
A Builder's Ideology
Adopting the right public policies designed to get us from where we are today to where we want to be in the future is not the current issue. The issue is recognizing the need for change, intellectually and emotionally, figuring out where we want to be in the future, and then creating a sense of urgency about getting there. Those who succeed will build man-made brainpower industries of the future. Capitalism will have to shift from a consumption ideology to a builder's ideology with time horizons much longer than those of absentee capitalist or consumers. If individuals are to develop a builder's mentality, government will have to be an active visible builder.
Adjusting To a New Game
Making the necessary changes will be hard for Americans who believe that their system is perfect. Instead of blaming the system when something goes wrong, Americans blame the bad guys who are never supposed to win. The free market is expected to provide the best there is, so the changes required in the new game will be hard to accept.
The European model faces different problems. Its savings and investment rates are higher than in America, it has a more communitarian character, and believes that social security is the rightful outcome of economic progress. In Europe the public sector provides 80 percent of the social welfare while the private sector provides the other 20 percent. In contrast, 55 percent of the welfare system is financed by the public sector in the U.S. and 45 percent is privately financed. As a result the collapse of the welfare system is more of a problem in Europe where the current system cannot continue.
Japan has higher savings rates and an even more communitarian culture than Europe. Individuals identify with the firm, collaborate in teams, share profits and bonuses, and firms have a cross ownership structure with business groups. The Japanese problem is that profits have nearly disappeared. Their system is not socialism, but a profitless capitalism is not a system that can thrive. Japan needs a domestically pulled economy rather than the export-led economy that developed after World War II, but Japan seems to be stuck in an ever-lengthening recession. Becoming a global leader will require an enormous change in the Japanese culture.
Conclusion
Capitalism will not implode like communism. Instead, stagnation is the danger. The problems visible at its birth (instability, rising inequality, a lumpen proletariat) are still waiting to be solved, but so are a new set of problems produced by capitalism's growing dependence on human capital and man-made brainpower industries. Technology is making knowledge and skills the only sources of sustainable strategic advantage. Short run consumption maximization is at odds with what is needed for economic success. What is needed is a willingness and ability to make long-run investments in skills, education, knowledge and infrastructure.
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Related summaries:
Johnson, H. T. 2012. A global system growing itself to death - and what we can do about it. The Systems Thinker (May): 2-6. (Summary).
Martin, J. R. Not dated. A note on comparative economic systems and where our system should be headed. (Note).
Martin, J. R. Not dated. ASCE report cards for America's infrastructure. Management And Accounting Web. (ASCE Infrastructure).
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).
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).