Capitalism will slowly evolve into a Democratic Socialist system that will be able to provide the structures for maintaining democratic substance and resolving the challenges of a difficult future.
Theory and logic indicate Socialism’s possible superiority. If centralized planners, especially in the technological age of data mining and artificial intelligence, responsibly control the processes, allocate resources, create an agreeable work ethic, and capably enter into the international trading system, Socialism might succeed. Apparently, except for China, which is more of an authoritarian mixed or semi-fascist economy (government and industry working together), this has not occurred. The public views Socialism as a totally failed concept.
Despite numerous failures of theoretical inferiority, Capitalism sustains, going through crises of fall, revival, and survival. “Can Socialism’s failures be ameliorated, can Capitalism contue to revive and survive, and can Socialism replace Capitalism?” are questions arising from the debate between Socialist and Capitalist competition. Answering the questions allows changes in qualifications for reception. Enhancing quality of life, increasing material wants, and augmenting Gross National product are becoming lesser qualifications. The future portends more importance to meeting challenges posed by climate change, pandemics, greenhouse gases, and other potential crises. The future portends more importance to survival, to having sufficient means to meet the next day in a gracious and inviting manner.
In a capitalist system, the capitalist owns means of production, invests profits to regenerate more profits, and increases capital from this constant reinvestment. An outgrowth of the industrial revolution, Capitalism promoted industrial progress and greatly increased the material wants of much of the world. Stagnating through recessions, depressions and panics, Capitalism periodically breaks down, retreats, and petitions government rescue. From another perspective, pure Capitalism had a short life, needed to be constantly resuscitated, and finally evolved into neoliberalism Capitalism, a sub-system to a mixed economy that uses capitalist structures. Severity of forecasted global problems indicates that neoliberal Capitalism cannot meet the challenges, and a new socioeconomic system is demanded.
Pure Socialism is an economic and political system, where the government owns much of production and controls most prices. Considered, from historical attempts, to be a liability, Socialism has two primary built-in failures ─ inability to properly allocate resources and to motivate workers. The former occurs from industries hoarding to meet quotas, which creates waste, and from other industries being unable to meet commitments, which creates production bottlenecks. The latter is a product of workers having lifetime employment and not requiring motivation to maintain security. Although they occur in the capitalist system, Socialism also allows a more sinecure and corrupt system, where close associates are favored.
Democratic socialism has many definitions. For this conversation, Democratic Socialism defines an economy and society that is politically democratic, allows private enterprise to generate surpluses and uses government controls to assure profits are optimally reassigned for both business (profit reinvestment) and public needs (taxation). Government policies, such as subsidizing, regulating, and distributing, help shape the economy. Social ownership of businesses is encouraged. These include worker-owned cooperatives, publicly owned enterprises managed by workers and consumer representatives, and workplace democracy, where workers sit on corporation boards. Some inefficient and vital industries necessitate some form of state ownership, but most industries are best run as private enterprises.
Democratic Socialists consider central planning for major public industries — mass transit, housing, and energy — and permit market mechanisms to determine the demand for consumer goods. Mainly, Democratic Socialism attempts to combine the positives of Capitalism and Socialism and eschew the faults of both systems.
Failures of Capitalism and its neoliberal doppelganger ─ free enterprise
Behind the appearance of Capitalism’s (free enterprise) success in providing material wants to vast population, lie failures — economic depressions, world wars, civil strife, and inability of the private sector to respond quickly to catastrophes, as shown by western response to the corona virus.
Periodic economic recessions, depressions, and panics gripped the United States since its beginnings. Government actions to repair the defects and readjust the failures proceeded from recognition that Capitalism becomes comatose every few years and must be constantly revived. A plethora of laws, regulations, agencies, government deficits, and other ameliorations have provided stitches, transplants, band-aids, and surgical operations to patch up and rescue a constantly ailing patient, reviving the collapsed after each fall. The history of Capitalism reveals a system that ignored the nation and a nation that did its utmost to maintain free enterprise.
From 1867 to 1929, the U.S. economy exhibited a shock every several years. Seven severe depressions or financial panics occurred during that 62-year period. One of these started in 1873, and is considered to be the Long Depression ─ a period of bursts of prosperity and contractions from 1873-1896.
Constant economic disturbances and sputtered growth prompted lawmakers to socialize capitalism, and correct the excesses of “rugged individualism capitalism,” in which a few financiers exercised control of the economic system and used it for their private gain ─ essentially robbing banks by owning them. Establishment of the Interstate Commercial Commission in 1887 for regulating the railroads, passage of the Sherman Antitrust Act of 1890, which “declared illegal all combinations in restraint of trade,” creation of the Federal Reserve System in 1912 to regulate the money supply, stabilize the financial system and subdue inflation, passage of the Clayton Act in 1914 in order to further restrict anti-competitive practices and enforce the earlier Sherman Antitrust act, establishment of the Federal Trade Commission in 1914, an agency with powers to “prevent business practices that are anti-competitive or deceptive or unfair to consumers,” and formation of The Federal Communications Commission , by the Communications Act of 1934, to “maintain jurisdiction over the areas of broadband access, fair competition, radio frequency use, media responsibility, public safety, and homeland security,” are a few examples of government attempts to rectify Capitalism’s problems. They did not halt the calamities ─ “boom” and bust” persisted; speculation remained rampant; mergers tending to monopolies continued; banks went bankrupt.
The call for regulatory legislation proved that the capitalist system, which had its moments of genuine success, was, as constituted, insufficiently effective or efficient ─ it could not exist without government intervention. Legislators, in their ardor to preserve the system, neglected to realize that the capitalist system had survived with special advantages. How far would the capitalist system in the United States have advanced without a century of slave labor, land and resource appropriation from the Native Americans, constant wars to seize territory in North America and command global markets, and tens of millions of immigrants working at subsistence wages? Government attempts to stabilize the erratic free enterprise system with regulatory capitalism served as a temporary palliative, which eventually became co-opted and could not prevent the Great Depression.
Hunger and unemployment in the land of plenty drove the New Deal toward the rescue plan of welfare capitalism ─ government sponsored programs and legislation that fostered institutions to re-distribute wealth and enable all citizens to escape poverty and gain equal opportunity. Soon more rescue was needed, such as government construction of transportation, communication and power infrastructure ─ interstate highways, airports, hydroelectric and nuclear power plants, and ARPANET (the first wide-area packet switching network). Equal opportunity laws, subsidized mortgage loans, and direct coordination in research and development between the defense department and private industry drove free enterprise toward a mixed economy. Extensive cessions of public lands made to states and to railroad companies, between 1850 and 1872, promoted railroad construction; government defense contracts developed the electronics and aviation industries; Eisenhower administration’s interstate road system magnified the automobile and steel industries.
The role of the defense department in providing sustenance to the free enterprise system is insufficiently considered. Entire industries — defense, armaments, electronics, shipbuilding, aviation, space exploration — and parts of some industries — airlines, plastics, chemical, metallurgical, Internet — owe their existence and prosperity to defense department developments, funds and contracts. Airplane designs and manufacture are direct outgrowths from defense industry warplanes. Airline growth relied upon government subsidies, mail and freight deliveries, and airport constructions. Despite the assistance, the airline industry, until recently, consistently showed bottom line losses and most of the many airlines have gone bankrupt. Without government assistance, the free enterprise economy would have permanently collapsed decades ago.
OPEC’s higher oil prices challenged a troubled Capitalism with inflation, ultra-high interest rates and a 1981 recession, which invoked the final rescue plan ─ pump the economy with government deficits and easy credit ─ the final attempt to rescue the system.
Since the Reagan administration, the Gross Domestic Product (GDP) has closely followed an almost continually increasing sum of public and private debt. Growth in the Capitalism system became allied to and dependent upon growth in debt.
Excessive debt enabled the Reagan administration to emerge from its incipient recession. Escalated private debt offset budget surpluses during the Clinton administration. A combined whammy of private and public debt during the Bush term soon hit a wall and caused the huge 2008 recession. Wisely, Obama pursued slow growth policies that needed slow accumulation of debt and prevented any downfall during his entire administration.
Almost all money is conventional debt, issued by banks in their lending process, and by Federal Reserve open market operations. Capitalism runs on this debt. As debt plus interest is retired, new and more expensive debt must replace it or the monetary base will decrease and money available for purchase of goods and services will decline. Aligned with this decline is the rapid disappearance of profit.
Capitalism needs profit in order to grow and generate its periods of prosperity. Because profit is the lifeblood of the capitalist system, understanding the modern concept of profit ─ how profit is made, its functions, problems, benefits, and failures ─ provides an improved understanding of the contemporary Capitalism system.
The price of goods Pr = C+ P, where C is cost, and P is profit. In the production process, excepting for some subsidies, no funds are supplied to the economy for purchase of the goods represented by profit, or as Karl Marx defined it, the surplus value, the value of goods that worker wages are insufficient to purchase. From where comes the added purchasing power to obtain the mysterious profit?
Increasing the Purchasing Power
(1) Private debt supplies a major increase in purchasing power.
(2) Distribution of profits by dividends, share buybacks, and bonuses to management and employees recirculate profits for purchase of goods.
(3) Government deficit spending supplies the knockout punch to clear the shelves, growing when private debt shrinks.
(4) A positive trade balance brings purchasing power into the system, reclaiming dollars circulating throughout the world. A negative balance, which has occurred during the last decades, removes purchasing power from the system.
(5) Some liquid funds from savings and investments re-enter the system.
The first three components have operated strongly and actively to restore purchasing power. Regardless of approaches to stabilize the capitalist system, the profit motive has built-in failures and must eventually collapse.
The ultimate failure of the profit system is apparent. To increase purchasing of goods, the money supply must increase. Trade imbalances (subsidized by government debt), and retirement of private debt and its interest decrease the money supply. When, securing debt becomes saturated, which means the money supply cannot increase, wants from all sectors are fulfilled, or workers become unavailable for increased production, the economy must stagnate and soon must decline. Proper actions can slow the failures but not forever. Bust is inevitable.
The true meaning of profit
Profit is perceived with awe, glorified as the deserved result of risky and arduous effort. Household debt is viewed with sympathy, as an opportunity to purchase hard goods and participate in the material life of the nation for those who cannot immediately earn enough to buy the goods. Government debt has severe detractors who consider it a theft on future generations. The true meaning of profit is that they are all the same, the principal component of someone’s profit is debt accrued by others.
As described, a Capitalist system does not exist on its own merits; capital formations are only one part of a complex socioeconomic system, which includes credit control, welfare, government spending, taxes, subsidies, regulation, directives, and oversight, all which determine production, growth, and progress. The entrepreneur deserves remuneration, but he/she and the capitalist system maintain existence only due to government largesse.
Profit is not tied to Capitalism, and other economic systems can incorporate it for growth and material enrichment. A severely modified Capitalism can more efficiently and effectively employ profit, which has significant benefits.
A Democratic socialized system can issue credit to those willing to amortize expensive items that would ordinarily require years of savings. Instead of dividends to stockholders, profits from the credit purchases are recirculated as bonuses to laborers. The profit motive remains, and the rewards enrich a greater number of people.
Industry wide sharing of profits between investors and employees extends the years between economic cycles and allows stable and high profits ─ previous year distributed profit allows purchase of next year’s surplus. Less domestic and government credit are needed to keep the system alive.
The Economic Consequences of Wealth Concentration
An economy that has operated as “trickle down” has reached a peak, and it is time for an economy that pours itself out for all. Share the wealth and lessening inequality by distribution of income are not just idealistic expressions or populist proposals; they are sound economics. More equitably distributed wages and spending power lessen social grievances, reduce social problems, and increase domestic spending. More equal distribution of wealth has also been associated with improvements in national health. Fairness to all reflects as benefits to all, including a lower need for government spending on social programs.
Rationalizing ill-conceived wealth distributions by describing the American poor as wealthier than the lower middle class in many developed nations is deceiving. Poverty is defined as an absolute number, but its effects are relative. The lower wage earners in the United States are unaware of what they have in relation to foreigners; they are aware of what they do not have in relation to others living close to them. The wide disparity in wealth creates resentment and tension leading to psychological and emotional difficulties. Minimizing social problems means combining the giving of more to the lower classes with the taking of less by the upper classes.
The social problems and associated costs in developed nations that have wide distributions of income and wealth are well-documented — elevated mental illness, crime, infant mortality, and health problems. Every citizen suffers from and pays for the social problems derived from income inequality, an unfair condition in a democratic society. Several investigators have clarified the social determinants of health.
Kawachi, I. and B.P. Kennedy, 1997, in Socioeconomic Determinants of Health: Health and Social Cohesion: Why Care About Income Inequality? British Medical Journal.
Growing evidence suggests that the distribution of income, in addition to the absolute standard of living enjoyed by the poor, is a key determinant of population health. A large gap between rich people and poor people leads to higher mortality through the breakdown of social cohesion. The recent surge in income inequality in many countries has been accompanied by a marked increase in the residential concentration of poverty and affluence. Residential segregation diminishes the opportunities for social cohesion.
University of Chicago, Nov, 16-22, Sir Michael Marmot, The Social Determinants of Health and Disease Health
One of the dominant features affecting the health situation of all industrialized countries is the social gradient in health and disease. Analysts who approach this topic commonly think of it as a problem of poor health for the disadvantaged and good health for those who are not in the disadvantaged category. This is an inadequate way to pose the problem. The Whitehall Study of civil servants showed that, amongst people who are not poor, there is a social gradient in mortality that runs from the bottom to the top in each society. People in each socio-economic category have worse health than those above them in the hierarchy.
Impact of the Coronavirus on Health and Economics
Response to the Covid-19 pandemic has shown the inability of the private sector to adequately contain a pandemic and diminish its deleterious economic effects. Only a fully committed government can completely mobilize the public to subdue a serious epidemic and arrange the nation’s resources to assure its economic health. In a socialized system, an epidemic will not lead to economic uncertainty; the public will know that basic care will be provided. Nor will there be confusion of for whom, how, where, and when health services will be available. The Covid-19 epidemic revealed the capitalist system dropped the ball, slowed to a walk, and finally was temporarily replaced by a quasi-Democratic Socialist system that planned, controlled, and distributed resources to the citizens, a prelude to governing the future.
A future of growing challenges — climate change, pandemics, robotics and artificial intelligence replacing workers, greenhouse gas emissions heating the atmosphere, change from fossil fuels to renewable energy sources, prevention of nuclear war, migration chaos, political polarization, and redistribution of the wealth — demand a realignment of the socioeconomic system.
Governments are needed that can assure the safety and security of all the worlds peoples, no matter their economic status, and no matter the hardships of the prevailing circumstances. Wealth will be immaterial, and escaping human extinction will be the motivation, requiring government action in many aspects of human existence. Capitalism will slowly evolve into a Democratic Socialist system that will be able to provide the structures for maintaining democratic substance and resolving the challenges of a difficult future.
Dan Lieberman edits Alternative Insight, a commentary on foreign policy, economics, and politics. He is author of the book A Third Party Can Succeed in America, a Kindle: The Artistry of a Dog, and a novel: The Victory (under a pen name). Dan can be reached at firstname.lastname@example.org