Capitalism is working as designed

David Leonhardt of The New York Times has made a shocking discovery: Capitalism isn't delivering the goods for the working class! By Jove! Thus he concludes that capitalism "isn't working."

He argues this is due to business leaders becoming selfish and forgetting their social responsibility. And to be fair, it's nice to see liberal business journalists writing frankly about the profound economic dysfunction that has gripped the United States for decades. But capitalism as such is working as designed.

Capitalism is a pretty nebulous concept, of course, and people use it to mean a lot of different things. However, there is a set of bedrock ideas that have generally defined the system over the years.

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They are: private ownership of the means of production (that is, factories, land, raw materials, tools, etc); a class of workers who must sell their labor to get income; and the price of that labor, as well as those of all goods and services generally, being set through markets. We might call this classical or laissez-faire capitalism, as developed in the 19th century. This system has basically never existed in its purest state, so we can think of it as an ideal that states can approximate to a greater or lesser extent. And like all systems of political economy, it produces a justifying ideology: classical liberalism back in the 19th century, or neoliberalism today.

An important design feature of classical capitalism is that it only distributes income to workers and owners of capital. It displaced feudalism by driving the peasants off the land, which previously (for all its other gruesome characteristics) served as a sort of safety net by allowing for some subsistence agriculture. If one couldn't work and had no wealth, one starved — which is why early capitalism was widely and correctly seen as a brutal, inhumane system.

An important empirical characteristic of classical capitalism is that it automatically creates extreme inequality. This happened in Britain and the United States during the Industrial Revolution up through the Gilded Age, and as Thomas Piketty writes in Capital in the Twenty-First Century, it took the Great Depression and two shattering world wars to cut down inequality, through confiscatory war taxation and outright destruction of wealth.

It's possible to fight capitalist inequality, but only by moving away from that pure state of capitalism. Heavy taxation on the rich — or building up collectively-owned wealth with public corporations or social wealth funds — means cutting down private control over the economy, as does extensive regulation to prevent things like pollution or financial crises. The postwar construction of the welfare state — which helped keep inequality down by providing income to families, the elderly, the disabled, the unemployed, and so on — also eroded the capitalist labor system by giving big swathes of the population income without working. (Indeed, the entire point of welfare is to moderate the social carnage of classical capitalism.) All these were features of the postwar New Deal political order.

Nordic countries demonstrate that it's possible to basically eradicate the foundational aspects of capitalism — especially in Norway, where the state owns 75 percent of all non-home wealth and state-owned companies produce 60 percent of economic output — while maintaining a cutting-edge productive economy. None of the Nordics have abolished markets, it's true, which is why conservatives insist they are still capitalist. But their market institutions have been so carefully hemmed in by regulation and public ownership that they bear only a slight resemblance to the pure capitalist forms detailed above.

Leonhardt notes that in the 1940s, the corporate executive class — frightened by the Second World War and fascism — largely embraced regulation, taxation, and welfare:

This did happen. But it understates the degree to which those equal incomes were taken by a mobilized working class. In 1944, for instance, Montgomery Ward chairman Sewell Avery willfully violated legal agreements with his union so many times that FDR seized the entire company to keep war production going, and Avery had to be carried out of his office by soldiers. It also understates how much business executives feared and hated Soviet Communism. Back then it was conventional wisdom that if a country couldn't produce a reasonably fair distribution of income, it would have a communist revolution. Some welfare and stiff top tax rates were regarded as a price worth paying to keep the workers from going berserk.

But starting in the 1980s, as the Soviet Union visibly stagnated and collapsed, and the conservative backlash to the New Deal gathered strength, classic capitalism was back in vogue. All those anti-capitalist structures were dismantled piece by piece: Unions were killed, regulations dismantled, taxes lowered, and welfare slashed. The result was a nearly point-for-point retread of the 1920s: skyrocketing inequality, a devastating global financial crisis, and lingering economic dysfunction.

It may be possible to re-regulate capitalism and make it less dysfunctional. But at least for now, capitalism is working as designed — and that's the problem.