Hot! Why capitalism has time to save itself

TheGlobeandMail.com – commentary
Aug. 14 2013.   Michael Warren

Capitalism is the most efficient means of matching supply with demand and allocating resources. It has been effective at creating wealth and raising living standards. Democratic capitalism has enhanced human potential by providing intrinsic rewards for effort and innovation.

But the Great Recession of 2008 and its lingering effects have highlighted what some are calling a crisis in capitalism. It’s not just the occupy movement, the shrinking middle class or the service underclass who are questioning the system.

The captains of capital are also worried. A 2012 Bloomberg Global Poll of business leaders produced some surprising results: Seventy per cent believe capitalism is “in trouble.” Thirty per cent said it needs a “radical reworking of the rules and regulations.”

Most industrial economies are experiencing growing inequalities in the distribution of incomes, wealth and property. They are also coping with persistently high levels of unemployment and record levels of levels of public and individual debt. The collective result is a crisis of confidence in our current form of capitalism.

The evidence of wage and wealth inequity is overwhelming. The top 1 per cent of Canadians receives nearly 15 per cent of the nation’s total income. The Canadian economy has more than doubled over the last 30 years. But middle class incomes have only increased by 13 per cent.

Inequity in the United States is worse. The top 1 per cent of Americans receives almost 25 per cent of all U.S. annual income. They have more wealth than the bottom 90 per cent.

Historically capital and labour have shared the gains from productivity. But between 1980 and 2005 the real earnings of Canadian labour barely moved while their productivity increased by 37 per cent.

There has been a dramatic shift of power from nation state democracies to multinational corporations. More than half of the 100 largest economies in the world are now corporations.

There are fundamental conflicts between the values of the capitalism and those of democracy. And we are failing to keep the influence of these “twin pillars of the Western World” in a healthy balance. Economist Jacques Attali predicts the rise of “market dictatorships” if stronger and more participatory democracies don’t emerge soon.

Then there is capitalism’s reliance on infinite economic growth on a finite planet. Our free market economy is predicated on the questionable assumption that nature is limitless, that it can be endlessly exploited.

Some of the most serious flaws of mature capitalism are masked by how narrowly its performance is measured. Our primary measure of economic growth is gross domestic product (GDP). But this calculation ignores how income is distributed, what natural resources were depleted, and how much pollution resulted.

Quarterly unemployment reports don’t include people who have given up looking for work, or who are underemployed or have agreed to work for less pay. Yet these market measures are the basis of many major public and private sector policy decisions.

Reforming capitalism attracts many opinions. But it may already be on the way to reforming itself.

There are those who believe that course corrections are all that are needed. Strengthen shareholder advocacy and connect corporate compensation to long-term performance. Integrate the laws of sustainability into capitalism.

Others see the emergence of social media as a force that is transforming how we work, play, consume and learn. The two billion (and growing) people interacting online have helped to spawn new business models, collective behaviours, and social organizations. But they have yet to modify the values of the corporations that own and operate the “World Brain.”

Since 1980 blue collar workers have declined from 40 per cent to only 20 per cent of our work force. Meanwhile two new classes have arisen: the high skill, high-pay creative class, and the low skill, low-pay service class.

Rotman School of Management professor Richard Florida says we need a new social compact, one that regulates growth, reduces inequity and rebuilds a vibrant middle class. “We cannot impede the logic of capitalism, but we can and must move to a system of more sustainable growth – one that fully utilizes human capabilities and adds greater purpose and meaning to our lives.”

Others believe that the structure of for-profit corporations is at the heart of the problem. They encourage entrepreneurs, investors and consumers to consider the “for-benefit enterprise” model. These entities are designed to seamlessly integrate financial, social and environmental value creation. They would add a fourth sector to the for-profit, non-profit and public sectors.

Finally, there are those who see mass protests in the streets as the only way of humanizing capitalism. They believe compromised democracies and their corporate elites won’t yield up voluntarily.

But capitalism came back from a similar crisis following the Great Depression. It has the inherent ability to right itself again – in its own self interest.

One of the basic reasons for our anemic global growth is that consumers aren’t consuming. Capital, in pursuit of uber profits, has disconnected from the needs of societies and nations. It’s allowed wealth and wages to concentrate at the very top where job creation and consumption is limited.

Some corporate leaders are beginning to see that reviving demand means putting more money back into the hands of middle and working class families. And progressive political parties in Canada and the U.S. have identified this as their primary goal.

It’s on this common ground that reform may emerge.

Michael Warren is a former corporate director, Ontario deputy minister, TTC chief general manager and Canada Post CEO.

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