The current narrative endorsed by the conservatives in the Republican Party tells us that laws of economics if applied consistently will yield goods and services in quantities sufficient for the prosperity of all of us. These laws are to be protected by a government limited primarily to insuring the sanctity of contracts, the rule of civil law, and the legitimacy of the state as the custodian of enough force to keep the peace. It is assumed that each of us will strive to maximize our own profit and unfettered competition will create an equilibrium where prices and wages will settle in the best possible relationship. The early Puritan idea that personal wealth is a sign of God's favor probably lingers as a justification for success. Private property is the rock upon such a society is built. Without private property no one can be sure that wealth will be secure and there would be little incentive to work for so uncertain a future. Government must not, therefore, interfere in the economy by regulations, with minimum wage requirements, by promoting unions, by offering dependency-creating social insurance programs, or with any activity that limits economic freedom. Violating these natural laws will doom us to wealth-destroying socialism.
But when we see the history of the last 50 years, we have to reassess some assumptions about letting the law of supply and demand just play out. With GOP resistance to government programs along with faith in market forces, we have seen wages, adjusted for inflation, virtually flat; free trade agreements that dislocated many of our workers; periods of ruinous inflation; and the Great Recession of 2007-2009 followed by a slow recovery marked by high rates of part time employment and lack of participation in the work force.
We have to examine, therefore, what we are missing in this story:
1. Competition is good but not that good! The paradox: economic competition results in winners and losers. If the process is allowed to continue a few winners will emerge resulting in a monopoly, which of course destroys competition. The increasing number of mergers with a reduction of the number of firms operating in many markets illustrates the alarming drift toward oligopoly.
2.Maximizing profit is good but not that good! As Adam Smith, the patron saint of economic conservatives warned, business owners seeking profit will try always to drive down wages. With no protection for workers, wages would sink to the subsistence level and businesses would eventually suffer from low levels of consumer purchasing power. Business owners ignored Smith by claiming early efforts to form worker unions were conspiracies in the “constraint of trade”. Producing dangerous products might be good for short-term profit, but bad for the society in terms of quality of life and costs to the society not borne by those companies. Making short-term loans to poor people at high interest rates is good for the credit card banks and Payday, but destroys purchasing power of those caught in the debt trap. Making subprime loans and then bundling them into securities for sale made good sense to banks but caused a near collapse of the financial system.
3. Having a government of laws that allow the capitalist system to work is good, but not that good! When those who run corporations can buy influence in government, the result is a tax system that unjustly favors corporations. Among the laws that favor owners of capital is the limited liability benefit which is essential to capital formation by shielding investors against losses but does little for workers who do not enjoy protection against loss of wages.
4. The opportunity to get rich is good, but not that good! The capitalism that we have now allows the accumulation of wealth by those already wealthy by rewarding investment capital at a higher rate than the growth in national income. The result is a class of families that initially may have earned their money through hard work and skill but are now are able to receive wealth passively. And much of that capital goes to making bets rather than making loans to finance needed productive enterprises.
5 Private property is good, but not that good! Private property is the basic building block of capitalism, but unlimited property rights allow individuals to threaten the health and safety of others. “Private” has no meaning apart from a society that grants that privilege.
Capitalism then, is a good thing, but to make it work for all of us requires institutions that will protect competition, ensure full employment, protect the environment, support wages so that purchasing power can be maintained, sustain a safety net that offers universal health insurance and loss of job benefits, provide sufficient educational and training to equip workers for needed skill sets, invest in infrastructure without which the economy will suffer, and to protect health and safety. In other words, the law of supply and demand may be a powerful force to create wealth, but to serve the greater society it must be guided by a set of institutions that will make sure it benefits all of us.