To make capitalism more attractive, policymakers must emphasize pro-market (not pro-business) policies
The purported rise in the popularity of socialism among millennials members of Generation Z has generated sharp reactions on the political right, handwringing in boardrooms and characteristically overwrought media coverage. A significant part of the blame for the diminished appeal of capitalism among the younger generations should be placed on the shoulders of politicians and business leaders. The steady drift towards crony capitalism, along with a shift away from pro-market and towards pro-business policies in recent decades, has created a sense of disillusionment and led to the rise of populist candidates on both the right and the left.
In “The Great Reversal: How America Gave Up on Free Markets,” the French-born NYU economist Thomas Philippon offers a timely diagnosis of what fundamentally ails the American economy. Philippon, using solid empirical evidence and careful research, asserts that the level of competition has declined in the U.S. (as exemplified by the rise in market concentration in several industries, the extent to which sectoral leaders have become entrenched and the high level of profits attained by the dominant firms).
Furthermore, the rise in market concentration over the first two decades of the 20th century has led to market inefficiencies. The resultant increase in barriers to entry has reduced business investment, raised consumer prices and lowered productivity growth. While technology, economies of scale and globalization have played a part, it is increasingly clear that political factors (corporate lobbying, weak antitrust enforcement and campaign contributions) have had a decisive influence in bringing about this new era of limited competition.
Though some are relatively sanguine about the recent dominance of big business and the associated decline in competition, there is growing concern that market concentration poses a threat to the long-term stability and health of the American economy. First, the relative decline in labor share of income observed in recent decades is to some extent driven by the rise of superstar firms. Second, changing norms, policy changes, automation, globalization and employer concentration have reduced the bargaining power of workers. Recent research suggests that the weakening of worker power may be a key factor behind the decline in labor share of income. Third, and most importantly, declining business dynamism and insufficient creative destruction pose a serious risk to the U.S., whose economy is especially dependent on innovation and technological progress to sustain future economic growth.
So, what can be done to rejuvenate American capitalism and establish a fair and free-market economy? The solution is not to install elaborate and complex regulatory regimes. If we take the example of regulating the U.S. financial industry (still dominated by megabanks), a pro-market solution would entail a simple but effective rule change — higher capital requirements (with minimal or no loopholes). In “The Bankers’ New Clothes: What’s Wrong with Banking and What to Do About It,” Anat Admati and Martin Hellwig make a persuasive case for sharply raising bank capital requirements (which, in essence, raises the owners’ skin in the game) to reduce excessive risk taking and financial instability. The overly complex Dodd-Frank Act, passed in the aftermath of the 2008 financial crisis, has largely been defanged after a decade of effective lobbying by the banking industry. Also, by raising the cost of compliance, Dodd-Frank is likely to aid incumbents (in particular, large banks) and limit the entry of new competitors.
Brink Lindsey and Steven Teles offer a few intriguing proposals for reforming the American economy in “The Captured Economy: How the Powerful Enrich Themselves, Slow Down Growth, and Increase Inequality.” In particular, their call for undertaking a much needed, pro-market reform of intellectual property laws should be heeded by politicians from both sides of the aisle. Recent research suggests that patenting is concentrated in the hands of a few leading firms (who have already stockpiled a large cache of patents), and, given that there is limited knowledge diffusion between the frontier firms and the laggards, this further entrenches the dominance of market leaders.
Limiting new acquisitions by dominant tech firms is another pro-market action that can lead to greater competition. There is growing evidence that Big Tech is creating barriers that reduce innovation and restricts the growth and future success of promising new startups. The American economy would be well-served in the long run if it remains open to and supportive of entrepreneurs and a new generation of tech pioneers.
Finally, adoption by the U.S. of a Scandinavian-style economic system that dramatically smooths out the rough edges of free-market capitalism is unrealistic and likely to remain a fantasy on the political left. However, the modern-day Nordic economic model, widely misunderstood by Americans, offers intriguing lessons for creating capitalist regimes that embrace open markets and globalization but limit some of the downsides by pursuing greater risk sharing across the populace. Two policy lessons of particular import to the U.S. involve creating a broad-based tax system and reorienting government spending priorities towards public goods provision. Such reforms would especially appeal to the millennial and Gen Z cohorts.
Political reforms, such as campaign finance reforms aimed at reducing corporate lobbying, are beyond the scope of the current discussion. However, the above noted pro-market reforms should in theory find bipartisan support, and, if implemented, can reenergize capitalism in America and make it more appealing across all demographics.
Vivekanand Jayakumar is an associate professor of economics at the University of Tampa.
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