Sunday, April 01, 2012

Have Americans forgotten the meaning of capitalism?

Shouldn't capitalism be about capital. It is about creating the industrial plant for the nation, about creating the human capital needed to run that plant and to innovate, and it is about creating the public capital in infrastructure, institutions and knowledge to empower industry.

In order to build capital, investment is required. Fundamentally, part of income has to be saved from consumption in order to invest in replacing depreciated capital and creating new capital.

The United States is not saving. Our citizens are not saving. Our businesses are saving, but are not investing their savings. Our governments (federal, state and local) are not saving. Indeed, all are borrowing in order to increase consumption.

During the Great Depression, economists have told us that we had to increase demand for goods and services. It was a time in which people needed goods and services but could not buy them. There was massive unemployment, people wanted jobs, but companies could barely sell the products that they were already producing and did not feel that they could hire more people. Businesses had plants that were in excess of what they needed to produce the goods and services that they could sell. Economists came up with the solution of government spending to "prime the pump". Even then, government invested in infrastructure to increase its spending/

The success of government spending as a process for stimulating the economy worked so well that the United States had a long period of economic growth after World War II. We came to assume that more government spending, even if it had to be supported by borrowing, would lead to more economic growth. We failed to realize that government spending on wars in Iraq and Afghanistan was not investment in our productive capacity.

While deficit spending to prime the pump during the Great Recession may have been appropriate, such spending is not always appropriate. When we have full employment, humming industry, and most needs met, we can save.

The problem is that we have to get our citizens to consume less and save more, putting their savings into investments. (Incidentally, we have to stop consuming more from foreign producers than we produce to sell abroad; we have to stop running a permanent trade deficit.) Businesses need to stop hording more and more savings and to invest them in productive capacity, using that capacity to produce goods and services that they can sell.)

There are some who feel that the way to do this is to let the very rich get still richer faster, believing that they will then invest more. We have been doing that for a long time. How well has that worked? In the 1920s people bought a lot of stocks, driving a bubble in stock prices that eventually crashed; that also didn't work, did it. I think we need to get lots of people to save money and to invest that money in productive enterprises.

Of course, people will not invest if there are not places to invest that will yield returns. We need a high level of innovation, creating new goods and services and new enterprises to produce those new goods and services, to make people want to save and invest their savings.

Incidentally, I doubt that more capitalism must mean a less caring and humanitarian society. Other countries seem to be able to promote more investment and economic growth while also maintaining a more equal distribution of income and wealth and also providing a safety net for their citizens who find themselves in some kind of distress. American can too!

It would seem that America has substituted consumerism for capitalism. Perhaps we should go back to a robust (but caring) but caring capitalism. We need an economy that innovates, one in which people save and invest, one in which students choose to learn things that will make them more productive in the economy, one in which companies invest in the capacity to produce new, more and better goods and services, and one in which the government invests more and spends less on things we don't need.

Incidentally, Bill Clinton ran a government that balanced the budget and actually got to the point where there was a surplus and George Bush ran up unprecedented debts and saw the economy in the dumps by the end of his term. It seems that capitalism can be a Democratic policy while consumerism has been a recent Republican policy.


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