The Poverty of the Wealth of Nations

Is capitalism in decline?

At the very least, it seems in need of first aid. Adam Smith, in The Wealth of Nations (1776), himself noted that capitalists are the biggest threat to capitalism. They don't like to compete, and so try to create monopolies and cartels to avoid competition. If they succeed on a large enough scale, capitalism (which is predicated on consumers and choice) ceases to exist. Thus, according to the father of capitalism, capitalists must be regulated.

Remember that capitalism requires consumers and choice, as well as bona fides between participants in a contract. In our society, most of the consumers are (or were) employees. The great capitalist Henry Ford recognized this when he opted to pay his workers an order of magnitude more than the going wages at the time. The businessmen at the time thought he was crazy. His reply was that if his employees couldn't afford his cars, he couldn't sell as many. Ford recognized the connection between his employees and the consumer pool that bought his products.

The problem we have is that most capitalists today no longer seem to see that connection between both the number and the pay scales of their employees and the demand for their own products. The consumer pool consists of all the employees, so it's easy to "cheat." If any individual company gets rid of employees or reduces their wages, the overall pool isn't hurt much. But if every company starts to do this, the economy goes into a negative spiral. Layoffs and salary reductions lead to fewer customers, which leads in turn to more layoffs and salary reductions.

If, during an economic downturn, businesses would reduce their expectations for profit and hence keep their employees on the payroll, the economy would stand a better chance of not falling as deeply, or at least bouncing back more quickly. Game theorists call this type of arrangement the Prisoner's Dilemma. If everyone plays nicely, everyone does better than he would be if he were playing alone. But by cheating, you can get the best of both worlds, as long as you are the only one cheating. Hunter-gatherer societies have strict penalties for those who are caught "cheating." It's clear that in our large, modern societies, we have not yet developed the processes to create and impose sanctions on those who cheat at Prisoner's Dilemma games. As people (investment bankers, hedge fund managers, union leaders, politicians, consumers who borrow more than they can pay back) see others cheating without severe penalties, they start to cheat too -- until the system falls apart.