Why capitalism must adapt to a new era

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In a hybrid format with virtual and in-person participants at Booth’s new campus near St Paul’s Cathedral in London, the broad conversation focused on the erosion of the social contract, how to make capitalism work better, China’s alternative model to Western free enterprise and more.

A crumbling social contract

Shafik began with a discussion of the unwritten social contract which she called “an essential foundation of capitalism“.

“You had a predominantly male breadwinner in most households. Women were available to take care of young and old for free, ”she said. “Most people … would work for two or three employers in their lifetime. When they retired, they would only live a few years. And during those years, if they needed any care, it would be provided by their families.

But technology, globalization and shareholder capitalism championed by Friedman have eroded that contract as women entered the workforce en masse and companies cut benefits and cut full-time employees, she said. suggested. Governments have stepped in to fill the void, to varying degrees.


“During the 20th century, the state has played an increasingly important role in this task,” said Rajan, who was also Governor of the Reserve Bank of India from 2013-2016. the community was unable to cope.

He cited the New Deal and Social Security in the United States as examples of government efforts to together weave a basic safety net. And yet, he stressed, neither the state nor the private economy can solve all problems. “We have seen gaps in the pandemic where neither the government nor the market is present,” Rajan said. “Society must intensify whenever the formal structure collapses and fills in the gaps.”

But how? “We are now coming to a point where workers need portable benefit plans and less of their social insurance needs should be tied to their employer,” Shafik said. “And frankly, we should demand that employers provide benefits to all workers, regardless of their employment contract. “

How to make capitalism work

Rajan said that in cases where private sector actions are insufficient, we may need public action, but an even bigger issue is one of equity and equal opportunity.

“I think one way to make capitalism work is to need a certain level of fairness in society,” he explained. “And that doesn’t mean socialism, but it does mean that when you think about capabilities, you have to have more equity in generating those capabilities.”

The family you were born into and where you were born has a huge impact on your career outcomes, Shafik noted. For example, she said, being born into a well-to-do family makes you much more likely to get a patent as an adult; if you were born in Silicon Valley, you are much more likely to get a technology patent, and if you were born in Minnesota, you are much more likely to have a medical patent. Shafik asked, “How do you invest in these people? [born to less fortuitous circumstances] earlier and give them equal opportunities in life so that capitalism’s promise of opportunity really comes true? “


Kroszner, Norman R. Bobins professor of economics at Chicago Booth, asked whether democracies that go hand in hand with capitalism can survive without addressing growing disparities in income and wealth. The two panelists underlined the historical adaptability of capitalism.

“There are many flavors of capitalism. Capitalism in Denmark is very different from capitalism in the United States, ”Shafik said. “I think we are at a time when capitalism has to change dramatically in order to maintain public support.”

While some advocate a universal basic income to protect people with limited opportunities in the labor market, both panelists are wary of this approach. “Rather than seeing them as collateral damage, we need to figure out how to get them back into the labor market? Rajan said. “Work has become such an important part of giving meaning to life. “

Shafik agreed. “In all societies around the world, part of the social contract says that if you are an able-bodied adult, you must contribute in return for being taken care of when you are young and old. Instead of a universal basic income, she suggests an earned income tax credit and the removal of barriers to contributing to the labor market. Specifically, she said that good childcare policies would help alleviate the additional burden on women and allow them to fully participate in work.


Capitalism, Democracy and China

China’s competition with the West also emerged, amid signs of growing authoritarianism and intervention by the ruling Communist Party in what had been one of the world’s most dynamic economies.

Shafik said China poses a challenge to Western liberal democracies who assume that capitalism and democracy are married.

“I think China is developing a model where you have market forces in some areas but you don’t have democracy,” she continued. “You don’t have an electorate; you have a “selectorate” – a small group that selects the leaders through an internal mechanism. ”

Rajan cautioned against glorifying the Chinese leadership’s ability to act decisively without coercion, especially over the messy partisan bickering in Washington. “There are no checks and balances. In my opinion, this is the problem with the Chinese system, ”he said. The two agreed that the best response to China is to make democracy work better so that it can offer a better form of capitalism to its citizens.

The promises and challenges of technology

Finally, the panelists discussed the technology, both the future of cryptocurrency and the threat of job automation.

Rajan noted that cryptocurrencies such as Bitcoin and the Ripple network present promising possibilities, for example by helping to facilitate cross-border transactions. Still, he worries about a central bank digital currency threatening innovation in the private sector and limiting consumer choice. “Consider having your accounts with the Federal Reserve: what customer service are you going to get? You might not get much redress if they make mistakes or if something happens, ”he suggested. “Central banks need to think carefully about this. “


On the threat of automation, panelists took a more optimistic note. “The man plus the machine or the woman plus the machine is much better than the machine alone or the human alone. We have to figure out how to help humans do better jobs, ”Rajan said. “We can do so much with technology. But we have to guide him. We have to work with it. It won’t happen naturally.

“You have to invest in people, not just technology, in order to get the best results,” Shafik agreed.

– This story was first published by the Booth School of Business. The Future of Capitalism series continues on October 27, featuring Professor Lars Peter Hansen for a discussion on climate change and the economy.


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