December 5th, 2011
01:31 PM ET

Rogoff: Is capitalism sustainable?

Editor's Note: Kenneth Rogoff is Professor of Economics and Public Policy at Harvard University, and was formerly chief economist at the IMF. For more from Rogoff, visit Project Syndicate or follow it on Facebook and Twitter. The views expressed in this article are solely those of Kenneth Rogoff.

By Kenneth Rogoff, Project Syndicate

I am often asked if the recent global financial crisis marks the beginning of the end of modern capitalism. It is a curious question, because it seems to presume that there is a viable replacement waiting in the wings. The truth of the matter is that, for now at least, the only serious alternatives to today’s dominant Anglo-American paradigm are other forms of capitalism.

Continental European capitalism, which combines generous health and social benefits with reasonable working hours, long vacation periods, early retirement, and relatively equal income distributions, would seem to have everything to recommend it – except sustainability. China’s  Darwinian capitalism, with its fierce competition among export firms, a weak social-safety net, and widespread government intervention, is widely touted as the inevitable heir to Western capitalism, if only because of China’s huge size and consistent outsize growth rate. Yet China’s economic system is continually evolving.

Indeed, it is far from clear how far China’s political, economic, and financial structures will continue to transform themselves, and whether China will eventually morph into capitalism’s new exemplar. In any case, China is still encumbered by the usual social, economic, and financial vulnerabilities of a rapidly growing lower-income country.

Perhaps the real point is that, in the broad sweep of history, all current forms of capitalism are ultimately transitional. Modern-day capitalism has had an extraordinary run since the start of the Industrial Revolution two centuries ago, lifting billions of ordinary people out of abject poverty.  Marxism and heavy-handed socialism have disastrous records by comparison. But, as industrialization and technological progress spread to Asia (and now to Africa), someday the struggle for subsistence will no longer be a primary imperative, and contemporary capitalism’s numerous flaws may loom larger.

First, even the leading capitalist economies have failed to price public goods such as clean air and water effectively. The failure of efforts to conclude a new global climate-change agreement is symptomatic of the paralysis.

Second, along with great wealth, capitalism has produced extraordinary levels of inequality. The growing gap is partly a simple byproduct of innovation and entrepreneurship. People do not complain about Steve Jobs’s success; his contributions are obvious. But this is not always the case: great wealth enables groups and individuals to buy political power and influence, which in turn helps to generate even more wealth. Only a few countries – Sweden, for example – have been able to curtail this vicious circle without causing growth to collapse.

A third problem is the provision and distribution of medical care, a market that fails to satisfy several of the basic requirements necessary for the price mechanism to produce economic efficiency, beginning with the difficulty that consumers have in assessing the quality of their treatment.

The problem will only get worse: health-care costs as a proportion of income are sure to rise as societies get richer and older, possibly exceeding 30% of GDP within a few decades. In health care, perhaps more than in any other market, many countries are struggling with the moral dilemma of how to maintain incentives to produce and consume efficiently without producing unacceptably large disparities in access to care.

It is ironic that modern capitalist societies engage in public campaigns to urge individuals to be more attentive to their health, while fostering an economic ecosystem that seduces many consumers into an extremely unhealthy diet. According to the United States Centers for Disease Control, 34% of Americans are obese. Clearly, conventionally measured economic growth – which implies higher consumption – cannot be an end in itself.

Fourth, today’s capitalist systems vastly undervalue the welfare of unborn generations. For most of the era since the Industrial Revolution, this has not mattered, as the continuing boon of technological advance has trumped short-sighted policies. By and large, each generation has found itself significantly better off than the last. But, with the world’s population surging above seven billion, and harbingers of resource constraints becoming ever more apparent, there is no guarantee that this trajectory can be maintained.

Financial crises are of course a fifth problem, perhaps the one that has provoked the most soul-searching of late. In the world of finance, continual technological innovation has not conspicuously reduced risks, and might well have magnified them.

In principle, none of capitalism’s problems is insurmountable, and economists have offered a variety of market-based solutions. A high global price for carbon would induce firms and individuals to internalize the cost of their polluting activities. Tax systems can be designed to provide a greater measure of redistribution of income without necessarily involving crippling distortions, by minimizing non-transparent tax expenditures and keeping marginal rates low.  Effective pricing of health care, including the pricing of waiting times, could encourage a better balance between equality and efficiency. Financial systems could be better regulated, with stricter attention to excessive accumulations of debt.

Will capitalism be a victim of its own success in producing massive wealth? For now, as fashionable as the topic of capitalism’s demise might be, the possibility seems remote. Nevertheless, as pollution, financial instability, health problems and inequality continue to grow, and as political systems remain paralyzed, capitalism’s future might not seem so secure in a few decades as it seems now.

The views expressed in this article are solely those of Kenneth Rogoff.

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Topics: Economy • Global

soundoff (79 Responses)
  1. Tommie T

    This issue of sustainability is an old one. As less experienced countries gain abilities they undercut prices. So domestic industries die. Like steel. So innovation becomes a lifeblood. But what about the factory workers? What can they do? Since only a small percentage of people are smart enough and well placed enough to become managers. But this growing inequality rap is largely false. Since where else but America do poor people have cars, telephones, multi-bedroom apartments, etc. Plus well more than enough to eat. Issue rather is "What can they do?" Especially since the factories are long-gone. Well... maybe they can clean things? Or fix things? Or if anybody else has any bright ideas. Or maybe the Progressive companies can hire them and come up with some way to get them to create more value than they produce. Which is tough with all the requirements, regulations and extra costs associated with hiring low-skill people.

    December 11, 2011 at 10:48 pm |
  2. Samster

    I think it's more to do with the failures of central banks and fiat money as opposed to capitalism per se.

    December 12, 2011 at 2:00 am |
  3. Peter

    Capitalism is fine thanks very much. Demcracy on the other hand is in real trouble.

    December 12, 2011 at 11:25 am |
  4. Pete

    Did you mention capitalism is a system that works by financial bubles?
    Oh, you did mention it, en passant. Sheesh... 🙂

    December 12, 2011 at 3:08 pm |
  5. Voltairine

    "Is capitalism sustainable?": LOL! Capitalism is the exploitation of everything to its uttermost with the achievement of the most profits imaginable with in a lifetime trumping all other considerations, particularly those having to do with the environment and people, as citizens, customers, and especially employees, which, tellingly, are referred to openly as, "human resources".

    December 12, 2011 at 4:24 pm |
  6. Cam Rankin

    I thought this a good debate. Capitalism works at its best when people are at the very least moral in their dealings and voluntarily give up some of thier fruits to the less fortunate. US we are very lucky. No matter how you slice it we all have a chance to be president, or a doctor, or a lawyer etc. If you are stuck doing factory work then that is by your own hand. If you dont like something about it! As for the rest of the world good luck in finding your own way, since we (USA) is appearantly the world worst enemy these days I am tired of hearing it and dont care to fix your problems. If you want our help, I am happy to give it, otherwise I couldnt care less. Thats America. Thats the American Dream. God Bless America!

    December 12, 2011 at 5:52 pm |
  7. don't know a thing

    You lost me at "indeed, it is far from clear."

    There is nothing wrong with capitalism, just as there is nothing wrong with socialism. It is the capitalists and the socialists you have to watch out for.

    December 13, 2011 at 3:39 pm |
  8. Corporatist1

    Here is a simple answer. Capitalism assumes continuous unlimited growth in a limited world. Even when only Europeans and Americans and some small Asian nations became capitalist, it already caused massive climate change. Imagine what will happen when 3 billion Chinese and Indians join the party.

    December 14, 2011 at 5:43 am |
  9. WalmartRamen

    Capitalism, does not work well when most of the people are poor. As in my town, in Oklahoma USA they are ether
    rich or poor, mostly poor. They open new places, but most of the people here cant afford it. It is really that bad!
    When they lowered taxes, that was bad. What happened? The taxes that helped pay some of the rent & payed for food stamps went down. The rent went up & the food went down, so many people got their cars repossessed to save money, about $400, no payment, insurance, fuel.... This summer in 110 deg heat I seen a mom with kids & a baby in a stroller walking down the road. Every month the numbers grew & grew. And so did METH, the Meth labs have really went up after these taxes got lowered! It was not like this ever before the taxes got lowered.

    December 16, 2011 at 10:24 am |

    In ther infamous words of Gordon Gecko...Greed is good...But the problem with greed is that it has to have limits, otherwise the chasm between rich and poor will continue to widen. I understand the economic reality that Democrats are currently trying to reign in and I understand what the republicans are trying to do as well. The reality is there HAS to be oversight and at time intervention. The people whom we rely on to drive our economy have but one goal, and that is to increase their bottom line in favor of their particular company or corporation. This is not a bad thing. However, as Wall Street has demonstrated – repetedly – When their high dollar gambles do not turn out as they hoped....millions of people are effected....and in turn – the entire global economy is effected. In addition, it seems that Republicans believe that we are in the midst of creating a 'Nanny State'. This is rediculous in name alone. There comes a point when an individual, who has contributed to the U.S. via a lifetime of work and therefore taxes, is not able to work or contribute anymore....and then what happens to them? Where do they go? Do we leave them on the street? Do we relegate them to an undignified existence at the tail end of their lives? Because, unfortunately there are probably more individuals who are unprepared for the end of their working lives than there are prepared individuals. This obviously is unfortunate however sometimes life throws curveballs at us all and will drain away your savings and investments because the immediate future necessitates this course of action. So what then? Not everyone has the financial ability to put away for those perverbial rainy days or that glorious thing known as retirement. There is a solution. If the we continue to boast about how great this country is yet we cant seem to figure out an equitable solution for EVERYONE, we need to start watching the things we say because our words must begin to match our actions.

    December 16, 2011 at 11:45 am |
  11. bannister

    Asking if capitalism is sustainable is like asking if freedom itself is sustainable. Of course it is.

    December 25, 2011 at 8:02 pm |
  12. Mark

    To the question of "is capitalism sustainable"? Not in it's current model.

    As private and public deleverging takes the market back to baseline by 2016. Pre-1982 levels.
    The American-Anglo capitalism model will shift to a American-Asian capitalism model.
    The center of finance will move west. The most likely location will be Seattle.

    March 16, 2012 at 9:10 am |
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