This is the third in my Modern Philosophy series. Robert recommended that I write a piece on the future of capitalism. But I’ve wanted to write a blog on how Epicureans should think about the modern economy generally, so here it is. I’ve also been asked to write about what my contemporaries at university think on various issues, so look out for that next week.
The modern capitalist system must be understood as the third age of economic globalisation. The first age took place during the Industrial Revolution, where the nations of Europe used their insurmountable comparative advantage to dominate the global economy. Sometimes this would be achieved by formal colonisation- the imposition of European governance in the extra-European world. But there was informal colonisation; the dominance of European commerce globally, often without the consent of the colonised- China being the quintessential example. The second wave was during the mid-20th century, where two world wars and the Great Depression forced the developed world to rebuild its domestic markets. This was an austere but much more equitable time than the preceding age. Particularly after WW2, GDP growth was steady, and its benefits were evenly distributed. For social democrats, this was the ‘Golden Age of Capitalism’, at least for the developed world.
But in 1973, the global oil crisis shook the world economy. The mixed economy that depended on both private enterprise and government investment began to falter. Particularly in Britain and the United States, there was a demand for economic liberalisation. Under Thatcher and Reagan respectively, formerly publicly owned services were privatised, taxes and non-defence government spending were reduced, and many regulations were scrapped. At the same time, the Bretton Woods Institutions (World Bank, IMF, WTO) grew in policy depth. The European Single Market became more comprehensive. There was an emphasis on reducing barriers to trade and commerce, which became known in America as the Washington Consensus. This model of economic policy is called neoclassical economics- neoclassical because it reaffirms the commitment to free trade established by classical economists like Adam Smith and David Ricardo, while allowing governments to intervene in a crisis, such as the bank bailouts in 2008. Post 1973, the renewed aggressive trend towards global economic integration is what principally characterises the third age of globalisation.
The result of the third age has been what economists describe as an ‘elephant curve’ in improving fortunes for the world population. At the very left of the curve, the world’s extreme poor have been left behind. There are still billions of people who lack the basic necessities of life. They live in squalid conditions, often lack access to good food, drinkable water, decent healthcare, and are the most vulnerable to climate change. To make matters worse, they overwhelmingly live in illiberal democracies or authoritarian regimes, and so lack the means to enact democratic change. To varying degrees, they face discrimination on the basis of social class, ethnicity, gender, religion and age. The now vast wealth of the global economy makes it a moral disgrace that there are still so many people that live in inhumane conditions.
The good news is that most people are no longer living in extreme poverty. The third age of globalisation has seen a rapid reduction in the global poverty rate, even when adjusted for inflation. Increasingly uninhibited by trade barriers, and fuelled by investment from the developed world, the economies of the developing world are growing rapidly. At the same time, improvements in science and technology mean that the world’s average person now enjoys luxuries that the wealthiest person a century ago would only have dreamed of. What were formally agrarian economies, are now increasingly industrial, helped by corporations outsourcing jobs from the developed world and the rapid increase in global consumer demand. For the bulk of the world’s population- the non-extreme poor living in the developing world- globalisation as we now know it has been a runaway success.
The effects of the third age on the developed world has been very mixed and largely dependent on the country in question. But there are two commonalities that apply to all developed countries. The first is that the very richest have become much richer. In Britain and the United States, this is largely due to financial deregulation. But for the most part, the increasing wealth of the super-rich is because in a globalised economy, the potential profits are much greater because there is a larger market for goods and services. At the same time, developed countries have generally reduced corporation taxes and the highest bracket of income tax, because globalisation makes capital and labour more mobile; the rich can move away from unfavourable tax environments very easily.
The second, and more significant commonality, is that rapid deindustrialisation and the economically liberal policies pursued by politicians in the developed world, has led to incomes for the average rich-world citizen grow very slowly, if not stagnate. The replacement of now-unprofitable manufacturing jobs with unskilled service sector jobs has fuelled popular discontent, leading to the rise of populists like Donald Trump and Marine Le Pen. Both are disproportionately favoured in the rural, post-industrial parts of their respective countries, where people feel as if the political establishment has betrayed them by embracing globalisation. At the same time, freedom of commerce has been accompanied by freedom of labour mobility- the result has been a rapid increase in people migrating from the developing to the developed world in search of a better life. This migratory trend is viewed negatively in the post-industrial developed world: the newcomers are seem as competitors for jobs, culturally alien, and a threat to the close-knit communities that often characterise working-class life.
Overall, on a global scale, the free market is a force for good. It increases competition, drives up quality while driving down prices. It has increased the choice of consumer goods for the vast majority of the world’s population. Although there is still a lot of progress to be made, fundamentally changing the world’s economic model would put the rapid increase in global economic growth at risk. What international institutions need to focus on is making this growth environmentally sustainable in the era of global warming. The transition to renewable energy will not be costless, but it will also be the next great opportunity, should we choose to seize it.
It is the free-market policies enacted on a national level that are the greatest cause for concern, especially in the developed world. The developing world should pursue a moderate form of free market capitalism, where entrepreneurship and wealth-creation are encouraged, while the government makes strategic investments to improve productivity and environmental sustainability. These countries don’t yet have the resources to create a European-style welfare state. But in developed countries, the government ought to intervene further. The recent rise in popular discontent should be an impetus for rapid change. Governments need to develop clear strategies to deal with the challenges of deindustrialisation and more recently, automation. Communities left behind by globalisation should not be ignored on the basis that economic fortunes are improving for the nation as a whole. There needs to be more investment in retraining programmes, as well as infrastructure investments to boost non-professional employment and overall productivity. Having said that, there also has to be an honest recognition of the side-effects of globalisation. The income and wealth equality of the second age, desirable as it may be in theory, is not coming back anytime soon- and anyone who promises to restore it is either lying or a fool. It should also be acknowledged that should governments choose to pursue a more interventionist policy programme, as on balance I think they should, there will be losers. Of course, the super rich will be poorer due to higher taxes. But particularly in Britain and the United States, where the size of the upper-middle class is big, many moderately well-off people will also be worse off. It isn’t sustainable to fund the necessary investments described above by borrowing, particularly given global economic uncertainty and the possibility of interest rates rising. The upper-middle class may have benefited from free-market capitalism, but they have done so at the expense of their country’s overall wellbeing. This can be seen most clearly in Britain, where south-west London, Surrey and Buckinghamshire have a higher disposable income than almost the entirety of the rest of Europe, but productivity in most of the UK’s major cities lags behind its European competitors. In order for the latter to benefit, the former (which includes myself) must sadly pay.