“In November 2008, as the global financial crash was gathering pace, the 82-year-old British monarch Queen Elizabeth visited the London School of Economics. She was there to open a new building, but she was more interested in the assembled academics. She asked them an innocent but pointed question. Given its extraordinary scale, how as it possible that no one saw it coming?
“The Queen’s question went to the heart of two huge failures. Western capitalism came close to collapsing in 2007-2008 and has still not recovered. And the vast majority of economists had not understood what was happening.”
That’s from the Introduction to Rethinking Capitalism (2016), edited by Michael Jacobs and Mariana Mazzucato. The editors and authors review a catalogue of chronic economic “dysfunction” that they trace to policy-makers’ continued allegiance to neoliberal economic orthodoxy even as it has been breaking down over the past four decades.
Before we get to their dysfunction list, let’s give the other side equal time. First, consider an open letter from Warren Buffett published in Time last week. It begins this way:
“I have good news. First, most American children are going to live far better than their parents did. Second, large gains in the living standards of Americans will continue for many generations to come.”
Mr. Buffett acknowledges that “The market system… has also left many people hopelessly behind,” but assures us that “These devastating side effects can be ameliorated,” observing that “a rich family takes care of all its children, not just those with talents valued by the marketplace.” With this compassionate caveat, he is definitely bullish on America’s economy:
“In the years of growth that certainly lie ahead, I have no doubt that America can both deliver riches to many and a decent life to all. We must not settle for less.”
So, apparently, is our Congress. The new tax law is a virtual pledge of allegiance to the neoliberal economic model. Barring a significant pullback of the law (which seems unlikely), we now have eight years to watch how its assumptions play out.
And now, back to Rethinking Capitalism’s dysfunction’s list (which I’ve seen restated over and over in my research):
- Production and wages no longer move in tandem — the latter lag behind the former.
- This has been going on now for several decades, during which living standards (adjusted) for the majority of households have been flat.
- This is a problem because consumer spending accounts for over 70% of U.S. GDP. What hurts consumers hurts the whole economy.
- What economic growth there has been is mostly the result of spending fueled by consumer and corporate debt. This is especially true of the post-Great Recession “recovery.”
- Meanwhile, companies have been increasing production through increased automation — most recently through intelligent machines — which means getting more done with fewer employees.
- That means the portion of marginal output attributable to human (wage-earner) effort is less, which causes consumer incomes to fall.
- The job marketplace has responded with new dynamics, featuring a worldwide rise of “non-standard’ work (temporary, part-time, and self-employed).
- Overall, there has been an increase in the number of lower-paid workers and a rise in intransigent unemployment — especially among young people.
- Adjusting to these new realities has left traditional wage-earners with feelings of meaninglessness and disempowerment, fueling populist backlash political movements.
- In the meantime, economic inequality (both wealth and income) has grown to levels not seen since pre-revolution France, the days of the Robber Barons, and the Roaring 20’s.
- Economic inequality means that the shrinking share of compensation paid out in wages, salaries, bonuses, and benefits has been dramatically skewed toward the top of the earnings scale, with much less (both proportionately and absolutely) going to those at the middle and bottom. 
- Increased wealth doesn’t mean increased consumer spending by the top 20% sufficient to offset lost demand (spending) by the lower 80% of income earners, other than as reflected by consumer debt.
- Instead, increased wealth at the top end is turned into “rentable” assets — e.g., real estate. intellectual property, and privatized holdings in what used to be the “commons” — which both drives up their value (cost) and the rent derived from them. This creates a “rentier” culture in which lower income earners are increasingly stressed to meet rental rates, and ultimately are driven out of certain markets.
- Inequality has also created a new working class system, in which a large share of workers are in precarious/uncertain/unsustainable employment and earning circumstances.
- Inequality has also resulted in limitations on economic opportunity and social mobility — e.g., there is a new kind of “glass floor/glass ceiling” below which the top 20% are unlikely to fall and the bottom 80% are unlikely to rise.
- In the meantime, the social safety nets that developed during the post-WWII boom (as Buffett’s “rich family” took care of “all its children”) have been largely torn down since the advent of “workfare” in the 80’s and 90’s, leaving those at the bottom and middle more exposed than ever.
The editors of Rethinking Capitalism believe that “These failings are not temporary, they are structural.” That conclusion has led some to believe that people like Warren Buffett are seriously misguided in their continued faith in Western capitalism as a reliable societal institution.
More on that next time.
 Michael Jacobs is an environmental economist and political theorist; at the time the book was published, he was a visiting professor at University College of London. Mariana Mazzucato is an economics professor at the University of Sussex.
 “In the US, real median household income was barely higher in 2014 than it had been in 1990, though GDP had increased by 78 percent over the same period. Though beginning earlier in the US, this divergence of average incomes from overall economic growth has not become a feature of most advanced economies.” Rethinking Capitalism
 These have accounted for “half the jobs created since the 1990s and 60 per cent since the 2008 crisis.” Rethinking Capitalism
 Meanwhile, those at the very top of the income distribution have done exceedingly well… In the US, the incomes of the richest 1 percent rose by 142 per cent between 1980 and 2013 (from an average of $461,910, adjusted for inflation, to $1,119,315) and their share of national income doubled, from 10 to 20 per cent. In the first three years of the recovery after the 2008 crash, an extraordinary 91 per cent of the gains in income went to the richest one-hundredth of the population.” Rethinking Capitalism