Does the recent global financial crisis marks the beginning of the end of modern capitalism?
Modern capitalism far from doomed yet winds of change are blowing
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 there is a viable replacement waiting in the wings.
The truth of the matter is, 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 holidays, 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 state intervention, is touted as the inevitable heir to western capitalism, if only because of China's huge size and large growth rate. Yet its 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 the country will eventually morph into capitalism's new exemplar.
Perhaps the real point is, 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 people out of abject poverty. Marxism and heavy-handed socialism have disastrous records by comparison.
But, as industrialisation 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 did not complain about Apple's late leader Steve Jobs' 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 - such as Sweden - have been able to curtail this vicious cycle.
A third problem is the provision 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: healthcare costs as a proportion of income are sure to rise as societies get richer and older, possibly exceeding 30 per cent 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.
Fourth, today's capitalist systems vastly undervalue the welfare of unborn generations. By and large, each generation has found itself significantly better off than the last. But with the world's population surging 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. In the world of finance, technological innovation has not conspicuously reduced risks, and might have magnified them.
In principle, none of capitalism's problems is insurmountable, and economists have offered a variety of market-based solutions. 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 paralysed, capitalism's future might not seem so secure in a few decades.
Kenneth Rogoff is professor of economics and public policy at Harvard University, and was formerly chief economist at the IMF
* Project Syndicate