"The Future Of Capitalism"
Jim Blair

The Future of Capitalism
by Lester Thurow
William Morrow and Company, NY (1996)
385 pages including 40 pages of notes and a 14 page index.

I found this book to be a strange combination of insights so profound that Thurow might have been reading my newsgroup posts, combined with misuse of data and contradictory opinions.

The general theme begins with the thesis of "The End of Hisory and the Last Man" (see a review). With the fall of the USSR, and the transformation in China, capitalism has won the great ideological war: there is no alternative economic/political system. Recall that socialism and eventually communism was to prevail because of the internal contradictions in capitalism. Well now the entire socialist empire (one third of the world) has collapsed, and even the socialist parties of Western Europe have embraced capitalism, saying that they can do it better. But in its moment of triumph, capitalism is showing some serious problems.

Economics and Geology

Thurow uses an analogy between economics and the geologic theory of plate tectonics. (I have previously proposed an analogy with meteorology, but his is better). He lists pressures that are building beneath the surface: powerful forces that are largely out of sight, but which cause both the gradual movements of the surface features (plates) and also the sudden disruptions of the economic/political world order, akin to volcanic eruptions or earthquakes. This is when there is a sudden jump from one equilibrium situation to another, different one: punctuated equilibrium. (He could have evoked the mathematical chaos theory here).

All this has a great deal of merit as a way of thinking about the world situation.


Cultures and Values

He recognizes that different cultures instill and promote different values. The rise of agricultural societies was based on a different set of values from the nomadic societies they displaced: an ideology that persuaded large numbers of people to collectively build and maintain communal dikes for irrigation.

The civilization of ancient Egypt had a very different outlook from ours. Pharaohs lived in mud houses while building those mighty pyramid tombs to be buried in. The Romans dominated those who were bigger, stronger, richer and more astute than themselves, because of their ability to organize.

The Emerging World Economy

He recognizes that with transportation costs falling, communication rapidly improving, and a political climate favorable for it, there is a single world economy developing. Workers in backward parts of the world were paid little, in part because they were cut off from tools and information. Now they can compete with workers in industrial nations. While third world workers still lack education and skill, workers from the (former) socialist countries are very well educated: they are poor because of the system they lived under.

The Ukraine is the best place on earth to grow grain. It has a better climate and soil than North America west of the eastern 1/3 of Kansas. This will be the future competition for the French and American farmers. And will anyone continue to pay American Ph.D physicists $75,000 a year when Nobel Prize winners from the old Soviet Union get $100 a month? And I will add to that the $2 classical music CD's available with performances by very talented musicians from Russia and Eastern Europe.

He predicts that China will become an economic giant, now that the people are freed from communism. Anyone familiar with the success of the "overseas Chinese" in so many countries around the world will likely agree. (See my review of Race and Culture).

Here is one of his curious contradictions. He talks of a growing inequality of wealth while he see the global economy creating better opportunities for the poor nations, and a more efficient use of the earth's resources. In the 1960's, Barbara Wards's "Rich Nations and Poor Nations" pointed out that 80% of the earths people lived on less than one dollar a day, while the 20% (living in the USA and Western Europe) were very wealthy. Does he think that gap is growing today? Or will grow in the future? Take a look at Are Things Getting Worse Or Better?

Demographics Immigration,and Medical Costs

He knows that as the industrialized nations have reduced population growth, their population has become older (on average). And with medical technology people live longer and spend more on medical/health care.

And the third world "developing" nations will not become wealthy until they go through the same cycle. In the meantime, poor people from the undeveloped world move to the rich countries, where there is little demand for unskilled labor. He says this depresses wages of native workers trying to compete, but voices opposition to measures like Proposition 187. But he does claim that National Identity cards that are frequently checked, combined with deporting those here illegally, could control the massive current movement of people into the USA. Is he critical of Proposition 187 because it is not strong enough?

Other Good Insights

A chapter on Social Volcanoes correctly warns of the dangers of religious fundamentalism and of ethnic separatism. On welfare, he knows that it is better to provide opportunity than goods (as in the GI Bill after WWII). And that welfare discourages saving for the future. He recognizes the Republican party as an attempt to blend libertarian principles with Christian fundamentalism, an unlikely combination. And that we suffer today from the past government policies of hobbling the railroads. He knows Americans should save more, and that Europe is discovering that it cannot afford its plush welfare benefits. The distribution of income and wealth under capitalism is far wider than the distribution of any measurable characteristic (like IQ).


Falling Wages

There are many references to the "fall" in wages, and the implication that people were better off in the past. He claims that family wages peaked in 1989 and have gone down since. (Well some others have said it is down hill since the 1960's or 70's). But he also recognizes that the CPI "overcorrects" for inflation. And this supposed loss of wages is because of inflation: almost everyone makes more in dollars now than in the past. If wages are less, it is because the more dollars supposedly buy less, when correct for inflation. If measures other than CPI are used to correct inflation, the "wage loss" disappears. See the "Inflation & Federal Reserve Policy" item on my web page.

The Trade Deficit

He thinks the US trade deficit is a problem, and that trade balance with different individual countries is important. Since the US trade deficit and the Japanese trade surplus are about the same size, it is our imbalance with Japan that is bad. So bad that an entire chapter is devoted to it.

He says we can't continue to have a trade deficit forever, and I agree. But he proposes "import tickets", a sort of ration coupon, or secondary money system just to insure a trade balance with Japan. But I think that while the overall balance counts, it is not countries, but products that matter. Almost half of the US trade deficit is due to the importing of oil. The various problems that he predicts for the US if the trade deficit continues will happen someday if- we continue to increase our dependency on a resource (oil) that we are ever less able to produce. But his "import ticket" plan would, I think, just shift the US import of goods made in Japan to goods made in China, or somewhere. See "Cut the Gas Tax?" and "It Depends on How You SAY It" on my web page for more on these topics.


Thurow has little fear of inflation. While he is opposed to "hyperinflation" he thinks a CPI rise of 10% per year is quite all right. Remember the 1970s? Stagflation, and the "misery index"?

Deceptive "Correct" Numbers

There are several places in the book where he quotes figures or facts that while "correct" in some sense, result in a deception when given with no further explanation. For example, he says there were no net new jobs created in Western Europe from 1973 to 1994. But when an area reaches a stable population (as much of that region has), it would be expected that there will be about the same number of people (and workers) from one year to the next: they will be doing different kinds of work in a growing economy, but the number will remain about the same, or even drop as the population ages and more are retired.

Thurow also claims that in the US the top 20% of the workforce got all the gains of the 1980's. So if you took a survey, you should find 4 people who "lost" income or stayed even, for every one who "gained", right? Not at all. The vast majority of people were better off economically at the end of the decade than they were in 1980. See my item on "The Use of Statistics" and the income/income mobility table from the Reagan Homepage for details.

And he points out that the US "teenage birth rate" was higher in the pre- 1955 era than today. As if "teenage birth" were some sort of "problem". Thurow, along with many political leaders, is being sloppy with nomenclature: the "problem" (maybe the most serious problem we face) is single women having kids they cannot afford. In the pre-1955 era, only 5% of births were to single women. See "America's War on Kids".

The Future And Capitalism?

The last point in the book is probably the most important, and I don't know if he is right or not. He claims that Capitalism has no mechanism to insure investment for the long range future, and this will lead to stagnation. The rate of economic growth has been falling since at least the 1950's (and maybe since the last century). As the average age increases, people have ever less interest in long term investments. Before Social Security and welfare there was an incentive to save for retirement and for the "rainy day". But now people have less need to. US tax laws reward consumption but penalize saving. The saving rate is falling. And of course, it is money saved and invested (rather than consumed) which provides the capital for future progress. In the last century, private investment built the railroads and canals. But more recently, the government has provided the capital for major projects like the interstate highways, the internet and space exploration.

John Kenneth Galbraith's 1962 book American Capitalism claimed that the US corporation was the ideal institution to promote technological development. Individual people may have a "short term" outlook, but a corporation can live forever, and can take a long view. Back in the 1960's big companies like Du Pont hired PhD chemists, even though it had no specific job for them to do. They were just put in a lab (like in Wilmington Delaware) and told to look for things that might pay off in the future. (I know. I was one of them). Bell Labs (the telephone company!) found the leftover heat from the original "Big Bang", and developed the transistor.

But since anti-trust breakup of the giant companies, and more intense foreign competition, they can't afford that sort of "luxury" any more. Some say that government sponsored research has displaced corporate R&D. As the government withdraws, companies will get more involved.

The space program will be an important test case for this idea. The potential profit from space is big (how much is the universe worth?). But the investment is also big and the payoff could be decades away. See To Save the Earth, Go to Mars.

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