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US Capitalism

David Westbrook makes a spirited defense of US capitalism: "Considering the fact that both Europe and Japan have struggled mightily (and with limited success) to emulate the U.S. economy since its last restructuring in the 80s (the wave of mergers and acquisitions treated by Oliver Stone in the movie Wall Street, which I recommend), I don't think the U.S. economic model has been "discredited." This does not indicate comfort with capitalism on my part -- I've got several hundred pages in circulation critiquing capitalism. That said, the U.S. economy is the world's engine, and until the Japanese and Europeans can strike a better compromise between growth/inflation/employment, for practical and political purposes the U.S. will remain the model.

To speak in terms of cliches, the U.S. has one great vulnerability vis-a-vis the other industrialized countries -- inequitable distribution -- but that evil is considerably ameliorated by social mobility, growth, and most importantly, innovation. [The relationship between growth and distributional equity is contested among economists.] We've just finished the longest peacetime expansion in history, and even the current recession appears to be short and mild (barring a real dive in confidence following Enron, or some other circumstance I don't see). Conversely, the situation in Europe (most importantly, Germany) and Japan over the last dozen years or more has been much worse. Slow or even negative growth, coupled with considerable unemployment, make the benefits of equity less sweet. Even after Enron, I think it would be difficult to argue in U.S. policy debate -- I think few Germans or Japanese or even French (privately) would argue -- that an industrialized economy other than the U.S. is in some broad sense exemplary.

In fact, just the opposite. Despite its distributional problems, here are three ways in which the U.S. economy is exemplary, each with relevance to the Enron debacle. First, incredible as it may sound, U.S. accounting for corporate activity is widely regarded as far more clear than the accounting demanded in other countries. This was nicely illustrated when Daimler wished to list its shares on the New York Stock Exchange, which required it use US Generally Accepted Accounting Principles (GAAP), which required Daimler to admit losses where they had reported gains to the European markets. More generally, the U.S. equity markets are the widest and deepest in the world in large part because they are trusted by retail customers, who seem to believe, with some justification, that most information on the market is decent.

Second, and related, most industrialized and even developing countries are attempting to create an "equity culture" in which finance is driven by stock markets rather than banks, because markets are seen as innovative and banks are seen as stodgy. The U.S., of course, is the premier equity culture in the world. Japan and Germany are important examples of bank cultures.

Third, it is widely believed that U.S. bankruptcy law is the best, and most widely available, in the world. Because U.S. businesses can fail relatively cleanly, and without destroying the lives or personal creditworthiness of all the individuals involved, risk-taking is encouraged, which is believed to foster an innovative/high growth economy. Consequently, U.S. bankruptcy law is widely regarded as exemplary.

There are counter arguments to our style of capitalism, of course, but simple fraud in Houston isn't enough to discredit the model, particularly not vis-a-vis its highly problematic alternatives".

My comment: I am mystified by the statement that "US businesses can fail without destroying the lives of all the individuals involved". What about the thousands who have lost everything in the Enron scandal? Most informed world opinion is not as sanguine about the US economic system as David suggests. This is where we came in. I remember that during the boom of the 20s, Europeans were full of admiration for US capitalism, although wise people warned of the dangers ahead. Come the depression, all were damning the US system. I strongly agree that alternatives are "highly problematic". We must beware of jumping from the frying pan into the fire. Yet, with all due caution, I think "another world is possible", and I hope that it develops peacefully out of the present one.

Ronald Hilton - 2/21/02