Sorry Marx, Capitalism May Not Be Self-Limiting

From the Wall St. Journal: The Middle-Class Squeeze

dire forecasts of Karl Marx…

The Marxian prophecy may be wrong because of the Pareto Principle, which is that the richest 20% contribute 80% to consumer spending, while the poorest contribute very little. This means that Capitalism may not be as self-limiting as commonly believed by some. America’s middle class may not be so important anymore, and the economy as measured by GDP, technological progress, profits & earnings, and exports can do fine even as many see their economic prospects stagnate. Capitalism as measured by profits & earnings, economic activity and consumer spending is doing better than ever. There is a billion-strong and growing middle class in China and all over the world that is overtaking the American middle class. Globalist consumer companies Apple and Nike keep posting blowout earnings year after year. Disney, too. Then you have business to business – Cisco, Oracle, and Microsoft, for example, selling enterprise software and hardware to other businesses all over the world.

In the Silicon Valley, techies strait out of college are making 6-figures. Anyone with a good idea and some coding can become a multi-millionaire or even a billionaire within 2-3 years, with notable examples being Dropbox, Facebook, Snapchat, Uber, and Pinterest..If that’s not capitalism, I don’t know what is.

If you’ve ever had the misfortune of arguing with a liberal about economics, he will tell you the problem is our regressive tax system that hurts wage earners, since the income tax is sometimes higher than the than long-term capital gains rate. What the liberal ignores is that investment involves risk, potentially 100% of invested capital or more, unlike a paycheck. Or in mathematical terms, the cumulative equity curve of a paycheck is monotonically increasing whereas investments have ups and downs.

But technology also means that while inflation adjusted wages may be stagnant, you get more bang for your buck. For example, a TV today has much more utility than a TV set manufactured 40 years ago. Before the invention of compact storage formats (VHS, DVD), movie choices were limited to what was playing at the theater or on TV, but Netflix, at an affordable monthly price, provides thousands of choices instantly at your fingertips.

And also, entitlement spending keeps surging, offsetting stagnation of wages. This is evidenced by declining out-of-pocket costs for healthcare and tuition; prices are high, but grants, loans, and other subsidies keep rising.

Inflation adjusted prices for food and energy keep falling; for example, food has become so affordable and abundant, there is an obesity epidemic. People have dozens of appliances plugged in all night and day, sucking power.

Also employee benefits, especially healthcare, have out-paced inflation.

But on the other hand, as part of the post-2008 bigger is better theme, capitalism may be harder for small business due to high borrowing costs, unlike large business that have very cheap borrowing. Forever low interest rates benefits multinationals that can raise gobs of cash by selling low-yielding debt, while small business has to pay very high yields. Large business also have better pricing power, economies of scale, and can buy inputs in bulk, which is good for profits. This allows large businesses to ‘price out’ smaller competitors, sometimes by lowering profit margins temporary to put a smaller competitor out of business before raising them again. So capitalism may great for big guy, but harder for small guy unless, I suppose, you’re in web 2.0 or other select industries. I’m sure there are some capitalism opportunities catering to the new ‘tech elite’ in Silicon Valley, whether it’s food, landscaping, or child care.

While nations, economies, and civilizations come and go, America is not typical. There have been only two major crisis in the past 100 years (1929, 2008). Emerging market, on the other hand, are a minefield. Pretty much every emerging market has at some point defaulted and or had a crippling crisis that required the IMF to bail them out. It’s better to not lose sleep over crisis, although the doom and gloom media tries to make it seem like financial crisis are an everyday occurrence.

The good news is policy markers are good at fixing crisis when they occur, which I think is more important than predicting them. We can’t let an irrational fear of crisis impede economic progress if we have the tools to quarantine crisis as it arises.