Summers

trial world.

Americans have traditionally been the most enthusiastic champions of capitalism. Yet, a recent public opinion survey found that among the US population as a whole 50 per cent had a positive opinion of capitalism while 40 per cent did not. The disillusionment was particularly marked among young people aged 18-29, African Americans and Hispanics, those with incomes under $30,000and self-described Democrats.

Three elections in a row in the US have been, by recent standards, bloodbaths for incumbents. In 2006 and 2008 the left did well; in 2010 the right won comprehensively. With the rise of the Tea Party on the right and the Occupy movement on the left, this suggests that far more is up for grabs than usual in this election year.

So how justified is disillusionmentwith market capitalism? This depends on the answer to two critical questions. Do today’s problems inhere in the present form of market capitalism or are they subject to more direct solution? Are there imaginable better alternatives?

The spread of stagnation and abnormal unemployment from Japan to the rest of the industrialised world does raise doubts about capitalism’s efficacy as a promoter ofemployment and rising living standards for a broad middle class. The problem is genuine. Few would confidently bet that the US or Europe will see a return to full employment, as previously defined, within the next five years. The economies of both are likely to be demand constrained for a long time.

But does this reflect an inherent flaw in capitalism or, as Keynes suggested, a “magneto”problem – like the failure of a car alternator – that can be addressed with proper fiscal and monetary policies and which will not benefit from large scale structural measures. I believe the evidence overwhelmingly supports the latter. Efforts to reform capitalism are more likely to divert from the steps needed to promote demand, than to contribute to putting people back to work. I suspect that if andwhen macro-economic policies are appropriately adjusted, much of the contemporary concern will fade away.

That said, serious questions about the fairness of capitalism are being raised. These are driven by sharp increases in unemployment beyond the business cycle – one in six of American men between 25 and 54 is likely to be out of work even after the economy recovers – combined with dramaticrises in the share of income going to the top 1 per cent (and even the top 0.01 per cent) of the population and declining social mobility. The problem is real and profound and seems very unlikely to correct itself unatended. Unlike cyclical concerns there is no obvious solution at hand. Indeed the observation that even Chinese manufacturing employment appears well below the level of 15 years agosuggests that the roots of the problem lie deep within the evolution of technology.

The agricultural economy gave way to the industrial one because progress enabled demands for food to be met by only a small fraction of the population freeing large numbers of people to work elsewhere. The same process is now under way with respect to manufacturing and a range of services, reducing employmentprospects for most citizens. At the same time, just as in the early days of the industrial era the combination of substantial dislocations and greater ability to produce at scale is enabling a lucky few to acquire great fortunes.

The nature of the transformation is highlighted by the 50 fold change in the relative price of a television set of a constant quality and a day in a hospital over thelast generation. While it is often observed that wages for median workers have stagnated, this obscures an important aspect of what is occurring. Measured via items such as appliances or clothing or telephone services, where productivity growth has been rapid, wages have actually risen rapidly over the last generation. The problem is that they have stagnated or fallen measured relative to the...