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Perhaps the real point is that, 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 ordinary 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), 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 byproduct of innovation and entrepreneurship. People do not complain about Steve Jobs's success but this is not always the case: great wealth enables individuals to buy political power and influence, which in turn helps to generate even more wealth. Only a few countries — Sweden, for example — have been able to curtail this vicious circle without causing growth to collapse.
A third problem is the provision and distribution 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. It is ironic that modern capitalist societies engage in public campaigns to urge individuals to be more attentive to their health, while fostering an economic ecosystem that seduces many consumers into an extremely unhealthy diet. According to the United States Centers for Disease Control, 34 per cent of Americans are obese. 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 above 7 billion, 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, perhaps the one that has provoked the most soul-searching of late. In principle, none of capitalism's problems is insurmountable, and economists have offered a variety of market-based solutions. A high global price for carbon would induce firms and individuals to internalise the cost of their polluting activities. Tax systems can be designed to provide a greater measure of redistribution of income by minimising non-transparent tax expenditures and keeping marginal rates low. Effective pricing of health care, including the pricing of waiting times, could encourage a better balance between equality and efficiency. Financial systems could be regulated, with stricter attention to excessive accumulations of debt. Will capitalism be a victim of its own success in producing massive wealth? For now, as fashionable as the topic of capitalism's demise might be, the possibility seems remote. Nevertheless, as the inherent flaws of the modern capitalism grow, its future might not seem so secure in a few decades as it seems now.
The author is Professor of Economics and Public Policy at Harvard University, and was chief economist at the IMF. Copyright: Project Syndicate, 2011
(This story was published in Businessworld Issue Dated 26-12-2011)