Capitalism is an
economic system that has generated masses of wealth but can we expect that to
continue?
The recent trials and tribulations of the global economy
would have made more than a few people question their faith in capitalism. Stagnating economies shackled by convoluted
politics and a chronic lack of business confidence have made economic growth
seem like a thing of the past. The
capitalist system has powerful forces within it that drive the generation of
wealth but the mechanisms which generate growth have been damaged by excesses
built up in the run up to the global financial crisis. It is still too early to tell when and even
if the previous rate of economic growth can be reached any time soon.
At its core, capitalism is a battle for productivity and
efficiency. Companies compete against
each other to supply goods and services for a better price or higher quality
than their rivals with higher profits as a reward. Any products that are offered with even a
slightly lower price tag or in a way that attracts more customers will ensure a
greater market share and prosperity for the business selling it. As such, firms have to constantly strive to
improve their offering or else their survival will be called into question. Companies that can do a better job of
satisfying the needs of their customers lure in more business and increase in
size. This results in resources in the
economy such as workers and money for investment being drawn into firms with the
best business plans where typically fewer inputs are required to make customers
happy. And it is this relentless shift
to businesses which produce more for less that is the key to growth.
So, trying to stop capitalism is like trying to stop people
making money. But capitalism can suffer
when resources are not available for successful companies. Take workers for example. A business looking to grow needs more
employees but high levels of mortgage debt and the drop in house prices in many
Western countries mean that people are not free to sell up and move somewhere
else for a new job. Immigrants, both
skilled and unskilled, provide greater access to the necessary human resources
but places such as the US and the UK are making it tough for foreigners to get
visas.
Lending by banks allows for rapid expansion of businesses
but the finance industry is struggling with the consequences of having been too
generous in the past and banks prefer to keep the cash in their vaults. As a consequence, successful firms are
hamstrung by a lack of funds for expansion. A further hurdle to success is competition
from so-called zombie firms – companies that should go bust but are kept alive
by low interest rates and banks not wanting to incur any bad debt. This stops the productive firms from grabbing
the market share that should reflect their better business practices.
The situation with the banks is made even more complicated
by new regulations applied to the finance industry. Deregulation over the previous decades
unleashed creativity at banks which boosted the economy to begin with but went
on to sow the seeds for the global financial crisis. Re-regulation is necessary to ensure that
banks can’t bring the global economy to its knees but the financial sector also
needs to be free enough to move money around to more productive uses. The uncertainty over where this new balance
might be makes for a difficult environment for banks to operate in.
Whether the current growth path will be a temporary slowdown
or a permanent shift to a slower rate of expansion is as yet unclear. Capitalism has bounced back from previous
setbacks but the past is not always a good guide for the future. Even if a revival of the previous pace of
progress is a possibility, more than three years have passed since the worst of
the financial crisis hit the global economy in 2009 and the light at the end of
the tunnel still seems some way off. While
capitalism has been seemingly unstoppable in the past, only time will tell if
or when economic growth can be kick started once more.
