Last week I joined Jason Furman, chief economist in the Obama administration, for an episode of Open to Debate on the state of American capitalism. Jason is a serious thinker and a generous opponent. These are rare qualities to find in an economist—a profession that often treats the testing of ideas as an insult. It made for a great debate.

We found plenty of ground for violent agreement. We agreed that markets are the most powerful mechanism humans have ever devised for solving problems and improving lives, and we agreed that corporate power needs a strong antitrust regime to keep it in check.

But early on, Jason described marginal productivity—the idea that workers under capitalism are paid exactly what they are worth—as an economic fact. That’s the moment when we found the actual debate.

Marginal productivity is not a law of nature that God handed down thousands of years ago. In fact, we know exactly when the concept was created, who created it, and why he did so.

When John Bates Clark published The Distribution of Wealth in 1899, he was explicit about the book’s purpose. Throughout the Gilded Age, workers realized that they were being exploited by the super-rich. The Distribution of Wealth was intended to refute that growing awareness by claiming that worker exploitation is arithmetically impossible, and that distribution is governed by a natural law which allocates to every worker precisely what they create.

For obvious reasons, rich people like me have promoted this concept ever since. It works out very well for the super-rich if everyone believes that raising wages would interfere with the inviolable laws of the universe. And the next logical conclusion to draw from this idea is that if your barista is always paid exactly what they are worth, then every outsized CEO compensation package was likewise written in the stars. There’s nothing we can do about it, adherents of marginal productivity argue. It’s destiny in action.

Here’s the thing: you are not paid what you are worth. You are paid what you have the power to negotiate. The value you create is only one input into that negotiation, never the whole of it. I have run companies and sat on the boards where these numbers actually get set, and I can tell you from experience that nobody in those boardrooms is crunching the numbers on any one worker’s marginal product. And on a macro scale, we know marginal productivity is bunk because you can draw a straight line from the collapse of unionization to four decades of wage stagnation. When workers lost the power to negotiate, their paychecks began to languish. It’s as simple as that.

This is not just quibbling over economic jargon. If one of the best economists in the country believes marginal productivity is a natural law akin to gravity, rather than a cover story for mass wealth extraction, then the most effective tools we have to combat inequality—higher wages, stronger labor standards, real bargaining power—are off the table before anyone reaches for them. The problem is, those tools are exactly how economies grow. When ordinary people have money to spend in the economy, the economy grows for everyone. Tackling runaway inequality while denying that reality is the equivalent of pushing a boulder uphill with one arm tied behind your back.

My one regret is that we ran out of time before I could make the case for the alternative. Eric Beinhocker and I have spent years building Market Humanism as a modern paradigm to replace the neoliberal thinking that has governed us since the 1980s and delivered the inequality now tearing our politics apart. It isn’t an invention so much as a synthesis of what the best economists of the last half-century—many of them Nobel laureates—already know about how economies actually work.

If viewers take away one idea from this debate, I hope it is this: An economy is a choice, not an immutable natural law. We do not have to accept the one we’ve got. If you think you’ve got a better way to grow the economy for everyone, I look forward to that debate, too.

Watch the full debate below. And vote for the winner while you’re there.

Open to Debate

Is Capitalism Broken?

Topics: Economics, Finance, U.S…

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7 days ago · 2 likes · 2 comments · Open to Debate

Over a decade ago, two Princeton economists published a remarkable report in the most prestigious economic journal in the world. Their findings should have upended everything we understand about political economy. Instead, economists and the media glossed over the report, relegating its findings to obscurity.

Here’s what Alan Blinder and Mark Watson reported in the American Economic Review, in their own language: “The U.S. economy has performed better when the President of the United States is a Democrat rather than a Republican, almost regardless of how one measures performance. For many measures, including real GDP growth (on which we focus), the performance gap is large and significant.”

I’m going to step back in here to clarify a point: By “large and significant,” Blinder and Watson mean that they found the U.S. economy has grown nearly twice as fast under Democratic presidents as it has under Republican presidents. This is not some statistically insignificant blip. It’s an irrefutable fact.

And this isn’t some narrow finding. Whether you measure economic growth through GDP, business investment, employment, or pretty much any other metric you care about, Democratic presidents are better for the economy by a mile. And they have been consistently better at it since World War II.

These findings spit in the face of conventional wisdom. In virtually every poll taken in my lifetime, voters have stated that Republicans are better stewards of the economy than Democrats, who are seen as wasteful spenders who drag the economy down. But in reality, the exact opposite is true.

Why This Groundbreaking Report Didn’t Break Any Ground

Why doesn’t everyone know about Watson and Blinder’s findings? Why wasn’t this front-page news? In part, it’s probably because the authors themselves couldn’t explain why their findings were true. After checking and rechecking the numbers every which way under every imaginable condition and getting the same results again and again, they eventually attributed the pattern of strong Democratic economic stewardship to, basically, good luck. They offered some hand-waving arguments that oil prices happened to be lower and the world happened to be more peaceful when Democrats took office.

Nobody found Blinder and Watson’s excuses to be satisfying, and nobody could explain their results. So the report was, for all intents and purposes, buried, remembered as nothing more than a curious footnote in the history of economic research.

In the decade since Blinder and Watson smothered their own news-making report with a shrug, our understanding of the economy has evolved. We now have a deeper understanding of how and why the economy grows. And as a result, we can finally explain why Democratic presidents have been far better stewards of the economy.

To get a better sense of what’s happening here, we need to first consider the fact that we’ve been living under an economic paradigm for the better part of the past fifty years that gets the cause of economic growth not only wrong, but entirely backward.

You may call that paradigm neoliberalism or supply-side economics or neoclassical economics or trickle-down economics. But no matter the name, this theory of economic growth has always been the same: Cut taxes, slash regulations, and hold down worker wages, the argument goes, and prosperity will trickle down throughout the economy.

Neoliberalism didn’t spontaneously take hold one day, and it certainly wasn’t subjected to rigorous empirical study. It became the unitary economic understanding through decades of strategic funding, cultural cultivation, and a little bit of dumb luck when its ideal champion, Ronald Reagan, won the presidency.

In our lifetimes, neoclassical economics became dominant in both political parties, and the entire field of political economy had largely been reduced to quibbling around the edges of neoliberalism. Republicans suggested more drastic tax cuts for the rich and deregulation for the powerful, while Democrats typically proposed merely to keep prior tax cuts and deregulation in place while also enacting minor positive policy changes for working Americans.

Finally, an Explanation

Over the last decade, though, a new economic paradigm has come into focus. You may know it as middle-out economics, or, as Oxford economics professor Eric Beinhocker and I call it, Market Humanism. This understanding of the economy holds that economic growth doesn’t come from the top down. Instead, it grows from the paychecks of working people. Their purchasing power drives consumer demand, which stimulates business investment, job creation, productivity, and wage growth.

When we apply these two contrasting economic theories to Blinder and Watson’s test, the winning paradigm is obvious. Neoliberalism argues that cutting taxes on capital empowers private business investment. But the data show that business investment grew at only 2.98% on average under Republican presidents, while it soared at 6.58% on average under Democratic presidents. Under Republican stewardship, tax cuts did not flow into productive capacity and economic growth; instead, corporate investment as a share of GDP fell as profits were hoarded by the very rich.

There are countless examples of the failures of neoliberalism, but the biggest, cleanest example of how tax cuts fail to create growth came in 2012, when conservative governor Sam Brownback, working closely with one of the architects of trickle-down, the economist Art Laffer, proposed slashing taxes by 30% and lowering some taxes on business to essentially zero. When they passed into law, Brownback called the sweeping tax cuts a “real live experiment,” and promised that the cuts would offer “a shot of adrenaline into the heart of the Kansas economy.”

The experiment was a resounding failure. The tax cuts didn’t create jobs or businesses in Kansas. In fact, the state’s economic growth tanked. And the tax cuts devastated state revenue, starving the state budget of billions of dollars and forcing state lawmakers to enact draconian cuts to education and other popular programs.

The blowback was so fierce that the incredibly conservative Kansas legislature repealed all of Brownback’s tax cuts in June 2017 with a veto-proof majority. Neoliberalism always results in this kind of race to the bottom, in which each successive generation of leaders continues to promise tax cuts and deregulation until they finally reach the bone.

By contrast, the data in support of Market Humanism’s role in creating economic growth are already robust and growing. From the state and local minimum-wage increases of the past decade, we have seen countless papers showing that raising the minimum wage not only doesn’t kill jobs, as trickle-downers have promised, but in fact the increased consumer demand following wage increases actually creates jobs.

We Now Understand How the Economy Works

I said earlier that leaders from both sides of the aisle have been captured by neoclassical economics. If that’s true, how can Democrats be actually, provably better at creating economic prosperity than Republican presidents? The answer can be found in data from the Federal Reserve Bank of Dallas, which indicate that government nondefense research and development investment accounts for roughly 25% of postwar productivity growth.

Without that boom in public spending, we wouldn’t have the breakthroughs in medicine, communications, and technology that we all enjoy today—innovations that have expanded the economy and created jobs. Democratic administrations have historically increased or directed major funding toward public investments, including the CHIPS Act and the Inflation Reduction Act, while Republican administrations typically call for cuts to non-defense R&D spending.

And nobody in their right mind could possibly argue that Democratic presidents and Republican presidents hold exactly the same economic priorities. For most of the twentieth century, Democratic presidents raised the federal minimum wage, emphasized the importance of union protections for workers, and defended the overtime threshold. Even though they didn’t go far enough, Democratic presidents tended to promote legislation that put more money in workers’ pockets—not enough to undo the massive redistribution of wealth to the top 1%, but certainly more than their Republican counterparts.

In other words, even the watered-down neoliberal defense of government spending, taxes on the rich, and investments in working Americans that Democrats have upheld when in office has resulted in astronomically higher levels of economic growth than their Republican peers. Just by being a little less bad on economic issues than Republican presidents, Democrats have produced tremendous economic results.

It really is this simple: Neoclassical economics is unambiguously bad for the economy and terrible for economic growth, while Market Humanism unambiguously supercharges widespread economic growth by creating a positive feedback loop of growing paychecks inspiring higher consumer demand. We now have 70-plus years of economic data proving that this is true, with more studies added to the corpus with each passing month.

When Blinder and Watson’s study was published over ten years ago, it was a puzzle with no solution. Now, when we take everything we know into account, it’s a confirmation. More than seven decades of economic data, across every imaginable measure of performance, consistently show that the approach that centers worker paychecks as the cause of growth produces a stronger, more prosperous economy.

After nearly a half-century of swimming against the tides of trickle-down economics, imagine how far and how fast we can go if we pay attention to how prosperity truly grows, and commit to growing that prosperity for everyone.