What America Needs to Understand About Capitalism

The candidates in the 2020 U.S. presidential race are proposing an array of economic policies frequently described as either free-market or socialist. These labels often confuse the American public. In particular, capitalism is widely--and wrongly--understood to be synonymous with free markets. In fact, it includes all economic systems with private ownership of property, from free markets to social democracy.

These various forms of capitalism require basic rules governing how markets operate, such as protection of property and the rule of law. Most capitalist societies also have social programs to protect the most vulnerable. Governments in capitalist economies therefore face two fundamental choices. First, they can either set market rules for the common good, or delegate this task to big business under the guise of "free markets." Second, they can design universal social programs with the aim of reducing inequality and protecting the environment, or scale them back in order to minimize government spending in these areas.

The choices governments make strongly influence levels of inequality, greenhouse-gas emissions, and overall well-being. To evaluate the Democratic candidates' economic policies properly, therefore, we must understand their proposals for structuring markets and creating or expanding social programs.

U.S. President Donald Trump disparages such measures as "socialism," and instead praises free markets without acknowledging that markets need rules to function. Rather than having government set the rules, Trump prefers to let multinational corporations decide how to operate their own markets. Yet in Big Tech and many other increasingly concentrated sectors, deregulation does not increase competition; on the contrary, it allows big companies to rig things in their favor.

Consider the energy sector, where Trump has put Big Coal, Oil, and Gas in charge of U.S. climate policies. Corporate bosses now determine how much they may pollute and how fast they need to develop renewable-energy capacity, while the U.S. remains addicted to fossil fuels. In the health-care industry, big pharmaceutical companies are free to set drug prices, and large insurers reap one-quarter of the sector's revenues. The military-industrial complex rules the Pentagon, investment banks control Wall Street, and big agricultural conglomerates hold sway over America's farmland.

Market concentration allows a few large multinationals to control an industry, resulting in high prices and excessive executive pay. Big incumbents crush newcomers in order to maintain their market power, and then use excess profits to help elect friendly lawmakers and lobby for policies that support their continued dominance--often undermining the power of popular democratic movements.

Several Democratic presidential candidates have highlighted these problems. Elizabeth Warren, for example, blames big-business corruption for worsening inequality and the climate crisis, and undermining American democracy. Bernie Sanders has called for a grassroots political revolution to create a social democracy in the U.S.

Although Warren and Sanders differ on the details, both want to put government back in charge of structuring markets for the common good--including higher taxes on the wealthy and big business, along with stricter enforcement of antitrust and environmental laws. Both candidates also advocate government social programs aimed at providing everyone with health care, childcare, higher education, adequate housing, and decent jobs, along with a social safety net to support them in hard times.

Other Democratic hopefuls have also advocated some of these measures, but more centrist candidates say such programs would be too expensive or even undermine freedom, thereby echoing a standard right-wing critique. Former Vice President Joe Biden, for example, recently told wealthy donors that "nothing would fundamentally change" if he became president. Yet the U.S. capitalist system needs a major revamp in order to tackle the climate crisis and unacceptably high levels of inequality. European countries have demonstrated how broad government programs, flourishing economies, and freedom go hand in hand.

Some are mapping the way forward. Nobel laureate economist Joseph E. Stiglitz says progressive capitalism could greatly help to reduce wealth-snatching and create a more sustainable, equitable economy. And the Poor People's Moral Budget advocates progressive social programs funded via taxes and the redirection of existing federal spending.

Our research team at the University of California, Berkeley, has created the Sustainable Shared-Prosperity Policy Index (SSPI) to measure policies that support a meaningful life in a sustainable world. The SSPI ranks 50 countries based on three broad criteria: policies that structure markets with rules and taxes; measures to protect the environment; and government programs that support healthy, educated people along with the infrastructure and human rights that establish a well-functioning society. By gathering data on over 50 policy indicators, the SSPI provides a practical roadmap toward creating an economy that cares for people and the environment.

All U.S. presidential candidates should present their plans for the economy so that voters can assess how the alternatives will affect their quality of life. People need to know whether they will have access to health care, higher education, and childcare, along with a secure job that pays a decent wage and allows time for a balanced life with family, friends, and community.

This is surely not too much for citizens of a rich country to expect and demand. America has the resources to create a better capitalist economy, and we know which policies can improve wellbeing today and for future generations. Now the country needs to elect a president and Congress that can build this new system.