Inaugural Report on the Health of Democratic Capitalism
Review a digital summary of our 2022 Inaugural Report on the Health of Democratic Capitalism or access the full report at the link below.
The goal of the Denny Center Inaugural Report on the Health of Democratic Capitalism is to evaluate how well the benefits of free market capitalism are balanced with the needs and expectations of a democratic society, focusing primarily on the United States. While almost everyone agrees that free market capitalism is the most efficient wealth creation system, reconciling the benefits of capitalism with broader societal needs and aspirations is a perennial tug of war. The Denny Center was founded on the belief that maintaining balance between the two is critical to the future of both capitalism and a flourishing democratic society.
Since the Industrial Revolution, people around the world are better off in a number of ways. Over the last 200 years, annual gross domestic product (GDP) per capita in western economies has grown by a multiple of almost 50 times—from $1,100 to $50,000; the average global life expectancy has more than doubled from 29 to 72 years old; and the percentage of the world’s population living in extreme poverty has shrunk from 84% to less than 10%.
Despite a long-run track record of success, free market capitalism is under pressure on multiple fronts, motivating some to argue that the system has run its course—and that it’s time to consider alternatives. However, based on the Denny Center’s core research, (conducted with support from leading economists) we believe that democratic capitalism is still the world’s best option, though there are real problems that need to be addressed.
The Report uses a clinical approach to study objective data that sheds light on democratic capitalism’s overall health, confirming where the system continues to perform well, and also identifying where it’s falling short.
The Report is organized into the following Vital Statistics:
- Efficacy and Vitality: Does the Economic System Generate Growing Total Wealth?
- Fairness and Social Mobility: Does the System Address the Well-Being of All Members of Society, or Does it Favor Distinct Groups?
- Social Well-Being and Stability: How Does the System Strengthen (or Weaken) Society More Broadly?
- Business Environment: What is the Current Status and Nature of Free Market Competition, and How Well is the Business Community Positioned to Address Current Pressures on the System?
Democratic capitalism is under pressure, and we should not shy away from identifying problems that need to be addressed. Using data to better understand the problems within the system and identify potential solutions can help improve and strengthen both capitalism and democratic society.
At the same time, we should not let a clear-eyed acknowledgment of real problems cause us to forget the many benefits of free market capitalism. When combined with various forms of democratic societies built upon disciplined moral/cultural frameworks, the market economy continues to support human flourishing around the world.
Therefore, with the aim of reconciling the market economy’s many benefits with society’s values and needs, we recommend the following topics as areas that merit further research to:
- better define problem areas,
- verify the existence and extent of problems and sub-issues, and
- propose potential solutions.
The Report’s Context & Rationale:
Free market capitalism has proven itself an unmatched engine for driving economic growth and improving standards of living in the United States and around the world. However, big problems persist. With accelerating frequency, news headlines warn of widening gaps in wealth and incomes, degradation of natural resources, societal division and strife, and questionable integrity of business owners and corporate leaders. Capitalism as an economic system is under fire because its ability to generate wealth and innovations appears to be falling out of step with society’s needs and values. Though reasonable voices may disagree on potential solutions, the Report aims to present data all sides can accept as a true reflection of the present realities—and to raise the critical issues that require long-term solutions.
The Denny Center’s Report will attempt to clinically measure the health of democratic capitalism, focused primarily on the United States but including key measures for a handful of other countries, both in terms of its economic vitality and its broader contribution to the well-being of society.
This first edition of the Report is rooted in the center’s desire to produce a clinical, data-driven assessment of the free market economic system and how it serves the well-being of a democratic society, focusing primarily on that of the U.S. but also comparing key measures to those of a handful of additional democratic countries. The thesis of the report is that the economic well-being of society is unmatched when coupled with free market capitalism that is also responsive to the values and needs of a functioning democracy.
The Report’s objectives include analyzing how well the U.S. and several other developed democracies are managing the tensions presented by free market capitalism and identifying emerging trends that could undermine the balance of free markets and democratic society.
The objectives of this inaugural Report are to:
- analyze how well the U.S. and several other developed democracies are managing the tensions presented by democratic capitalism (and their related trade-offs), and
- identify emerging trends, which if unaddressed, may undermine the balance necessary to preserve the coalition of free market capitalism and democratic society.
The Report’s target audience includes corporate board members and management executives, federal and local government officials (including legislators, regulators and judges), influential institutional leaders (in academia, the arts, and religion), and the public-at-large. Though some necessary solutions will require changes in laws and/or regulations, the Denny Center believes that the majority of positive changes can be driven by business and the private sector without sacrificing long-term value creation for owners or viewing tensions among stakeholders as zero-sum trade-offs over a longer strategic time horizon.
The Report’s Contributors
To produce the majority of the vital statistic datasets for this initial report, the Denny Center collaborated with two external economists: Jay Shambaugh (Brookings Institution, George Washington University) and Michael Strain (American Enterprise Institute); Dr. Strain also contributed an essay in response to this report’s initial findings. Dr. Shambaugh is currently a Professor of Economics and International Affairs at George Washington University and a Senior Nonresident Fellow at the Brookings Institution. Formerly, Dr. Shambaugh served as a member of the White House Council of Economic Advisors (August 2015-January 2017) and the lead researcher for Brookings’ Hamilton Project. Dr. Strain is currently a Senior Fellow and the Director of Economic Policy Studies at the American Enterprise Institute and the author of the recent book, The American Dream Is Not Dead (But Populism Could Kill It). Before that, he served at the Center for Economic Studies at the U.S. Census Bureau and in the macroeconomics research group at The Federal Bank of New York. In addition, Betsey Stevenson contributed an essay in response to the report’s initial findings. Dr. Stevenson is a Professor of Public Policy and Economics at the Gerald R. Ford School of Public Policy at the University of Michigan. She is the author of a Principles of Microeconomics and a Principles of Macroeconomics textbook and the cohost of the podcast Think Like An Economist. Formerly she served as a member of the White House Council of Economic Advisors (July 2013-August 2015) and the Chief Economist of the U.S. Department of Labor (August 2010-September 2011). Duncan Hobbs also contributed to the report and its datasets; he is a Senior Research Associate in Economic Policy Studies at the American Enterprise Institute and a graduate of Georgetown University (SFS’17).
“Capitalism for the Long-term”, Dominic Barton (Harvard Business Review, 2011)
“The Error at the Heart of Corporate Leadership”, Joseph Bower & Lynn Paine (Harvard Business Review, 2017)
Value(s): Building a Better World for All, Mark Carney (2021)
“The Biggest Contract”, Ian Davis (The Economist, May 2005)
Grow the Pie: How Great Companies Deliver Purpose and Profit, Alex Edmans (2020)
“Walking the Talk: Valuing a Multi-Stakeholder Strategy”, FCLTGlobal (2022)
Reimagining Capitalism in a World On Fire, Rebecca Henderson (2020)
“Whose Wages Are Rising and Why?”, Ryan Nunn and Jay Shambaugh, (Brookings, 2020)
Can American Capitalism Survive? Why Greed is Not Good, Opportunity is Not Equal, and Fairness Won’t Make Us Poor, Steven Pearlstein (2018)
“Capitalism and the Future of Democracy”, Isabel Sawhill (Brookings Institution, 2019)
The 10 Rules of Successful Nations, Ruchir Sharma (2021)
“Economic Growth and Subjective Well-being: Reassessing the Easterlin Paradox”, Betsey Stevenson and Justin Wolfers (Brookings Institution, 2008)
The American Dream is Not Dead (but Populism Could Kill it), Michael R. Strain (2019)
The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, and the Public, Lynn Stout (2012)
A Vision of Democratic Capitalism
Ideally, capitalism, the provider of the bulk of society’s needs for goods and services, thrives in a free, competitive market where (i) investment decisions rely on and reflect market input, (ii) economic freedom coupled with disciplined individualism, innovative ingenuity, motivation and courage are critical ingredients, (iii) governments do not control or seek to influence or preempt private sector decisions, and (iv) governments provide law and order, pursue fiscal and monetary stability, enforce laws to preserve competitive markets, issue administrative regulations only to the extent they are justifiable, and establish a broad system of basic public, quality, affordable and accessible services and safety nets to insure equal opportunity and protection from misfortune while simultaneously striving to achieve generational equity.
Society looks to capitalism to (i) provide jobs, (ii) consistently generate wealth and growth sufficient for the government to fulfill its obligations, (iii) generate household labor income adequate for households to enjoy a constantly improving life style sustained by increasing GDP per capita, (iv) focus on individual merit, effort, potential and character rather than societal classifications thereby enabling and increasing social mobility and achievement of the American dream, (v) facilitate business’s pursuit of innovative R&D to enable long-term investments required for the future, (vi) enable and encourage shareholders to invest in long term growth, and (vii) rely on corporate boards to temper market wisdom when incompatible with societal values, to recognize the need for fair compensation, and to respect and support the common good. How well capitalism is fulfilling the principal needs of a democratic society is the standard which will determine capitalism’s continuation as a country’s economic system. In a democracy, that decision will be made by a majority of citizens eligible to vote.
Less obvious is the impact of the governmental role at the state and local levels in the regulation of cultural issues including education, family support, and tax policies which have an effect on fertility rates, the maturation process of young people and their preparation for adulthood, employment, and citizenship. In addition, the record of government’s engagement in asset allocation is checkered compared to the success of the private sector and needs to be examined.
Neither capitalism nor democratic governments have consistently measured up to all of the foregoing standards. The success so far is remarkable, but a lot of work remains to be done. Repetitive shortcomings, such as executive compensation and questionable regulations, undermine trust in the system and are frequently exacerbated by the involvement of lobbyists serving as agents of crony capitalism. The future of capitalism is largely in the hands of corporate boards because they have the power to live up to the ideals articulated above—seek fair compensation, invest for long term wealth creation, maintain the competency to excel, and abide by values compatible with the common good. Failure to exercise this authority may induce the electorate to transfer authority to the government with adverse impacts on the vitality of capitalism and its ability to fulfill the needs of society. Shareholders also have a stake in the future of capitalism but a large percentage of them own their shares derivatively through mutual funds and index funds which control the voting rights of the shares. A number of initiatives are in process to give investors in these funds a voice in how fund shares should be voted. If the point is reached where a significant percentage of investors control voting rights, they will also be held accountable for the future of capitalism. If, with the passage of time, they fail to fulfill this responsibility, it might ultimately lead legislators to question the rationale for continuation of the shareholder exemption from liability for corporate debt.
There is considerable turmoil in the U.S. and the world. The challenges are daunting for capitalism, governments, and decision-makers of all types. Now is the time for realistic assumptions, clear thinking, and relevant fact-based decisions. Our goal is for the center and this report to be meaningful contributors to the achievement of those goals. Under the aegis of the Georgetown University Law Center and with the participation of other academic disciplines of the university, the Denny Center will use the conclusions of this initial report as a guide as we sponsor research papers, symposia and conferences to examine in greater depth issues in need of solutions. Boards, shareholders, and governments are center stage. Hopefully, each group will rise to the challenge to work towards meaningful change.