My Response to “Why Isn’t Capitalism Working?”, by Larry Summers

In an op-ed piece that appeared on Reuters this morning (link provided above), Larry Summers, the former head of President Obama’s economic council and former Treasury Secretary, wonders what has gone so wrong with capitalism that young people are now evenly split on whether or not it’s an economic model that serves us well. 

I thought you’d be interested in my response, the third from the top.  I can only hope that Mr. Summers and perhaps colleagues of his (if they can get past the vitriol of the first two comments) might be intrigued and think to themselves, “Hmmm.  I wonder if this guy is onto something?”  A reader recently commented to me that this inverse relationship between population density and per capita consumption seems like more of a “law” than a theory – essentially a no-brainer.  And indeed it is.  If only some economist with clout would open his/her mind just a crack to that possibility. 

For your convenience, the following was my reply:

The problem with capitalism is that it has transitioned from being our servant to being our master. Workers have become slaves to the dog-eat-dog economy it has spawned in which far too many workers are competing for too little work.

This has happened because economists have failed to recognize the inverse relationship between population density and per capita consumption. Per capita consumption data from around the world and for a wide range of products proves that per capita consumption declines as societies grow more crowded beyond some critical population density. Since per capita consumption and per capita employment are inextricably linked, the result is worsening unemployment and poverty.

And it is disparities in per capita consumption that drive global trade imbalances. When two nations grossly disparate in population density attempt to trade freely with each other, the work of manufacturing is spread evenly across the combined labor force. But the disparity in consumption remains. The result is an automatic shift of manufacturing jobs to the more densely populated nation, and an automatic trade deficit and rising unemployment for the other. Population density is an extremely consistent predictor of the balance of trade.

In spite of this, and because of economists’ steadfast refusal to ever again give credence to the notion that there may be a problem with never-ending population growth, we continue with our attempts to use population growth to stoke economic growth, making matters worse. Nothing will improve until the field of economics pulls its collective head from the sand and looks beyond the narrow confines of Malthus’ theory to consider what other consequences of population growth there may be.

Pete Murphy
Author, “Five Short Blasts”


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