THE MODES OF CAPITALISM
poorly equipped, and by granting rewards to those who anticipate consumer
demand and meet it with the most efficient use of labor and capital
resources. Newer technologies increasingly drive this unforgiving capitalist
process on a global scale. To the extent that governments "protect" portions
of their populations from what they perceive as harsh competitive pressures,
they achieve a lower overall material standard of living for their
people.
Regrettably, economic growth cannot produce lasting contentment or
happiness. Were that the case, the tenfold increase in world real per capita
GDP over the past two centuries would have fostered a euphoric rise in
human contentment. The evidence suggests that rising incomes do raise
happiness, but only up to a point and only for a time. Beyond the point at
which basic needs are met, happiness is a relative state that, over the long
run, is largely detached from economic growth. The evidence shows it is
determined mainly by how we view our lives and accomplishments relative
to those of our peers. As prosperity spreads, or perhaps even as a result
of its spread, many people fear competition and change that threaten
their sense of status, which is critical to their self-esteem. Happiness depends
far more on how people's incomes compare with those of their perceived
peers, or even those of their role models, than on how they are doing
in any absolute material sense. When graduate students at Harvard were
asked a while back whether they would be happier with $50,000 a year
if their peers earned half that, or $100,000 if their peers earned double
that, the majority chose the lower salary. When I first saw the story, I chuckled
and started to brush it off. But it struck a chord that unearthed a long-
dormant memory of a fascinating 1947 study by Dorothy Brady and Rose
Friedman.
Brady and Friedman presented data showing that the share of income
that an American family spent on consumer goods and services was largely
determined not by the level of family income but by its level relative to the
nation's average family income. Thus, their study suggests that a family
with the nation's average income in 2000 would be expected to spend
the same proportion of its income as a family with average family income
in 1900, even though in inflation-adjusted terms the 1900 income was only
a small fraction of that of 2000.1 reproduced and updated their calculations
269
THE AGE OF TURBULENCE
and confirmed their conclusion.* Consumer behavior has not changed
much over the last century and a quarter.
The data made clear that how much people spent or saved was determined
not by the level of their real purchasing power, but by their pecking
order on the income scale, their income relative to that of others.+ What is
all the more remarkable about this finding is that it held even in the latter
part of the nineteenth century, when households spent much more of their
income on food than they did in 2004.*
None of this would have surprised Thorstein Veblen, the American
economist who in his book The Theory of the Leisure Class, written in 1899,
famously gave the world the expression "conspicuous consumption." He
noted that an individual's purchase of goods and services is tied to what
used to be called "keeping up with the Joneses." If Katie had an iPod, Lisa
had to have one too. I always thought Veblen carried his analysis to an extreme,
but there is little doubt that he identified a very important element
of the way people behave. As the data show, we are all competitively sensitive
to what our peers earn and spend. They may be friends, but they are
also seen as rivals in the pecking order. Individuals are demonstrably happier
and less stressed as their incomes rise with a rising national economy,
and rich people, surveys show, are generally happier than those lower down
the income scale. But human psychology being what it is, the initial eupho
*Sample surveys of U.S. consumer income and outlays have been published periodically by the
U.S. Department of Labor and its predecessors since 1888.1 collected data from seven surveys
from 1888 to 2004. The raw survey data appeared to have no consistent pattern until I exhibited
each income bracket's ratio of spending to income against each particular year's average
family income. Then, as in Brady and Friedman, for all seven surveys, the ratio of spending to
income for those households with a third of the nation's average income concentrates around
1.3 (their spending exceeds income by 30 percent). The spending/income ratio then falls eventually
to about 0.8 at double the average income level.
tAn alternate way to reach the same conclusion is to observe that there is no discernible long-
term trend in the nation's household saving rate. Yet all surveys show the saving rate is higher
for upper-income households than for lower-income households. For both statements to be
true (and if the distribution of incomes does not veer outside its historical range), households
at any given dollar income level must be saving less as the aggregate incomes rise with time.
The extent of the downward creep in saving must be directly related to the growth rate of average
household income.
tFood, of course, is a very useful proxy for the subsistence level, which shouldn't be tied to
where a family stood in the income pecking order.
2 70
THE MODES OF CAPITALISM
ria of a higher standard of living soon wears off as the newly affluent adjust
to their better status in life. The new level is quickly perceived as "normal."
Any gain in human contentment is transitory*
People's conflicted reactions to capitalism have spawned a variety of
modes of capitalist practice in the postwar years, from highly regulated to
lightly constrained. While each individual has an opinion, there is a visible
tendency for much of a society to coalesce around a common point of view,
which often differs measurably from the choices of other societies. This, I
sense, results from the need of people to belong to groups defined by religion,
culture, and history, which, in turn, is fostered by an innate need of
people for leaders: of the family, the tribe, the village, the nation. It is a universal
trait that probably reflects the imperative for people to make choices
to govern their day-by-day behavior. Most people, much of the time, feel inadequate
to the task and seek guidance from religious direction, the recommendations
of family members, and the pronouncements of presidents.
Almost all human organizations reflect this need for hierarchy. The shared
views of any society, in practice, are views embraced by its leadership.
If happiness were tied solely to material well-being, I suspect, all forms
of capitalism would converge to the American model, which has been the
most dynamic and productive. But it is also the one that creates the most
stress, especially in the job market. As noted in chapter 8, some four hundred
thousand people in the United States lose their jobs every week, and
another six hundred thousand change or leave jobs voluntarily. Average job
tenure for Americans is 6.6 years, well short of the 10.6 years for Germans
and 12.2 years for Japanese. Market-based societies, which today means
virtually all, have had to choose where on the spectrum they wish to reside
between two extremes that could be symbolized by two points on the
map: frenetic but highly productive Silicon Valley at the one end and unchanging
Venice at the other.
For each society, the choice, in effect the trade-off between material
*Fortunately, this psychology also works in reverse. Sharp financial adversity brings deep depression.
But people not otherwise psychologically incapacitated rebound with time. Their
smile returns.
271
THE AGE OF TURBULENCE
wealth and lack of stress, appears to rest on its history and the culture it has
spawned. By culture, I mean the shared values of members of a society that
are inculcated at an early age and that pervade all aspects of living.
Some aspects of a nation's culture end up visibly affecting the GDP.
Positive attitudes toward business success, for example, a deeply cultural
response, have in the course of generations been an important springboard
to material well-being. Clearly, a society with such attitudes will give enterprises
far greater freedom to compete than a society that perceives competitive
business as unethical or unsettling. In my experience, even many of
those who acknowledge the advantages to material well-being of competitive
capitalism are conflicted for two somewhat related reasons. First, competition
and risk taking cause stress, which most people wish to avoid;
second, many feel deep-seated ambivalence toward the accumulation of
wealth. On the one hand, wealth is a much-sought-after means of flaunting
status (Veblen would understand). But that view is opposed by the well-
nurtured belief best captured by the biblical injunction "it is easier for
a camel to go through the eye of a needle than for a rich man to enter
the kingdom of God." The ambivalence toward accumulation of material
wealth has a long cultural history that pervades society to this day. It has
had a profound influence on the development of the welfare state and the
social safety net that is at its core. It is argued that unconstrained risk taking
increases the concentration of income and wealth. The purpose of the welfare
state is to lessen that income and wealth concentration, which it does
largely through legislation that, via regulation, constrains risk taking and, via
taxation, reduces the pecuniary rewards that may result from taking risks.
Although the roots of socialism are secular, its political thrust parallels
many religious prescriptions for a civil society, seeking to assuage the anguish
of the poor. The pursuit of wealth has been deemed unethical, if not
immoral, since long before the emergence of the welfare state.
This antimaterialist ethic has always been a low-intensity suppressant
to the acceptance of dynamic competition and the unfettered institutions
of capitalism. Many of the business titans of nineteenth-century American
industry were conflicted about the morality of holding on to material gains
from their ventures and gave away much of their wealth. To this day, a residue
of guilt about wealth accumulation exists under the surface of our
272
THE MODES OF CAPITALISM
market culture, but the degree of ambivalence toward wealth accumulation
and attitudes toward risk taking differ widely across the globe. Take the
United States and France, for example, both of whose most fundamental
values are rooted in the Enlightenment. A recent poll shows that 71 percent
of Americans agree that the free-market system is the best economic
system available. Only 36 percent of the French agree. Another poll indicates
that three-fourths of young French men and women aspire to a job in
government. Few young Americans express that preference.
Such numbers speak to a remarkable difference in risk tolerance. The
French are far less inclined to suffer the competitive pressures of a free
market and overwhelmingly seek the security of a government job, despite
the widespread evidence that risk taking is essential for economic growth.
I can't say the greater the risk taking, the greater the rate of growth. Obviously,
reckless gambling rarely pays off in the end. The risk taking I have in
mind is the rationally calculated kind of most business judgments. It has to
be the case that restraint on freedom of action, the essence of government
regulation of business, or heavy taxation of successful ventures must suppress
the willingness of market participants to act. To me, the degree of
willingness to take risks is, in the end, the major defining characteristic that
separates countries into the various modes of capitalism. Whether different
degrees of risk aversion stem from an ethical antipathy toward wealth accumulation
or the stress of competitive battle does not affect the consequences.
They are both captured in the choice of legal inhibitions imposed
on competition that dilute laissez-faire capitalism, an important purpose of
the welfare state.
But there are other, less fundamental suppressants of competitive behavior
as well. Most politically prominent is the inclination of many societies
to protect "national treasures" from the winds of creative destruction, or
worse, foreign ownership. That is a dangerous restraint on international
competition and another issue that differentiates one culture from another.
In 2006, for example, French officials blocked an Italian firm's attempt to
buy Suez Company, a large Paris-based utility manager, by promoting the
merger of Suez and Gaz de France. Both Spain and Italy have made similarly
protectionist moves.
The United States is scarcely innocent of such behavior. For example,
273
THE AGE OF TURBULENCE
in June 2005, China National Offshore Oil Corporation (CNOOC), a subsidiary
of China's third-largest oil company, made a bid to buy Unocal, an
American oil company, for $18.5 billion in cash. This topped an earlier
$16.5 billion cash-and-stock offer from Chevron. Chevron cried foul, saying
the bid represented unfair competition from a government-controlled
company. U.S. lawmakers complained that "China's governmental pursuit
of world energy resources" represented a strategic threat. By August political
opposition rose to such a pitch that CNOOC withdrew its bid, saying
the controversy had produced "a level of uncertainty that presents an unacceptable
risk." Chevron got the deal, at the expense of a valuable U.S. asset:
our reputation for nondiscriminatory international fair dealing, particularly
our pledge to treat foreign corporations the same as domestic ones for regulatory
