Moving Towards 21st Century Capitalism

Moving Towards 21st Century Capitalism
January 12, 2011

(This originally appeared on on January 12, 2011.)

“Twenty-first Century Capitalism” is a term I adopted to help people break out of their old ideological ruts. It seems like conservatives and liberals have been making the same old arguments for decades–especially here in the United States. These disagreements have devolved into a sort of ritualized theater, producing little actual progress, while the world has moved on. If you could start with a clean slate, what would you do? It’s a new century, so maybe it’s time for some new ideas.

Capitalism of the 19th century, especially in Britain and the U.S., was characterized by very low taxes–no federal taxes at all in the U.S.–almost no government services, and money that was linked to gold. It was a wonderful environment for unfettered capitalism, and societies made great advances in industrialization and wealth creation.

However, the gulf between rich and poor, and the general conditions of overwork and exploitation, became totally unacceptable by the end of the century. Governments began experimenting with various solutions, mostly involving expanded government services. Prussia (Germany) introduced a public health care system in 1883 and a public pension (Social Security) system in 1889. Prussia was also first with compulsory public education, in 1765; this first appeared in the U.S. in Massachusetts in 1852. Mississippi was the last U.S. state to adopt a public education system, in 1918.

This trend continued. Capitalism of the 20th century was characterized by rather high tax rates, large governments with substantial social services, and an expanding set of regulations covering everything from working conditions to financial services to the environment. Money remained pegged to gold until 1971, but the intellectual trend toward “discretionary monetary policy” (originally to address unemployment) and floating currencies began early in the century and became dominant in the 1930s. Governments in developed countries grew to 25% to 50% of GDP. Some countries became communist, and their government/GDP ratio hit 100%. By the end of the century, the communist experiments had been abandoned, while the developed countries struggled with entitlement bloat, hideously complicated tax systems, regulatory coagulation, and monetary chaos.

I hope we learned something during those 200 years. My idea of 21st Century Capitalism combines the best aspects of the 19th century model with the best aspects of the 20th century model. A good example of 21st Century Capitalism is Hong Kong.

Hong Kong has long been a favorite example for libertarians, as it has some of the lowest tax rates in the developed world. The highest income tax rate is 17%, and the corporate rate is 17.5%. There is no VAT or sales tax, and no payroll tax, inheritance tax or capital gains tax. The entire tax code is about 200 pages long, compared with the U.S.’ tax code of 17,000 pages. Hong Kong ranks an impressive No. 1 on the Heritage Foundation’s 2010 index of economic freedom.

Hong Kong has also refused the U.S.’ fascination with monetary manipulation. For decades, it has foresworn discretionary monetary policy altogether, relying on a simple dollar-linked currency board. This is analogous to the gold standard systems (in effect, a gold-linked currency board) in use throughout the world in the 19th century.

However, Hong Kong is no Victorian throwback. It has also assimilated most of the government services common throughout the developed world. The government provides a public education, a welfare “safety net” and–liberals take note–a government-operated health care system open to all citizens. Hong Kong historically has not provided a public pension, although it is now experimenting with a “mandatory provident fund” system whereby mandatory payroll deductions (similar to a payroll tax) are deposited in an investment account similar to an IRA. Hong Kong manages to provide all of the government services common to developed countries worldwide, on tax revenue equivalent to 12.8% of GDP.

And what of Singapore? Singapore doesn’t have Hong Kong’s reputation for libertarianism–it is famous for banning chewing gum–but it ranks No. 2 on the Heritage Foundation’s index. Per capita GDP of $42,653 exceeds that of Belgium, France and Germany. Like Hong Kong, Singapore foregoes most “discretionary” monetary policy, pegging the Singapore dollar to a currency basket. Singapore also provides all the standard government services, including a public health system available to all citizens. Tax revenue is 13% of GDP in Singapore, almost the same as Hong Kong.

Singapore’s top-notch health care system costs 3% of GDP, compared with 17% in the U.S. It was No. 6 on a World Health Organization ranking of health care systems, based on outcomes alone (not considering costs). Only France, Italy, San Marino, Andorra and Malta ranked higher. Sweden ranked No. 23 and Denmark No. 34. The U.S., which accounts for 50% of worldwide health care spending–the U.S. government alone already accounts for about 22% of worldwide spending–ranked a pathetic No. 37, just behind Costa Rica.

Is Singapore a capitalist’s paradise? A worker’s paradise? Is it “conservative” or “liberal”? Or is it both? Singaporeans themselves don’t waste their time with such antiquated intellectual posturing. These lessons have not been lost on other governments. During the last 10 years, “flat tax” systems have spread around the world. At least 35 governments now have flat tax systems, up from nine in 2000. Of course Hong Kong was one of the first, introducing its flat tax system in 1947.

Belarus (12%, 2009), Paraguay (10%, 2010), Kazakhstan (10%, 2007), Albania (10%, 2007) Slovakia (19%, 2004) and Mauritius (15%, 2007) care little for worn-out 20th century ideology. They just want what works. Many of these governments were formerly part of the Soviet bloc, so it should be no surprise that they combine their low tax rates with ample social services, including universal health care. On the monetary side, they typically have a loose or tight connection to some major international currency, once again abandoning discretionary monetary policy.

Twenty-first Century Capitalism is already emerging, almost unnoticed in the U.S. or Western Europe, which plod along with exhausted 20th century models.

The final step to the flowering of 21st Century Capitalism is a gold standard system. This is difficult for these small countries, because the major international currencies remain in the throes of Keynesian chaos. Either the major currencies will link to gold, or new gold-linked international currencies will emerge (possibly a golden ruble or yuan), or a gold-bloc of small countries which all share a gold-standard policy could be created. At that point, we will finally have the best of the 19th century–low taxes and stable money–with the best of the 20th century’s experiments in government services.