Capitalism Isn't Broken

Wall Street Journal, p. A-10, March 29, 1996

6 Pages Posted: 16 Dec 2003

See all articles by Perry Fagan

Perry Fagan

Harvard University - Business School (HBS)

Michael C. Jensen

Harvard Business School; SSRN; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Harvard University - Accounting & Control Unit

Abstract

The Third Industrial Revolution that began in 1973 promises increased productivity, large reductions in the world-wide inequality of wealth, and substantial increases in world-wide living standards. The immediate sources of the changes are large increases in capacity and productivity resulting from major political and technological progress.

The political dynamic behind this Third Industrial Revolution is the spread of capitalism in response to the world-wide failure of communism, socialism and other central planning systems. This move to market-oriented, open economic systems is putting 1.2 billion Third World workers into world product and labor markets over the next generation. Over a billion of these workers currently earn less than $3 a day, while the approximately 250 million workers in the U.S. and the European Union currently earn $85 a day.

With relatively modern technology, experience indicates that these Third World workers can produce from 85% to 100% of the output of their Western compatriots. The major shifts in the world product markets brought about by the 90 million workers in Hong Kong, Japan, Korea, Malaysia, Singapore and Taiwan in the past 30 years provide some insight into the even greater changes that are yet to take place in the West.

One can confidently forecast that the transition to open capitalist economies will generate great conflict over international trade as special interests try to insulate themselves from competition. The transition of established industrial economies will require a major redirection of Western labor and capital to activities where it has a comparative advantage. The upshot of all this for Western workers is that their real wages are likely to continue their sluggish growth and some will fall dramatically over the coming two or three decades, perhaps as much as 50% in some sectors. Wages will, however, reach a trough and recover as the cycle works its way through the system. Remember, these 1.2 billion Third World workers and their families represent huge new markets as well as competitors.

Suggested Citation

Fagan, Perry and Jensen, Michael C., Capitalism Isn't Broken. Wall Street Journal, p. A-10, March 29, 1996, Available at SSRN: https://ssrn.com/abstract=480144 or http://dx.doi.org/10.2139/ssrn.480144

Perry Fagan

Harvard University - Business School (HBS) ( email )

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Michael C. Jensen (Contact Author)

Harvard Business School ( email )

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Negotiations, Organizations & Markets
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United States

HOME PAGE: http://drfd.hbs.edu/fit/public/facultyInfo.do?facInfo=ovr&facId=6484

SSRN ( email )

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National Bureau of Economic Research (NBER) ( email )

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European Corporate Governance Institute (ECGI) ( email )

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Harvard University - Accounting & Control Unit ( email )

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