The communist revolution that spanned the 19th and 20th centuries was about concentrating government ownership of capital. Then, in the closing decades of the twentieth century, a counter-revolution swept the world, pushing for just the opposite: Disperse capital as widely as possible by getting everybody involved as owners.
Now the counter-revolution is being carried to its logical extreme: If everyone can be an owner, then everyone can be a capitalist, down to the barber, the waiter, and the trash collector. A specter is haunting us again; this time it is the dream of truly democratizing capitalism.
But turning everyone into a capitalist may be as impossible as the communist dream of turning everyone into an inspired socialist worker. Interest in the arcane principles of finance has always been an inclination particular to people who love to pore over numerical tables and study mathematical formulas. These people sometimes make themselves rich, and it would seem nice if everyone could do that. But the varying talents, foibles, and psychological predilections of men and women make this impossible.
The new spirit of democratic capitalism goes by different names and mobilizes a variety of symbols. But, however we describe it, the idea that the masses should be owners is growing everywhere.
In Britain, for example, Prime Minister Tony Blair articulates a vision of "a nation of savers and asset-holders." His plans have been called "asset-based policies," a term that has grown in popularity since Michael Sherraden's 1991 book Assets and the Poor: A New American Welfare Policy. In the United States, President George W. Bush calls his dream the "ownership society." In China, the National People's Congress last year re-defined entrepreneurs and individual proprietors as "builders of the socialist cause," and included them in the Patriotic United Front.
Governments around the world are spending money on regulating and monitoring their stock markets so that they are safer for individual investors, and so that investor interest in these markets will grow. They are also trying to develop their housing finance in order to expand homeownership. Some are talking about letting people own their social security contributions, in the form of personal retirement accounts, their health care through health savings accounts, and their education through educational savings accounts and school vouchers.
This is an attempt at a real revolution, not a return to an earlier capitalist past. The general concept of "ownership" is not by itself a road map to a successful new economy, and there are myriad interpretations of how to carry out the revolution. Revolutions are always experiments.
Some of the new policies seem exemplary. Blair's Labor government is implementing a plan that, beginning this month, will establish a personal Child Trust Fund of ?250 (US$468) to ?500 for every newborn. Parents can then make contributions to their child's trust fund which can grow tax-free, and can choose how to allocate the Fund among investments. The purpose of the gifts is to "encourage parents and children to develop the saving habit and engage with financial institutions."
This is a well-designed, small-scale plan that will cost the government fairly little: ?500, even invested for twenty years, will not be enough to lift someone out of poverty. The trust funds' real promise will consist in educating citizens about investments.
But other proposals carry bigger risks, notably the privatization of retirement pensions, which is talked about in many countries, and that some -- including Great Britain, Chile, Sweden and Mexico -- have already put in place, at least partly.
Bush's plan to reform Social Security in the US -- at least what is known of it -- represents the ownership revolution's cutting edge. Young people in the US who opt for it would see most of the traditional pension benefit replaced when they retire decades from now with proceeds from personal accounts that they would be free to allocate among a range of investments, including stocks. Whatever traditional benefit remains would not be enough to live on; retirees would be at the mercy of the markets for the bulk of their income.
The outcome of any such experiment is impossible to foresee, because other countries' experience can never be a perfect guide to a new system. A privatized social security system like the one Bush proposes might turn out very well, assuming that people behave sensibly and/or the stock market keeps going up.
But there is also a higher risk of disaster, owing to a seemingly inborn human tendency to extrapolate past returns. Investors could create a stock-market bubble, encouraging even more naive investors to concentrate their personal retirement accounts in the stock market -- and leaving them dangerously exposed when it crashes.
There is also a related risk that private accounts would cause a further drop in the personal saving rate. The saving rate is the lifeblood of any economy, because foreigners cannot be expected to finance capital investment forever. But all the talk of wondrous returns could spur what psychologists call "wishful thinking bias," leading people to believe that their personal accounts will be so valuable in the future that outside saving is unnecessary.
Encouraging widespread capital ownership could potentially give rise to good policies. But do we really want to extend such policies to areas like pensions, health care and education? After all, owning capital -- whether it is stocks or real estate -- entails risks, and the need to insure against these risks is why capitalist countries built traditional safety nets in the first place. Revolutions are exciting, but we must make sure that we still have a home to return to when the barricades come down and the dust settles.
Robert Shiller is professor of economics at Yale University, and author of Irrational Exuberance and The New Financial Order: Risk in the 21st Century.
Copyright: Project Syndicate
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