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Stagnant Capitalism

A decade after the 2008 financial crisis, faith in markets' self-regulating abilities once again lies in tatters. There simply is no single real interest rate that would spur investors to funnel all existing savings into productive investments, and employers to hire all who wish to work at the prevailing wage.

ATHENS – When the Great Depression followed the 1929 stock-market crash, almost everyone acknowledged that capitalism was unstable, unreliable, and prone to stagnation. In the decades that followed, however, that perception changed. Capitalism’s postwar revival, and especially the post-Cold War rush to financialized globalization, resurrected faith in markets’ self-regulating abilities.

Today, a long decade after the 2008 global financial crisis, this touching faith once again lies in tatters as capitalism’s natural tendency toward stagnation reasserts itself. The rise of the racist right, the fragmentation of the political center, and mounting geopolitical tensions are mere symptoms of capitalism’s miasma.

A balanced capitalist economy requires a magic number, in the form of the prevailing real (inflation-adjusted) interest rate. It is magic because it must kill two very different birds, flying in two very different skies, with a single stone. First, it must balance employers’ demand for waged labor with the available labor supply. Second, it must equalize savings and investment. If the prevailing real interest rate fails to balance the labor market, we end up with unemployment, precariousness, wasted human potential, and poverty. If it fails to bring investment up to the level of savings, deflation sets in and feeds back into even lower investment.

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