A decade ago, 80 percent of Americans believed that a free market economy was the best economic system. Today, that number is 60 percent. Another recent poll shows that only 42 percent of millennials support capitalism.

So what happened? Why have so many people, both in the US and abroad, lost faith in capitalism?

Steven Pearlstein, a columnist for the Washington Post and public affairs professor at George Mason University, has a few answers. The primary reason is that the system has become too unstable: Wages are largely stagnant, and the income gap is so wide that the rich and the poor effectively live in different worlds. No surprise, then, that people are unhappy with the status quo.

Pearlstein’s new book, Can American Capitalism Survive?, chronicles the excesses of capitalism and shows how its ethical foundations have been shattered by a radical free market ideology — often referred to as “neoliberalism.” Capitalism isn’t dead, Pearlstein argues, but it has to be saved from itself before it’s too late.

I spoke to him about how we might do that, whether capitalism is even worth salvaging at this point, and why he thinks America needs a new social contract between business and society.

A lightly edited transcript of our conversation follows.

Sean Illing

Why have so many people lost faith in capitalism?

Steven Pearlstein

The most obvious answer is that capitalism has left a lot of people behind in the last 30 years. Everyone can see that the top 1 percent, the top 10 percent, the top 20 percent, have captured most of the benefits of economic growth over the last 30 years, and the rest of the population has been marginalized.

Now, we all know this, but I wrote the book because I think there is a feeling even among those of us who didn’t get left behind that this system has become too unfair, too ruthless, and rewards too many of the things we think of as bad. The system offends the moral sensibilities even of people who are benefiting from it.

Sean Illing

I’m not so sure that the people at the top are starting to see it that way, but we’ll come back to that. First, tell me what went wrong in the 1970s and ’80s, when you say capitalism really started to go sideways.

Steven Pearlstein

Two things happened during the ’70s and ’80s. First, the American industrial economy lost its competitiveness. Neoliberal policies of global free trade and unregulated markets were embraced, and the US was suddenly facing competition from all over the globe.

So American companies, which had been so dominant in our own market and in foreign markets, started to lose their dominance, and they had to get leaner and meaner. They started behaving in different ways. They started sharing less profits with their employees and with shareholders and customers.

Eventually, that produced a revolt from shareholders, and in the mid-’80s we had the first of what were called “hostile takeovers,” in which people would come in and buy up large chunks of companies and threaten to take them over or out the executives if they didn’t put shareholders above all else.

The result of all this was that companies changed how they did business and completely embraced the idea that companies should be run to maximize shareholder value and nothing else. Obviously, that meant more money for executives and shareholders and less money for employees and customers.

This is the mentality that led us to the place we’re in now.

“This is not a sustainable system, and if it keeps getting worse, we run the risk of a revolution”

Sean Illing

I want to push you on what I think is an excessively sanguine view of capitalism. In the book, you imply that capitalism has gone off the rails, but I disagree. I’d argue that capitalism has evolved in precisely the way we should have expected it to evolve. The culture of norms and values that were supposed to check the excesses of capitalism has (predictably) been eroded by capitalism itself, and now it’s propelled entirely by greed.

You seem to think that capitalism can be saved from itself. What do you say to people who think it’s not salvageable, not morally legitimate, and in any case not worth salvaging?

Steven Pearlstein

The question is, is all of that endemic to capitalism? I don’t think so, because we see different kinds of capitalism in countries in, say, Northern Europe and in Germany. Some of that has to do with the rules and laws under which they operate, but a lot of it has to do with the norms of behavior. So capitalism doesn’t have to reach the point of ruthlessness like it has here and other places.

And one of the good things about capitalism is that it has self-correcting mechanisms, just as democracy has self-correcting mechanisms. The truth is that the outcome we have now, all of this tremendous inequality, is bad morally and economically. This is not a sustainable system, and if it keeps getting worse, we run the risk of a revolution.

So I don’t think capitalism is an inherently moral system or an inherently self-defeating system, but we have to ensure that it adapts when it veers too far into corruption and inequality. And that’s basically what I’m calling for in this book.

Sean Illing

Well, yes, capitalist systems are extremely adaptable (that’s definitely one thing Karl Marx got really, really wrong), but the problem is that our system isn’t adapting, or not adapting fast enough. And we live in a media culture in which nearly half the population is fed propaganda that convinces them that immigrants and regulations are what are holding them back, not greedy corporations.

How do we course-correct in the face of all this confusion?

Steven Pearlstein

We do it by changing norms, and by talking about it and discussing it. That’s how a democracy goes about it. Now one of the questions you might ask is, how do norms change? And the answer is, I don’t know.

But in the #MeToo movement, we see a very good example of how norms can change very quickly. What was acceptable five years ago is really not acceptable anymore. And it’s because enough people got morally outraged and things changed. That’s how norms shift and the culture evolves.

Sean Illing

I’ll circle back to the #MeToo comparison because I think it’s a bad one, but there are also legal and structural impediments here. We have a political system fueled by private money, which means that wealth translates to political influence, which in turn means the laws are increasingly rigged to benefit the people on top.

Steven Pearlstein

You make a very good point, and in the book I say the No. 1 thing we have to do is get money out of politics — and that will probably require a constitutional amendment. But you’re right: We can’t reform our economic system if we don’t reform our political financing system.

As it is now, we’re stuck in a vicious cycle in which concentration of wealth leads to concentration of political power, which leads to yet more concentration of wealth. And we know how this plays out in the long run — it leads to revolution. But we don’t have to get anywhere near that if we can make the changes we need to make now.

The Democratic Party will have to lead the way, and if they really want to do that, they need to put this at the top of their agenda and run on it. People out there are angry, and this will help them win. It’s a slam-dunk issue, really. People are as disgusted by what they’re seeing as you and I are.

Sean Illing

I want to quote something interesting from your book: “Liberal critics never miss an opportunity to complain about the level of inequality, but they’ve rarely been willing to say what level, or what kinds, of inequality would be morally acceptable.” I have my own answer to this, but I’m curious what you think the acceptable level of inequality is.

Steven Pearlstein

My answer has to do with something called social capital, which is a social science term that generally refers to the amount of trust that we all have in each other and in our institutions. And when things get so unfair that that trust becomes eroded, that’s when you know you’ve gone too far. That’s when you know that things have become too unequal. Another way that you would know it is when you see class mobility, intergenerational class mobility, start to decline.

Now, we’ve only been in this neoliberal paradigm for 40 years, so it’s a little too early to know what the intergenerational data will look like, but we can already see the gross inequalities and the erosion of social capital. That, to me, is enough of a warning sign. We know enough to know we have to course-correct or risk disaster.

“The system offends the moral sensibilities even of people who are benefiting from it”

Sean Illing

In the book, you catalogue all of these solutions to the problem — more income redistribution, better tax reform, something like a universal basic income, a new social contract between business and society, more access to higher education, etc. — and I agree with most of it. But I’m not confident we have the political will to get these things done.

If I’m right about that, what do you think is going to happen in the short to medium term?

Steven Pearlstein

First, let me just say that it will be easier to do these sorts of things than it will be to go full socialist. If we lack the political will to fix the kind of capitalism we have, then there’s surely a higher political barrier to the full socialist model of national health insurance, free college for everybody, and guaranteed income for every individual, whether they work or not.

So if you’re saying that things have to get worse before they get better, you may be right. However, if you look at public opinion polls, if you look at the recent election, I think the will may be already there. Again, I see the success of the #MeToo movement as a great example of what’s possible.

Sean Illing

The #MeToo movement is a misguided comparison. We’re talking about broad changes in our political and economic system, changes that directly threaten the most entrenched financial interests in this country. I think you’re right about public sentiment, but I’m not at all convinced that the financial class is prepared to relinquish anything.

In fact, we’ve seen the big banks essentially go right back to the sorts of behaviors that produced the financial crash in 2008, and we just saw Republicans pass an egregious tax cut that will deepen the very inequalities we’re talking about here.

Steven Pearlstein

Well, it’s worth remembering that social norms change before policy changes, not the other way around. But yes, I agree that the GOP tax cut was enormously irresponsible and unfair. These are the sorts of things that can cause the public to say, “Enough is enough.”

My view is that we’re at a tipping point now and things are about to change. You and I may disagree about what, exactly, we need to do, or how far we need to go, but I think there are enough positive signs in public opinion that suggest we’re at a tipping point.

We’ll just have to see what happens next.

This conversation was originally published on January 2, 2019.