August 2012

 

The myth of capitalism past

We idealize the past – call it the “older I get, the faster I ran in high-school” syndrome. Republicans in particular yearn for a mythical time  when rugged individuals, singlehandedly, working hard, created industrial behemoths and seas of jobs – thrusting the US to world dominance. There are elements of truth to this fable, but it is an incomplete explanation for American success.

There were – and are – and will be – titans of business who create great companies and visionary executives who run them. But there is an adage, “behind every great man is a great woman” – which, in the case of the American economy, should be modified to “behind every great company, there is a great infrastructure”.

The President pointed that out in a recent speech, saying:

“[L]ook, if you’ve been successful, you didn’t get there on your own … If you were successful, somebody along the line gave you some help. There was a great teacher somewhere in your life. Somebody helped to create this unbelievable American system that we have that allowed you to thrive. Somebody invested in roads and bridges. If you’ve got a business — you didn’t build that. Somebody else made that happen. The Internet didn’t get invented on its own. Government research created the Internet so that all the companies could make money off the Internet”. 

Republicans, of course ignored everything he said except for “you didn’t build that”. Implying that President doesn’t believe entrepreneurs create there own businesses – which is ridiculous if you look at the whole speech – but politics is about winning, not honesty.

It is inconvenient for the “small government” crowd to give government any credit. There is a scene in Monty Python’s “Life of Brian” where the anti-Roman, Judean revolutionary, Reg (John Cleese), is trying to make the points that all the Romans (ie. the government) do is take and not give. The crowd keeps pointing out Roman contributions – until Reg is finally forced to ask:

“All right, but apart from the sanitation, medicine, education, wine, public order, irrigation, roads, the fresh water system and public health, what have the Romans ever done for us?” 

The government is not perfect, but to suggest that it has played no part in the ascent of America, is either stupid or willfully deceptive.

Government, in fact, is necessary for capitalism to exist. If not for government the economy would resemble a poker game, where everybody starts off with some money, but at the end the winner has all the money, and everyone else is out of the game.

Capitalism is competition, but unfettered competition leads to a monopoly of a few gigantic corporations and competition becomes a memory. Left free to dominate the market, they effectively make the barriers to entry too high for any newcomer.

John D. Rockefeller is a towering symbol of American success – and excess. He stands for all that is great about capitalism – and all that is wrong with it. Through his efforts, the Standard Oil Trust (Rockefeller’s company) reduced the price of kerosene – before electricity, the source of light in America – by 80%, while improving its quality and distribution. Capitalism at its very best  – a man gets rich, while the customer benefits.

Post Capitalism

But by the time he was done, Rockefeller was the oil business, and dogged by accusations of shady – if not illegal – practices, designed to maintain Standard Oil’s monopoly. Let’s call it “post-capitalism”.

Ida Tarbell – muckraking journalist – was instrumental in turning the tide against Standard Oil with her expose of its business practices in “The History of Standard Oil”. Ironically she wrote: “I was willing that they should combine and grow as big and wealthy as they could, but only by legitimate means. But they had never played fair, and that ruined their greatness for me.”

Rockefeller himself put the nature of business and the role of government in perspective: “capital and labor are both wild forces which require intelligent legislation to hold them in restriction.”.

Here is one of America’s greatest entrepreneurs – who at the time of his death was worth 1/65th of the GDP of the US, easily more than any other American ever – clearly stating that business needs to be “restrained”.

But today’s Republicans wish to remove the restrictions on today’s trusts – most importantly the financial companies. Economic history’s lesson is that big companies need to be broken up and regulated – not allowed to grow unchecked. It is not an old lesson – we saw what could happen as recently as 2007 with the near collapse of the financial system.

Regulation

The financial industry was operating in a “post-capitalist” economy. In this case post-capitalist because financial companies didn’t run the risk of failure – a key component of capitalism. “Too big too fail” led these companies to ignore risk, confident that the taxpayer would pay for their lack of prudence.

If the taxpayer is on the hook to backstop the banks, then the taxpayer is entitled to have an interest in how the banks do business. The taxpayer is entitled to regulate the banks behavior. With the evidence of centuries of bad business behavior, nobody can credibly argue that business is capable of policing itself. The claim that businesses will behave, as it is their own best interest to do so, is ridiculous.

Baseball needs 4 umpires to monitor the 12 payers on the field – even when money is not involved. It is not just that some people cheat, it is that most of us need an independent review of our behavior. We shade the close decisions in our favor and convince ourselves that behavior we criticize in others, is acceptable for ourselves.

Taxes

The government’s key tool in preventing the economy from becoming a poker game is taxation. Conservatives tell us that taxes stifle job creation – a claim without evidence. Economic history shows significant job growth in times of high tax rates and the Bush tax cuts didn’t result in sustained economic growth – in fact, by the end of the Bush term, the economy was in disarray.

Conservative politicians aren’t really in favor of job creation. Their fealty to lower taxes is bought by the winners of life’s poker game, whose interest is in keeping all the money.

Oliver Wendell Holmes Jr, said that: “Taxes are the price we pay for civilization”. By which he meant that we pay for a government that provides security – including economic security. That government intervenes to ensure that we are better than the animals and everyone has a place in society.

Thomas Hobbes, in “Leviathan” went into greater detail – outlining a society without government as a “warre of every man against every man”. He argues that capitalism isn’t even possible without government:

“In such condition, there is no place for Industry; because the fruit thereof is uncertain; and consequently no Culture of the Earth; no Navigation, nor use of the commodities that may be imported by Sea; no commodious Building; no Instruments of moving, and removing such things as require much force; no Knowledge of the face of the Earth; no account of Time; no Arts; no Letters; no Society; and which is worst of all, continuall feare, and danger of violent death; And the life of man, solitary, poore, nasty, brutish, and short.” 

In addition Government does the things that private business cannot or won’t do. Cannot do because of the huge upfront costs – create nuclear power or GPS for example, or won’t do, because it may be right but it isn’t profitable – say, electrification of rural America or universal mail delivery.

Conclusion – it’s time to return to capitalism 

If we are serious about the vitality of the economy we need to reverse the trend to “post-capitalism”. No company should dominate its industry, no company should be too big to fail.

There has to be more winners in the economy. The increasing inequality in wealth and income must be reversed, or we will be suffer an entrenched economic aristocracy.

Educational opportunity must increase, or we will suffer a permanent underclass.

Big business cannot print “get out of jail free” cards by buying politicians. Corporate welfare must end.

Public money should be invested in technology and health research. Our infrastructure must be upgraded.

Strong, but not picayune, regulations must restrain business and there must be sufficient regulators to enforce them.

Corporate criminals must suffer the same penalties as non-corporate criminals.

Government must have an appropriate role.

 

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