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Adulteration of Capitalism
As I have expressed on occasions that the concepts of democracy, secularism, socialism, communism, nationalism differ more in practice than in theory, so does capitalism. All well intended sociopolitical theories conceived in response to certain social developments are corrupted in human (better said inhuman) hands. Capitalism is no exception. The current global economic disaster is the most recent and obvious example of it. But no one wants to admit that capitalism is failing, or more correctly said, capitalists are failing capitalism.
Socialism failed because of the increasing financial burden caused by uncontrolled welfare services. Communism failed because the superiority of collectivism over individualism killed individual motivation and created autocracy. Nationalism failed because it degenerated into ethnicism. Secularism failed because of neglect of its necessary component of education. Democracy is now failing because groups more powerful in numbers or in wealth take advantage of democracy to dominate the rest. Capitalism also has been on the path of self destruction for some time.
Capitalism is not only private ownership and entrepreneurship. It is an undertaking of a business to deliver a service to the public in return for an income. Should not therefore the entrepreneur be held responsible and accountable for obligations towards the public? No one forces an entrepreneur to engage in business with all the risks it involves. It is his/her choice. If no private entrepreneur would venture in, for example, steel production in the country, would not the government get involved in such production, because of the national need for such a product? And if it did, would not the government be held accountable in defense of public interest? The claim that the difference is in the nature of business, that capital being private as against public, does not wash. Most business capital is public and bankruptcy laws protect the entrepreneur/the business, while the private investor is not protected.
The main point is that businesses serve the public; they exist only because of the public. An enterprise is like any public office: an undertaking for the good of all. When you are enterprising you are in the public arena. You are producing goods or services for public consumption, you are creating jobs for the public, you are (if went public) using public money and providing dividends to the stock holding public. Nothing can be more public than that. Therefore your goods or services should not be of a type that would harm the public, your workers should not be slaves, your stock holders’ interest should be protected, your profit should not be such that would take advantage of the public. The recognition of this fact should be convincing enough to bring the private enterprise under the realm of public regulation.
Hijacking of capitalism by capitalists
In many instances the entrepreneur’s success turns him/her into a greed machine; power corrupts. It is by now public knowledge that today’s global economic depression was created by big private and public companies that consider themselves as God sent, indispensable, self-centered, arrogant entities, with complete disregard of public interest. The more successful and larger the business the more arrogant and dangerous its executives become with all that power at their disposal and without any checks and balances of that power. They consider themselves above all obligations of citizenship, while they expect the public, including the government, to be at their service. They know that the public is in fact hostage of the economy that they control.
Nothing can justify tens of millions of dollars of salary and benefits paid to the executives; no service irrespective of how successfully rendered deserves such outrageous pays; these benefits are immoral when compared to wages of their own workers, who in fact make that success a reality. WSJ recently reported that the CEO pays and bonuses of the largest financial companies (Goldman, Morgan, Merrill, Lehman, Bear Stearns) amounted to about $55 billion in 2002, and more than $115 billion (an amount that may have been enough to rebuild New Orleans) in 2007 although they already started loosing income in that same year. For example 2007 total compensation paid to Goldman CEO was $69 million, to Merrill CEO $83.785.021, to Blackstone CEO $350.729.482 (this is no typographical error). 2007 compensation paid to three top Blackstone executives totaled $623.756.171. This is not free market or free competition; this is outright free dipping in general public’s pockets; because all that money to companies comes from no other place than the public. This freedom of financial mismanagement is the cause of entire world left now holding out the bag. If one major purpose of capitalism is to let the economy function free from any authority then it should be free from corporate domination as well. Corporations pull wool over the eyes of gullible public while capitalists steal the capital. The public should assert that capitalism belongs to the public not to the capitalist.
Failed executives should be held responsible like any public servant would be held to fire for a wrong doing. What makes the business executives, who by their inaptness, indifference, and arrogance caused millions to suffer around the world, impermeable to similar accountability? Is it because of the freedom of private sector from government intervention? No. There are laws to protect the consumer and workers. They cannot produce harmful products or provide harmful services. They cannot employ workers below the minimum wage. These are in fact government interventions. Isn’t the famed Keynesian active fiscal policy or its nemesis monetarism a government intervention “par excellence”? So, then, what happened to the enforcement of those regulations?
Wage control v. uncontrolled profit
Our individual, national, and global livelihood (economy) depends on the symbiotic inter-relation between consumption (necessities), production (manufacturing and agri), labor, and savings. Savings are invested back in production, which in turn employs labor, which in turn enables consumption. This is a close circuit.
Consumption (let us recall that this is done mostly by wage earners) is limited by the amount of individual income, and the income of wage earners is regulated. This limitation is counter-balanced by issuing loans to encourage consumption. Loans also end up with governmental support (the point which I will return to below). Isn’t this a governmental intervention in economy?
Production is largely balanced by supply and demand rule, although there are many instances where products are required to meet certain regulatory standards, or where supply does not necessarily arise from demand. Isn’t this governmental intervention?
The claim that wages are freely determined at the market place by the availability and quality of labor (relative to supply and demand) is defeated by minimum wage laws and salary scales, which follow price increases (CPI) notoriously far behind. This is the area in which there is the most governmental control. If there are laws to fix the minimum wage why aren’t there laws to fix the maximum pay? I guess if there were laws to regulate the maximum pay they would be considered as government intervention, while wage regulations are not. Is tens of millions of dollars CEO benefits less immoral than a wage below human dignity paid by the same CEO to his/her worker? We observe all over the world the employment of the needy at wages below human dignity. But this is given a glorious explanation that business goes where labor is cheaper, so as to keep the price of goods low for the consumer.
Although wages are regulated they are fixed without a margin of savings in mind. Instead, wages are complemented by loans. Why is not the wage earner allowed an extra savings margin beyond his/her living requirements (CPI), when the manufacturer’s and trader’s profits beyond his/her needs are not even regulated? The great philosopher J.S. Mill in his extensive coverage of political issues could not offer any solution to the limitless growth of profits.
Debt based economy
Consumption, being vital to the maintenance of the economy, is aggressively and disproportionately promoted for increasing production. The major part of consumption is done of course by the poorer population, which constitutes the majority. Accordingly, in order to improve the purchasing power of the poor a partial wage replacement by way of consumer loans is also aggressively promoted. This means that the consumption, hence the economy, revolves around the debt of poorer wage earners. The introduction of the credit card system was to make the bitter pill of debt easy to swallow. Aggressive solicitation of credit card applications in schools (where collateral or simply fiscal responsibility cannot even be imagined) may only be interpreted as habituating the youth to debt, like dealers luring them to drugs. Interest paid on the loan also becomes an additional benefit for businesses. The current credit card debt stands at $970 billion. If, by a very conservative estimate, about one half of that amount generates an average of high credit premiums of 15%, it means a windfall of roughly $150 billion.
Production also relies on borrowed investment. Individuals and businesses, even governments issue IOUs to banks. Banks in turn sell these IOUs to central banks (the Fed), which issue money to banks for banks to give it against the IOUs they received from individuals, businesses and governments. Debts are also sold internationally to compensate for the paucity of domestic savings. Some examples are $7.5 billion Abu Dhabi investment in Citigroup or $3 billion Chinese investment in Blackstone. Japan currently holds $593.4 billion, China $518.7 billion, OPEC countries $173.9 billion IOUs from the US. The US national debt currently approaches the national worth. The national worth was $21.5 trillion in 2007. The national debt was $14 trillion, 65% of GDP, in 2007. And it is expected to rise to 90% of GDP in 2008. This is the result of the Keynesian economy.
Accordingly, it is the capital (assets, like property, jobs, and savings) that is at the core of capitalism, not the consumption or products, and capital is no other than debt. Debt for production purpose is investment. Debt for consumption against collateral is also ultimately assets; because collateralled debts are only a means to transform dead assets into active participants in the economy. Assets are nothing but private savings. Even in the case of capital grade debt (based on property, jobs, savings) there is a caveat, while property and savings can be secured jobs are not and wages are controlled. Therefore, revolving the economy on debt is the insecurity of capitalism for the unfair treatment of its core, wages.
We also need to distinguish between the public and the private sector debts. The public sector does not have, or ideally should not have, wealth. That is why governments operate -provide public service- with money taxed on citizens. Wealth lies with citizens. They labor and produce wealth. If they lend money to the government, it is for providing services to the public. Therefore, government’s domestic public debt is not a bad practice. However, the accumulation of wealth cannot be realized if public goes on debt for its consumption to corporations. Hence, excessive consumer indebtedness is a bad economic practice.
In fact, it would be the most democratic application to provide almost all services –local or national- by issuing public service bonds, and by limiting taxes only to meet the expenses of general administration. Such practice would encourage the accumulation of private wealth as the public would not only be lending money, but also would be lending it for an immediate and tangible benefit of their own communities, as opposed to paying it with no obvious return to a general fund. This method would also have the added benefit of allowing approval or disapproval of projects, and of close public oversight of approved ones.
Savings based economy
Aggressive consumption requires a proportionately aggressive investment. Investment is capital/assets, it is property, labor and savings. Property and labor are created by savings. The encouragement of consumption based on credit chases out the savings factor from the close circuit of the capitalist economy. Savings are already limited to a small portion of the US society because of the absence of a savings margin in wages. Savings in the US is only 1% of GDP while debt is 65%. Only richer people save for the purpose of investment since the poorer population does not have a savings margin in their income. The larger portion of the population as wage earners constitutes the consumers, while the smaller portion is the investors. In other words, capital does not accumulate by jobs and savings, but mostly by profits and by the false value of debts. That may explain why some economists define capital as profits or credits, and not as savings.
Another consequence of this practice is that the rich also rakes the benefits of investing. This conpounds the inequality. The claim that scaled taxes on income remedy inequalities in wealth distribution is whitewash. Scaled taxes make only a small dent in equalization. Although the fewer high income people pay higher taxes they are not adversely affected, because of the large size of their income. Here all we need to recall is the honest disclosure by W. Buffet that he pays proportionately much less tax than his secretary
The ills of the debt-based economy could be remedied more pragmatically and faster if wages were to be set at a level to encourage savings, instead of encouraging the poorer majority to borrow money for stimulating consumption, or instead of H. De Soto’s hypothetical conversion of slum properties to fungible assets (The Mystery of Capital, J.A. Schumpeter, Harper and Brothers, Ed. 3, 2000).
The myth of natural equilibrium
It is said that the free market works on natural feedback. And that is why it has upswings and downturns. They call it natural equilibrium. (Honest and humble economists admit that economics is not a science but a profession of collecting data and hypothesizing on statistics. Economic hypotheses cannot be tested and proven like hypotheses in theoretical and applied sciences can be). I suggest that there is no natural equilibrium because the market is manipulated by those who are powerful enough to leverage the market, to pull its strings. Big businesses and big investors, or sometimes small crooks, are able to manipulate the market. Therefore the market is free and natural only for those few who can manipulate it. The market is not free at all for the great majority on "the main street" (as the saying goes), and especially for those on the side street. The majority are only facilities of economy – maybe more bluntly said, they are faciles of economy. One honest economist of the 20th century W.C. Mitchell put it more subtly. He was of the opinion that the interaction of multitude of factors (emphasis added) affected the economy to swing up and down, there was no natural equilibrium. J. A. Schumpeter was more blunt; he wrote “ … largest-scale firms which, either individually or in concert, are able to manipulate prices even without differentiating products- the case of Oligopoly”. And, “… the ‘beneficial’ competition of the classic type seems likely to be replaced by ‘predatory’ or ‘cutthroat’ competition or simply by struggles for control in the financial sphere. These things are so many sources of social waste, and there are many others such as the costs of advertising campaigns, the suppression of new methods of production (buying up of patents in order not to use them) and so on. And most important of all: under the conditions envisaged, equilibrium, even if eventually attained by an extremely costly method, no longer guarantees either full employment or maximum output in the sense of the theory of perfect competition.” (Capitalism, Socialism and Democracy, 1950).
At any rate, the supply and demand theory is another pseudo-scientific name given to taking advantage of the needy. Consider a bottle of water for one dollar on supermarket shelf, sold at three dollars to travelers stranded at an airport during an airline strike. This is given the fancy name of supply and demand. If natural equilibrium means the rules of the jungle these practices are in fact natural. But, if natural should mean civilized society’s respect for common good, such practices are not natural. Therefore, if we start our reasoning from the nature of the jungle, we may say there is equilibrium, if from the civilized sphere there is no equilibrium. We will need to decide whether we are in the jungle or we are without equilibrium.
Globalization of capitalism
A major objective of capitalism of late is to go global. The idea is to enlarge and “diversify” the playing field by way of free trade and free capital movement so as to maximize the profit. But this movement only worked to move production, thus investment, to low wage areas while the consumption still remained mostly in the high income areas. New low wage earners who entered the market only slightly increased the consumption. Profits increased proportionately. Wages and prices were however kept low. Savings could not be increased. Globalization of free market economy became a tool of born again imperialism. John Perkins wrote in Confessions of an Economic Hit Man in 2004 that his job was “to convince the political and financial leadership of underdeveloped countries to accept enormous development loans from institutions like the World Bank and USAID. Saddled with huge debts they could not hope to pay, these countries were forced to acquiesce to political pressure from the US on a variety of issues”. De Soto confirms that with the globalization of capitalism “poverty has grown faster and income distribution has worsened over the last decade”, and adds that macro-economic assistance given to poorer nations widened the gap. “Capitalism appears increasingly as the leitmotif of a self-serving guild of businessmen and their technocracies.” P.G. Casanova writes in his entry in the Oxford Companion to Politics of the World (Oxford Un. Press 1993) “Many studies carried out by international organizations … present data on capital transfers and declines in standards of living in the countries of the periphery which indicate that the imperialist exploitation and domination of these countries is more thorough than ever”.
The logarithmic increase in population is not matched by a synchronized improvement in public services and in law. A great majority of growing population is left out of capitalist system. De Soto amply and clearly proves that “(O)nly twenty-five of the world’s two hundred countries produce capital in sufficient quantity”, and that “The major stumbling block that keeps the rest of the world from benefiting from capitalism is its inability to produce capital”. And he shows that there are in fact assets in the hands of poor who constitute 5/6 of humanity. “Even in the poorest countries, the poor save(d) … forty times of all of the foreign aid” given since 1945. "(B)ut they lack the process to represent their property and create capital” that they accumulated extralegally outside the system. However, while his estimate of $9.3 trillion for the value of the real estate held by squatters must be true he is not convincing about how these assets could translate into real capital from dead capital simply by legitimizing them. Not all shanties would be eligible or entrepreneurial and fungible for capitalization. On the other hand, he is right that squatters' issue should not be allowed to become a class issue. His suggestion to integrate the extralegal labor of the poor, who improvise work on the fringe of society, into the system would be a more pragmatic and powerful solution.
Consumption, wages, and savings did not globalize. The only true globalization that occurred was in trade and capital (debt) movement, which was to the detriment of the local business that could not compete. The remedy prescribed even by the international institutions is government regulations.
Government oversight v. intervention
Governments are equally responsible and culpable for misuse of capitalism. They do not fulfill their duty of protecting the public from corporate voracity. Governments' recent action to buy shares in banking and insurance sector in order to infuse money in their failing operations is state intervention in disguise. If government is expected to intervene ultimately when things go wrong, why not requiring it to regulate earlier so as to avoid or at least to minimize the damage? Governments fool themselves in the name of capitalism by objecting to a government oversight in businesses, by likening it to socialism. This claim is no more than a scare tactic by corporate capitalists in order to protect their ground. The government is not protecting capitalism, it is joining the foray and creating mercantilism by holding the same ground with the corporate body.
Is not macroeconomic fiscal policy, e.g. monetarism, a kind of state intervention any way? Are not some government regulations like Securities and Exchange Commission’s disclosure and enforcement authority a government intervention? Is not governments’ involvement in big aircraft industry in Europe a state intervention? Are not government guaranteed commodity price, plus up to $75.000/year subsidy, plus government certificate for the value of the commodity given to farmers in the US a state intervention in agriculture? Export subsidies, or import tariffs, or technical barriers to imports, or import quotas are other state interventions practiced to protect one or another national interest. It is nothing but hypocrisy to call “nationalization” when a foreign government de-privatizes a business for some economic or strategic reason, while we call “bail out” in the US the government’s purchase of some shares of banks or of even insurance companies. Why is capitalism such a glorious word, if it means that priority is the business, not the national interest? Why is nationalization a bad word, if its priority is national interest and not the private money? In the economically most successful states of our time, Germany, Japan, Singapore, South Korea, governments keep a close watch over the economy by various means. Such system is called by some scholars an “economic nationalism”. In fact, IMF, World Bank and other financial institutions require some oversight and control over the money they loan to governments. J. S. Mill also admitted that non-intervention of government in economics is fallacious (Ideas of the Great Economists, George Soule, 1959).
The problem is not so much that government regulation is inconsistent with capitalism, or that regulation is unwelcome by the people. The problem is that it is unwelcome by capitalists who evade, and even impede, whatever government regulation that exists.
Time to redefine capitalism
The major problem with economic theories is that they become dogmatic and change-averse ideologies. George Soule wrote (idem) “They (adherents of a doctrine) insist that others must obey the principles which attract them. …. No one can reckon the human misery caused by those who cannot see beyond the curtains of their ideas”. Like communism and socialism resisted adaptation and vanished in the oblivion of human mismanagement, and secularism and democracy are on the brink of the same abyss, capitalism seems to be heading in the same direction. Hence, it is time to rethink capitalism under the changing social conditions and values before it also destructs itself. J. A. Schumpeter wrote in Capitalism, Socialism and Democracy, “The thesis I shall endeavor to establish is that …. its (capitalist system) very success undermines the social institutions which protect it, and inevitably creates conditions in which it will not be able to live”. Social changes, which are the guide of the economy, have been apparent since 1960s. We must have already developed ideas in the past 50 years to reclaim capitalism (in its proper sense). The economy in the plural sense means us, the people. It is not a certain corporations’ or government`s exclusive domain. Therefore, any economic system (ending with “ism”), like capitalism, must be first and foremost for the public good, not for private benefit alone.
We need not necessarily sway the pendulum to the other extreme to find a solution, like Marx’ failed communism, or Schumpeter’s implied socialism, nor oligopoly currently practiced. All we need to do is to reclaim capitalism for ourselves, to save it from the jaws of oligarchs.
Economics is inseparable from public governance as it is intertwined with social needs and habits, and national interests. State intervention thus becomes paramount. The question is the nature of this intervention. The answer may not be the government welfare as it was in the 17th and 18th century colonial era mercantilism, or social welfare as in the 19th and 20th century nationalist era socialism, or state enterprise and collective ownership as in the 20th century communism, nor free for all unregulated 20th century capitalism. The answer may be in oversight regulations (more specifically, government oversight by verification and inspection of accounts) to ensure that economic activity carried out by private venture does not disadvantage the public financially or otherwise . Such oversight would be legitimized if the concept of private enterprise is redefined as being a public service, that it exists only because of the public, that it is for and by the public.
Lending for consumption must be regulated closely. Wage regulations should take into account a savings factor. While savings for investment in the private sector should remain a personal choice, government fiscal policies should rather be oriented towards investment in public projects (like public safety, public education, infrastructure). As public safety and public services are the function of the government, investments for such work may be made against government bonds (better yet local governments) issued for individual projects. The government will contract out these services and accordingly will keep a direct oversight over them. Thus savings would be channeled directly to public service, and they would carry government guarantee and accountability. Taxes could then be freed for the military, state administration (legislative, judiciary and executive branches) and foreign obligations.
For sure, voodoo economists and particularly the corporate world would try to explain away all these arguments with economic pseudo-science jargon. The truth of the matter remains that such jargon is nothing more than wool pulled by the more powerful sector of the society over the eyes of the general public. The long experience shows that we should not let capitalism be understood, defined and practiced by the corporate world. We, the people, need to determine definitively what should be understood from capitalism so vital to our own management.
January 2009
