Managed Capitalism in Three Acts

by Mixt Green Leo- Capitalism is going on about 300 hundred years old, with the Industrial Capitalism we’re most familiar with dominating for about the last half of that. As an economic system capitalism has shown itself to be significantly unstable – since the demise of the Second Bank of the United States in 1836, there have been 32 recessions or panics and three depressions, including both the “Long” and “Great” Depressions. On average that’s one recession or worse every five years, each lasting approximately 18 months. For a system that touts the “efficiency of the market and of market pricing mechanisms” as it’s raison d’être, it really doesn’t have much to show for itself in that respect.

The defense of capital, as opposed to capitalism, is pretty straight forward. It is one of the four factors of production, along with labor, management and raw materials/land, and without capital our modern standard of living would be impossible. If you question that, just ask any African nation what they stand most in need of: water and sewage treatment facilities, schools and hospitals, road, airports, rail lines and shipping ports, telecommunication and electricity infrastructure, manufacturing plant and equipment, working capital to pay wages and vendors, housing. That’s how capital shows its non-Wall Street, productive face in the modern economy – all the tools and infrastructure that makes our labor more productive. Capital is the power shovel that allows one man to move more dirt in a day than 1000 men with hand shovels in a year.

Political discussions in the U.S. about economic systems quickly degenerate into religious wars, with Gordon Gecko and Stalin representing the Satan of each side respectively. “Capitalism” is thrown around pejoratively by left-leaning critics, while Righties ask why the Left hates America so much, with no productive discourse or progress in between. “Financialism” is the latest term of derision to surface, rivaling “fascism” and “corporatism” for the top spot, and while it does touch on one of the important issues, stability, it misses several other economic aspects. With that in mind, it might be useful to break down capitalism as an economic system into three components and see what we can make of it: supply, demand, and stability, with supply and demand as two sides of the same coin, and stability representing the coin balanced on its edge.

On the supply side, capitalism historically seems to work. It creates capital, goods and services, jobs, wealth, and a higher standard of living. Central planning and five-year plans for tractor production just plain sucks as an economic system. As the Chinese are learning day-by-day, you need incentives for capital accumulation in the first place, and the on-going protection of the productive employment of capital if living standards are to improve. Extreme leftists tend to not just simply get this wrong, but are often completely ignorant of this aspect of basic economics, instituting policies and “solutions” that lead quickly to the law of unintended consequences and the flight of capital from their countries. They have little or no understanding of what it takes to run a business, raise financing and cash, meet payroll, develop new products and bring them to market, all the while competing against others who are doing the same thing, sometimes resulting in price wars such that no one makes a profit. Free enterprise isn’t easy, which is why so many corporatists are also protectionists.

Where capitalism fails on the supply side is when natural monopolies arise, or where business, often partnering with government regulators, becomes protectionist, creating barriers to entry and strangling competition by creating artificial monopolies/oligopolies. Approaches such as the Sherman Anti-trust Act serve to mitigate this issue somewhat, but as anyone who has but one choice in cable operators knows, the battle to protect already established business from competition never ceases. Where capitalism also fails on the supply side is when it uses its “limited liability” status to shift the risk from itself to the public – privatizing the profits but socializing the risk. There would not be a single commercial nuclear reactor in the world if capital had to bear that risk by itself.

The other side of the coin is demand, and this is where the real problems with the design of modern monopoly capitalism manifest themselves. Capitalists want to make demand a mirror image of the supply side: in their view, the only people who should be allowed to purchase the goods and services created by capitalism are the owners of the capital. They use the economic truth that capital, as the scarcest of the four factors of production (you can hardly argue that 7 billion humans make for scarce labor), is an excuse to funnel ALL of the value created by the joint economic activity of all four factors, including labor, into capital alone. Capitalism doesn’t see itself as a co-equal with the other three factors, but, because of its greater relative scarcity, as superior, with labor and raw materials merely employed in the service of capital. If the lords of medieval feudalism were alive today, they’d recognize the capitalists as their natural inheritors.

Modern capitalism functions as a productivity funnel, taking the 2% annual productivity gains of the economy as a whole and concentrating it, so that labor gets none of it, with capital multiplying that 2% by factors of 5, or 10 or more to generate 10%, 20% or even greater returns to the owners. The added-value of economic activity is created by all the factors working together, including labor, but capital has rigged the rules of the game so as to claim it all for itself. Labor is treated as nothing more than another commodity, like bushels of wheat or barrels of oil. Capital flies around the globe at the speed of light, searching out the cheapest labor markets, and exiting just as quickly, while labor, real human beings, are pretty much tethered to their physical homes, bodies, skills and education. Union bashing and busting is all about making certain that your labor is never treated as anything more than a line item on an income statement that can be bought, sold and traded at will on the open market. In the modern capitalist economy, labor can never be permitted to be seen as “human” in any way. As has been pointed out by others, capitalists actually like the idea of an economy based on the game “Monopoly”, where it’s winner-take-all for the hotel property/capital owners. Except of course that, for real humans, it’s not a game.

The typical approach by the Left in addressing this demand side of the equation has been redistribution, primarily through tax policy –progressive income, wealth and inheritance taxes, to be redeployed into the economy either as social infrastructure (roads, schools, hospitals) or safety net spending (Social Security, unemployment insurance, and Medicare). All-in-all, this is not a bad strategy. When the top 20% controls 65% of the income and 85% of the wealth, there are not a lot of other options. In fact, I would argue that under current conditions, it remains the best strategy, as most every supply-oriented approach tends to kill the golden goose through unintended consequences that strangle capital formation and deployment. Capital, of course, recognizes both its natural advantage as the scarcest of the production factors, and the limited arsenal that the public can employ, and so has been reflexively trained to yell “Class War” whenever the subject is broached, hiding behind the hypocrisy that it was they themselves who first declared war by rigging the rules and denying anyone but capital shareholders from having a say in the distribution of the value created by the WHOLE business enterprise (which, to remind them once again, includes labor).

Stability is not often recognized as its own, separate issue. Most of the instability in capitalist systems arises from the function of money and credit. When a bank receives a deposit, it can loan out 20 times that amount under current banking regulations. It can create credit, more money, out of thin air. This is not as absurd as it might at first seem. Consider the farmer who, if he could only purchase a tractor with his own, saved cash, might have to wait 20 years to do so. Having access to credit means that he can purchase that tractor today, and thus begin creating additional value that the entire economy can share in today, 20 years earlier than if he was left solely on his own. So there is some amount of credit creation that is warranted in such a system, putting more money into circulation matching the value that will be created. The problem is that we have no idea how much the proper amount might be. Five times? Ten times? 20 or 30 or 40 or 50 times, as the recent crop of Wall Street execs have tried? Economists don’t know, and politicians are even more clueless. With the continual pressure and expectation for growth and jobs, what happens is that policy is set such that the banks invariably create too much credit rather than too little – no one wants to take the blame for inadvertently holding the economy back. So we end up with too much money in the system chasing too few productive investment opportunities and we get speculative bubbles and cycles of booms and busts (and/or inflation).

What’s a citizen to do? Since we’re probably not any better collectively at this than the economists, it’s probably not a good strategy to put monetary policy up for a vote. But if we can’t play offense, there is still, as in the redistribution example above, the defensive approach. If the bubbles are going to burst no matter what we do, at least we can try to minimize their size, limit their scope and get capital to absorb most of the impact itself. This would necessarily include safety nets that protect our assets, our jobs and livelihoods, our health, our homes and our bank accounts – very much what the western European social democracies have done, and what the U.S. does to a more limited extent with FDIC insurance. [While I recognize that the sheer magnitude of the military-industrial complex also represents another huge flaw in the American economic system, it is unfortunately beyond my present, already too lengthy, scope]

The most radical thing such an approach to stability might entail would be the deliberate slowing of growth, choosing this time to err on the side of not enough credit creation and risking higher unemployment than what might otherwise have occurred – again, exactly what the western Europeans have largely done, with the resultant higher unemployment buffered somewhat by a robust safety net. The Europeans, of course, are not isolated nor immune from the political and policy foibles of the U.S., the world’s largest economy, and thus can be somewhat excused if their execution is less than ideal, but the overall approach is probably correct.

Short of throwing capitalism out the window completely, the prescription would seem to be to get out of the way of capital formation (health, environmental and safety regulations excepted), use progressive taxation liberally on the demand side, along with giving labor a seat at the management table, to even the playing field, and promote stability by holding growth in check with restrictive monetary policy and social safety nets – democratically managed capitalism. For the record, capital gains taxes are NOT part of the supply side, capital gains are the RESULT of productive capital – there is no need for unearned income to be taxed at half the rate of labor. The Capital Class will of course scream bloody murder and threaten to take their capital elsewhere, and that is part of the trade-off to be considered. However, look at what’s happening today – the lowest tax rates in generations and the jobs are still going to low-wage countries – so what more have we got to lose? Capital cares first and foremost about its protection, and nowhere else on the planet is capital better protected than in the U.S. Getting taxed at 35% or 50% on your billionth dollar is a good problem to have – at least you made a dollar and you still have your initial capital intact. And if those tax dollars are being reinvested in the economy as public infrastructure and education available for later productive use by capital, the U.S. will always remain a good, if not the best, option.

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