Clueless Capitalists

What has happened to the traditional reservoir of support for America’s market economy?

Karl Marx, Joseph Schumpeter, and Irving Kristol have two things in common. All three recognized the extraordinary ability of market capitalism to produce goods, services, and wealth. And they hoped, believed, and feared, respectively, that capitalism contained the seeds of its own destruction.

The time may have come when these keen observers of the capitalist system are being proved right. Not because the state will have taken over all the means of production and distribution, as Communists and socialists would have it—or merely the “commanding heights of the economy,” as Lenin would have it. The state no longer needs to own the means of production and distribution in order to control the economy, allocate capital to whatever purposes the state deems most desirable, and set prices, including the price of labor. To do that, it needs three things: a willingness to use regulation as a tool of control; the power to tax and subsidize; and a decline in the acceptability of capitalism, especially among the classes that have in the past benefited from its enormous productive power.

Donald Trump sees capitalism as a system in which businesses succeed by buying the approbation of politicians in power, no matter which party. Dollars buy access to those in positions to confer favor, no matter their beliefs. Doing business requires something other than the best product at the best price; it requires favors from the people in a position to grant them. His candor on the subject is not an adequate defense. Hillary Clinton takes a different view. The great wealth produced by capitalism is a sort of honey pot, and the game for a political leader is to figure out how to dip into it. Perhaps it takes getting elected to a high office; or establishing a seemingly charitable foundation; or getting in a position to dole out favors and collect IOUs to be cashed at just the right time; or linking all of the above and shaping it into a single large spoon with which to do the dipping, leaving no trace, as our colleague Daniel Halper lays out in detail in Clinton, Inc.: The Audacious Rebuilding of a Political Machine.

To Ted Cruz capitalism is a wonder, as indeed it is, but also a merciless Darwinian process that requires, among other things, deportation sans pitié, taxing what workers buy rather than the incomes of the wealthy, abolishing the sensibly porous but nevertheless useful fence that assigns some territory to religion without making it a key feature of democratic government, and featuring disdain for the political process that underpins capitalism but requires pragmatic adjustment and, dare I say it, compromise if it is to continue to play that role.

To Bernie Sanders, perhaps the most transparent of the lot, capitalism is a system to be changed by a “revolution.” No, not the bloody sort practiced by his socialist predecessors when he was honeymooning in the Soviet Union. And no, not one engineered by dispossessed horny-handed sons of toil seeking to be freed of their chains, but by a young army of privileged college students who should be forgiven for they know not what they do, owing to the absence of courses in Western civilization and an appalling lack of interest in the work of the Founding Fathers.

In short, no need to seek among the various aspirants to the leadership of our nation anyone with a belief in capitalism as it has until recently been understood: a system in which individual producers compete to offer individual consumers the best product at the best price, staying within the law while doing so, a law that introduces into the system noneconomic social values agreeable to a majority of the population. No need to hope that we will find such a one as Franklin Delano Roosevelt, a vigorous interventionist but one who sought to save, not destroy, capitalism by making markets work better to produce goods and jobs, and distribute essential benefits such as electricity and decent housing more widely. Or a John F. Kennedy, who understood that the purpose of tax policy was to keep the goose laying golden eggs. Or a Ronald Reagan, who understood that government is more often the problem than a solution, and that it could better provide solutions by making the supply side of the economy more supple rather than by artificially manipulating the demand side. All in their own way, and in all probability well aware of what they were doing, were seeking to preserve capitalism, by reforming it if necessary.

Some overstepped at times, some fell asleep at the switch at times and were too timid to deploy the tools at their disposal, but none sought what Trump, Clinton, Cruz, and Sanders have in mind for us: a stint in office that has no consistent understanding or fondness for the traditional underpinnings of America’s functioning capitalist system.

No need here to detail the many ways in which government has used its power to regulate by replacing capitalism’s market with rules, despite the fact that the problems could be met by greater, rather than less reliance on prices. Consumers are content to have their electricity made by burning coal, yet instead of making them pay for the environmental impact we will simply regulate the industry out of existence. Consumers make it clear in the market that they prefer large to small, European-style vehicles, but manufacturers are instead told what mix of the two they must turn out. Consumers want to buy health insurance policies that do not have premiums inflated with reimbursements for services they neither want nor need, but regulation prohibits the sale of such policies, which insurers would dearly love to make available to consumers who would dearly love to buy them. Homeowners who were led to believe that in a free-market capitalist system their homes were their castles find that government can snatch those homes away to permit developers to build parking lots or shopping malls in order to increase the tax revenues of the government that did the house-napping.

Equally, there is little need here to lay out in painful detail how the power to tax and subsidize has become the power to destroy capitalism’s ability to provide consumers with the goods and services they crave. Consumers want cheap electricity; government wants expensive wind machines and solar installations. So it pays well-connected businessmen to build such facilities, using taxes on consumers to fund that wealth transfer. Government thinks we should drive electric vehicles, so it takes money from the paychecks of middle-class workers and hands checks to those wealthy enough to afford $85,000 Teslas. Government thinks you should smoke less and is probably right, so it raises taxes on cigarettes and bans smoking within several hundred feet of federal buildings while the former speaker of the House contentedly puffed away in the office provided him by taxpayers. Travelers are willing to pay for more parking at airports, but cannot express that preference with hard cash because politicians have reserved spaces for themselves rather than bid and pay for them on an open market and taxes travelers to make up for the lost revenues needed by airport operators.

That this creates cynicism there is no doubt. That politicians’ personal behavior and ethical bent removes them from the ranks of possible defenders of the capitalist system is equally certain. Which is the least of our problems. More damaging to the sustainability of that system is the behavior of the corporate sector. The deeds of the financial sector are well known: lavishly rewarding the very executives who were not so long ago bailed out by taxpayers; slipping in charges for services that consumers neither want nor knew they were being charged for; foreclosing on loans of men and women serving overseas in the military to protect the livelihoods of the bankers ordering the foreclosures.

But there is more than the banking sector putting people off the system. High-tech billionaires, many of them major contributors to the party in power, demand and get more visas to allow them to import high-tech workers from abroad after engaging in a conspiracy not to compete for domestic workers, thereby keeping salaries down and depressing the supply of Americans who might, were wages set in the market rather than in Silicon Valley intercorporate communications, be available for those jobs. Hedge fund entrepreneurs, surely in the top .001 percent of earners, work the corridors of power to arrange to have their compensation taxed as if it were capital gains and not income, something that offends even Donald Trump, perhaps because he was too busy setting up a university to have time to open a hedge fund. General Motors’ inattention to quality results in deaths in cars manufactured during a time when it was operating with a taxpayer bailout. Drug companies, clearly entitled to profit from their wonderful research, go a step further and prevent the reimportation of drugs they are willing to sell at lower prices to Canada.

Capitalism has always had its discontents. But the vast majority of Americans accepted it, warts and all, because it produced a dazzling array of goods and services at reasonable prices, while at the same time distributing income in a way that made those goods widely affordable. Air conditioning, refrigeration, washing machines—not to mention the electricity that powered them—became available to almost all Americans, in the case of electricity with a major assist from a government now dedicated to making it more costly for them to use it. Today, a sales clerk in a department store lives better than most of her customers did in the middle of the last century. If some jobs paid more than others, no matter: With hard work a man (mostly men, then) could earn enough to live decently and to help his children do even better. Public schools worked well, and the brightest could get a decent education even if they were the poorest, witness the brilliant products of New York City’s public universities.

That was then, and this is now. Capitalism continues to produce a cornucopia of goods and services that makes life ever-more satisfactory. But as Robert Gordon argues in his interesting The Rise and Fall of American Growth, the inventions of 1870-1970, notably the internal combustion engine and electricity, had a far greater positive impact on the living standard of Americans than the current innovative output of Silicon Valley. That is debatable, but what is not is that the quality of the public goods that made America a land of opportunity has declined: I ask readers of a certain age to compare the public educations they received with those on offer in Baltimore, Washington, New York, and other major cities afflicted with teachers’ unions, kids coming to class from appalling housing projects and fatherless homes. And it is these public goods on which the middle class, with its incomes stuck, although at reasonable levels by historic standards, must rely as it pursues the American Dream, which, despite reports to the contrary, still lives, although its hold on life is more tenuous than it once was.

That is only in part because the marginal addition to the quality of life by the latest app is less than the addition of electricity. It is because Americans are less willing to accept the distribution of the bounty of capitalism as fair. Here is where both progressives and conservatives have much to answer for. Progressives, with their thousands upon thousands of regulations, have stifled growth, leaving the pie much smaller than it need be. But conservatives, by focusing until recently only on increasing the size of the pie—greater incentives to innovation, freer trade, constraints on trade-union work rules—ignored just how that pie is to be sliced. Yes, freer trade probably increases global efficiency; it also forces unskilled Americans—unskilled in part because the education system failed them—to compete with $1-per-day Asian labor while conservatives extol the virtues of free trade. And placing the burden of enhancing growth on monetary policy, which increases the value of assets held by the better-off at the expense of the value of savings and pensions held by the less-well-off, adds to inequality and loss of faith in capitalism.

Fortunately, Americans complain, and worry, and note that the incomes of the counties around our nation’s capital, populated by lobbyists, bureaucrats, and politicians, are among the highest in the nation, but so far are inclined to stick with capitalism if not with the entrenched political class. During the Great Depression, when poverty was rampant—real poverty, not lack-of-a-flat-screen-television-set poverty—and the unemployment rate hit 25 percent, Americans continued to believe that a responsive government, rooted in democratic capitalism, would be more in their interests than the other models on offer—national socialism in Germany, fascism in Italy, communism in Russia. After World War II, when the head of General Motors, then the symbol of American economic prowess, professed that what was good for his company was good for America, cynical guffaws were at a minimum. And when America was called upon to protect not only itself but most of the rest of the world from Communist imperialism, its citizens were willing to bear any burden, meet any hardship, support any friend in the cause of freedom. Now, corporate America is more tolerated than revered, and any candidate suggesting that we bear a burden in the cause of freedom is quickly retired from consideration.

So, as Lenin once asked in another context, what is to be done? It would be difficult to argue that the solution lies in a new attitude from the self-seeking political class, members of which believe that the long run is the time until the next press conference and the very long run the time until the next election. Rather, the answer must come from those who benefit most from American capitalism, but whose benefits are determined by a system of corporate governance that is seriously in need of repair that would turn over power to the shareholder-owners of the companies: CEO compensation in owner-run companies is well below that characteristic of companies where pliant boards selected from a roster of friends of the CEO set pay and perks.

Note that few resent our self-made billionaire entrepreneurs: Bill Gates, Mark Zuckerberg, Sergey Brin, Larry Page, and the late Steve Jobs—these men are more capitalist icons than capitalist running dogs, to borrow a phrase from the rulers of China’s 1.4 billion souls, including 3.6 million millionaires. In Irving Kristol’s formulation, these are “real person[s] .  .  . who took personal risks, reaped personal rewards, and assumed personal responsibility for [their] actions.” And there seems to be little anger at LeBron James, or Steph Curry, or other sports millionaires.

If corporate compensation could be made legitimate by relating it broadly to performance, profits, and attention to the public interest, and if businessmen could understand that (Kristol again) “the populist temper and the large corporation coexist uneasily in America,” they might take a different view of many important issues. Increased minimum wages set by legislatures might seem no more artificial than executive compensation set by friendly directors. Trade agreements that enhance the prospects of exports might be examined for their impact on more vulnerable American workers. Demands that consumers be protected from misrepresentation might seem more reasonable in light of recent history in, say, the banking and auto industries. The long-run survival of the system that sustains them might be seen to require restraint, the recalibration of moral compasses to point in the direction not of what an executive can get away with, but towards what Adam Smith called “the fortune of others.”

If that noble thought is not enough to make our corporate chieftains weigh the effect of what they do on the probability of the survival of market capitalism, perhaps an appeal to self-interest will. Let them survey the political scene with a cold eye, and ask where they will be if populism, for which I have great regard, turns really nasty, driven by a sense that the current system has to be destroyed if prosperity is to be more equitably shared.

Irwin M. Stelzer is a contributing editor to The Weekly Standard, director of economic policy studies at the Hudson Institute, and a columnist for the Sunday Times (London).

About MZR

I am a middle aged man trying to be the best person I can become, make a positive difference in our world, while trying to make sense of my life's journey.
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