How U.S. Capitalism might End
by William McGaughey
Ben Stein, The Hard Rain thats Falling on Capitalism, New York Times, January 29, 2007. Ben Stein, a humorist and cable-television personality, is son of the Chairman of the Presidents Council of Economic Advisors in the Nixon administration.
Paul Craig Roberts was Assistant Secretary of the Treasury in the Reagan administration and was once Associate Editor of the Wall Street Journal editorial page.
The above quotations from persons with impeccable conservative credentials and connections to the business community of previous years ought to be a warning that U.S. capitalism is in trouble. The political and business system which Americans believe to be superior to any other in the world could undergo profound change and even cease to exist.
Bush, Cheney, and Rumsfeld
Capitalism can only be destroyed from inside, by the capitalists themselves and by their political supporters. To a certain extent, this would be the result of a natural process in history by which human institutions over time inevitably decay and are replaced by something else. But we see visible signs of decay today in the final two years of the presidential administration of George W. Bush.
Mr. Bush, who has an MBA in business from Harvard, first went into the oil business and lost lots of money. He then became part owner and front man for the Texas Rangers, a professional baseball team. His main task was a political one: to convince the Texas legislature to build a new stadium for the team. After that job was successfully completed, Bush sold his interest in the team for a huge profit. His increased wealth came on the backs of taxpayers in Texas who financed the stadium and made the team which would use it much more valuable.
Dick Cheney, Bushs Vice President, was Chief Executive Officer of the Halliburton Corporation prior to joining the administration. When the United States invaded Iraq and its infrastructure was destroyed, Halliburton received sole-source contracts to perform various services for the U.S. military and to help rebuild Iraqs infrastructure. Revenue from Iraqs oil production would finance part of this, and the U.S. taxpayer the rest. And so, the idea was that contractors working for Mr. Cheneys former business would be earning large sums of money, and the company itself would earn large profits, while the Army Reserve and National Guard soldiers were forced to serve in dangerous combat positions at low rates of pay. In effect, it was slave labor. Officially volunteers, these nonprofessional soldiers were given mandatory tours of duty in Iraq, extended again and again, while their families at home were financially hard pressed.
Donald Rumsfeld, secretary of defense in the Bush administration, is a career politician who later became chief executive officer at G.D. Searle & Co., a pharmaceutical company later sold to Monsanto, by doing what Wall Street likes best. He increased the firms profitability by laying off employees. The remaining employees would be forced to work harder and smarter, it was supposed. Carrying that philosophy into his job at the Defense Department, Mr. Rumsfeld believed that the war in Iraq could be won with far fewer troops than what conventional wisdom would suggest. We would use our superior technology, combined with shock and awe tactics, to achieve a military advantage and then be greeted as liberators. Rumsfelds own superior insights and decisive leadership, honed through his business experience, would bring a glorious victory.
The Rumsfeld approach did bring Iraqs quick conquest, however the lack of sufficient military manpower failed to keep the peace. In the absence of enough troops to police the conquered nation, Iraqi society became plagued by looting, shootings, mine explosions, and sectarian violence, if not civil war. Secretary Rumsfelds egotistical, arrogant insistence of conquering and holding Iraq on the cheap (in terms of human casualties)was a direct cause of this catastrophe. But in the end it wound up costing the nation and the world much more than was initially expected. Rumsfeld looked more like Robert McNamara, another business genius who fumbled in his management of the Vietnam war, than someone who would be attractive to historians.
So we see, in all three cases, that capitalism was combined with government power to maximize profits and perpetuate power. None of these men became rich by competing successfully in a free-market economy. George W. Bush used his fathers reputation and connections (and that Harvard MBA) to gain executive positions with the Texas oil company and professional baseball team. Cheney and Rumsfeld became chief executive officers of large corporations on the strength of their political credentials - former members of Congress, cabinet officers, and presidential chiefs of staff. In their business capacity, they then used government to build taxpayer-financed stadiums or provide lucrative contracts in the absence of competitive bidding.
Thus the nations top three political leaders themselves exemplify capitalism in its decadent phase. Their activities represent the squandering or appropriating of wealth accumulated by others to achieve personal gain. As managerial leaders, they betray the trust of many who depend on them. Their policies put private interests ahead of the general interest of the organizations which they have been entrusted to lead. This is, at best, soft-core corruption. Such activities characterize societies or sectors of enterprise in decline.
Financial Irresponsibility of this Government and Signs of Institutional Decay
The Bush administration inherited a budget surplus and created budget deficits of unprecedented size in the ensuing years. While it is true that a recession and the terrorist attacks of September 11, 2001, contributed to the deficits, President Bush himself failed to exercise leadership in this area. He failed to veto a single spending bill even while the Republican Congress indulged itself freely in pork-barrel legislation. Much additional money was thrown at homeland security and was wastefully spent. A new prescription-drug benefit was created under Social Security which was neither affordable nor needed. Widely regarded as a giveaway to the pharmaceutical industry, the signed legislation would not allow the federal government to negotiate with drug companies for lower prices. Finally, the U.S. Government invaded Iraq and assumed responsibility for rebuilding the country after it was destroyed. This misadventure could add another trillion dollars to the national debt.
Meanwhile, the U.S. trade deficit soared to record levels. Part of this deficit was due to oil imports, reflecting the federal governments chronic failure to control gas-guzzling cars, trucks, and SUVs. A larger part reflects the escape of manufacturing to low-wage countries such as China. Administration spokesmen have suggested that this is actually a healthy adjustment in the world economy, allowing us to specialize in high-end productive functions handled by our more educated and intelligent work force. It is foolish, however, to suppose that China does not also have an educated and work force or will respect our intellectual-property rights any more than Americans respected such rights of Europeans in the 19th century. Yet, in the face of mounting trade deficits, President Bush proposes even more free-trade agreements. It is a head-in-the-sand posture characteristic of declining national power.
If capitalism is to continue on a growth track, it needs to find new products and industries that will contribute to human comfort and well-being. Simply to put more drug addicts into expensive prisons or build new gambling casinos does not fit that description. The fast-growing medical industry seems more committed to medicating patients and earning big profits than promoting personal health. Touting an ownership society, President Bush encouraged more people to buy their own homes instead of renting. Unless these new home buyers had reliable incomes to support the mortgage payments, his rhetoric merely encouraged bankers and mortgage brokers to push houses at inflated prices on unqualified buyers who would soon be in default. Low-interest rates and inflated housing prices provided the means of financing consumer purchases through home-equity loans rather than current income. Meanwhile the cost of higher education was going through the roof even as young people eagerly purchased this expensive service out of fear than they would otherwise be unemployable in the increasingly competitive global economy.
None of these growth industries contribute to the general well-being of society. Those which do - agriculture, manufacturing, etc. - are in a chronic state of decline. Yet, apologists for capitalism argue that Americans are becoming more prosperous and, even if we arent, are still much better off than people in other parts of the world. The socialist alternative has been discredited. Human thought and practice has yet failed to come up with a better economic or political system.
While this argument may be partly true, it fails to recognize that the trends are unfavorable. It fails to recognize the great lesson of history that powerful institutions seldom, if ever, remain for long at the peak of their power; they always enter into a period of decline. And they decline because of problems in their internal structure more than through external threats. Less than two decades after communism was overthrown in eastern Europe, the capitalist system was itself at risk. No, history did not end.
Capitalisms problems begin with the fact that the free market is imperiled. A free market requires choices freely made by the buyers and sellers of products, each seeking their own advantage. It requires adequate access to information about products, adequate financing, and relative freedom from government interference in the decisionmaking process.
Instead of this, we have in the medical field - the fastest-growing economic sector - state medical boards which decide who can and cannot practice medicine. In effect, government decides, in the name of ensuring high quality, that medical doctors must be licensed and allows the medical practice itself to decide what qualifications are required for licensure. (Milton Friedman once compared this with governments deciding that consumers can buy only Cadillacs and not the less expensive Chevrolets.)
A second departure from the free market is that typically the seller of the product - the medical doctor - decides whether or not the buyer will buy it and in what quantity.
Finally, we have a third party - the insurance company - paying most medical bills. The seller (who prescribed the product) has a direct incentive to inflate the price and the buyer (who is considered unqualified to make medical decisions) does not care about costs since someone else pays. Also, I might add that the decisionmaking process is contaminated by the drug companies high-pressure sales tactics, both with respect to doctors who are personally lobbied and to consumers exposed to heavy television advertising.
Many professions have state boards which restrict entrance to the field in the name of ensuring high-quality service. In the medical field, where decisions are sometimes a matter of life and death, this procedure can perhaps be justified. But would it be so bad if unqualified hair dressers, say, were allowed to practice? If the consumer received poor service, she could simply go to another hair dresser the next time she needed the service. Isnt that how the free market is supposed to work?
The beneficiary is, of course, the educational establishment. To pass licensing tests, or even sit for them, one needs to have completed a certain number of courses from an accredited educational institution. One needs a degree from an accredited college, and certainly from high school, to be allowed to apply for most jobs which offer adequate pay and benefits and reasonable job security. One can have a degree in history and be employed in banking - it does not matter. A degree, however, is presumed to be necessary to fill certain kinds of jobs successfully.
Of course, the whole system is based on a fictitious understanding, fostered by self-interested educators and incumbent jobholders with degrees. In fact, human intelligence can meet the requirements of almost any situation without formal training or with minimal training targeted to the functions that will be handled. The rest of our increasingly expensive and prolonged educational system constitute interference in the free market. It illogically restricts the supply of individuals applying for various jobs and has the effect of increasing the price.
In the global market, however, the political and business leadership insists that high-priced American workers compete directly against workers in less developed nations who earn a fraction of their wage. Our government has agreed that it will not use tariffs to buffer the price competition. Some working people, it is said, will benefit from the restructuring of industry while others - the uneducated and unskilled - will lose their jobs. They need to go back to school.
The real advantage, however, is that managers of manufacturing firms can quickly boost company earnings, stock prices, and their own income by outsourcing production to low-wage countries and continuing to sell in the high-wage U.S. economy. And since businesses following the so-called Wal-Mart model of business are large contributors to political candidates and hire armies of lobbyists, government policy caters to their wants and needs instead of representing the interest of average citizens. And, of course, professors of economics at our major universities are unanimous in extolling the virtues of free trade.
Another departure from the free market has to do with the fact that business is conducted in an environment of advertising and mass merchandising rather than in a market place where buyers and sellers can exhibit and inspect merchandise and haggle freely. The retailers and sellers of goods set prices by policy and are responsive only to large-scale buying decisions. Also, the information which buyers have about commercial products comes more often from newspaper and television advertisements than from immediate inspection of products. With their proliferation, only the heavily advertised and promoted products achieve high sales volume. Alternatively, only those goods carried by the large retailing firms will be available on the market for customers who habitually shop in such places. It is a system favoring large businesses and disfavoring small ones.
At a local level, large businesses which employ many people can negotiate tax concessions from local governments when deciding where to locate their facilities. Small businesses not only have to pay full freight but increasingly are at the mercy of a political class that suspects such business owners or managers of gouging their customers or permitting criminal activity in their facilities. Onerous regulations imposed on small businesses, combined with hostile political rhetoric, create a kind of modern-day pogrom directed against politically unpopular occupational groups.
Large businesses, on the other hand, can hire the public-relations specialists and lobbyists to deal with political problems, in addition to making campaign contributions to the candidates. The unrepresented general taxpayer is quite often asked to foot the bill for deals made between government officials and large business interests. In the housing industry, the affordable-housing lobby encourages government to pour public money into production and operation of housing units put in competition with those of private-sector business operators.
In capitalisms decadent phase, we see government intruding in business operations and intervening for the sake of the few against the general interest. We see more of what is called corporate welfare, or public subsidies to business enterprises which can afford to pay their own way, and we see political constituencies clamoring to get their hands on someone elses property.
The track record in recent years calls in question whether U.S. politicians are even capable of being fair and honest. It calls into question whether U.S. journalism is capable of honest and fair reporting of political and business activities, so focused are the reporters on their own narrow vision and the media enterprise on its desire to attract an audience and make money.
Capitalism in a more Creative Period
Let us compare what is happening today with events in a time when the U.S. economy was in its building phase. Yes, government subsidies helped to build roads, canals, railroads, and other infrastructure needed for transportation and the creation of larger markets. For much of our early history, American manufacturing was protected by the tariff system devised by Alexander Hamilton. We had the advantage of immense lands, taken from the Indians, which provided cheap timber, cattle, and wheat. We had abundant supplies of various minerals and, of course, clean water. We had small governments and low levels of taxation and regulation.
In this environment, ambitious individuals could invent new products or start businesses and hope to become rich. There were no educational requirements standing in their way, fewer lawyers wanting to sue, or expensive medical obligations attached to their enterprise. Factory workers were paid low wages and worked long hours in sometimes dangerous conditions, but eventually labor unions were formed to further their interests.
One of my favorite examples of enterprise dating to this earlier period would be the establishment and growth of the U.S. automobile industry focused especially upon Henry Ford. This was a relatively uneducated man who grew up on a Michigan farm but who had a certain mechanical knack. He was employed as an engineer in Edisons electric-power company while tinkering with automobiles. After building his own car and gaining a certain reputation from auto racing, Ford found financial backers for his product. The Ford Motor Company was established. Then Ford and his associates applied their mechanical ingenuity to developing mass-production techniques which would lower the per-unit cost of the product allowing it to be sold more cheaply and then at a higher volume of sales. In the end, the consumer had a high-quality, low-cost automobile and Henry Ford became fabulously rich.
This is only part of the story. Besides building automobiles, Henry Ford had a vision of how to sell them. He realized that his potential customers needed to have enough money to buy the product and enough free time to be able to use the product to full advantage and, therefore, to want to buy it. This went beyond creating a shallow desire for a product through advertising. In 1914, Ford unilaterally gave his production workers a huge increase in their hourly wage - to $5 a day - while restricting work time to eight hours a day. In 1926, during the changeover from the Model T to Model A, Henry Ford then announced that Ford employees would no longer work six days a week, but only five. So, he introduced on his own initiative the five-day, forty-hour workweek, not for sentimental or humanitarian reasons, he said, but because modern business needed to do this to remain profitable.
Of course, Henry Ford owned and managed the business where these decisions were put into effect. Controversial even in their own day, they could not have been introduced by a manager who answered to an independent board of directors or to stockholders having a majority interest. However, Fords two initiatives - higher wages and shorter working hours - did become more prevalent in U.S. industry thanks to certain enlightened businessmen but especially to labor-union agitation. Even certain government officials saw their merit.
But then the Great Depression came. The labor unions, favoring only wage increases for their members, lost interest in their traditional goal of reducing work time. Inspired by Lord Keynes, the federal government preferred financial techniques of regulating the economy. Hired managers became more focused in short-term profits and on obtaining more compensation for themselves in the uncertain period of time when they might be at the helm of the business. Wall Street made increasing demands on business managers, and government also loomed more largely. Instead of heeding Henry Fords advice that the person who makes the bulk of goods is the (same) person who consumes them, todays business leaders arrange for the producers to be in one country and the consumers in another. This is a formula for economic destruction.
Admittedly, one sees sparks of the old creative spirit in the computer, telecommunication, and consumer-electronics industries. A business leader such as Steve Jobs would compare favorably with industrialists of the earlier period. That is because the focus in such industries remains on how the product would affect the lives of consumers. There are trade shows where people become excited about the new gadgets that are available. There is a lively competition among competing brands. Prices are falling and quality improves. Capitalism flourishes in such an environment - new uncharted territory.
What is missing, however, is a vision, comparable to Henry Fords, of how ordinary people can afford these products and have opportunities to use them more plentifully. If labor unions are no longer agitating for the general good, then someone else - most likely government - must do this if the system is to endure. Socialism has been, as we said, discredited. The brutality and excesses of Stalinist rule in the Soviet Union and of other similar situations has set such a horrible precedent that reasonable people would not want to embrace this kind of government.
I would argue, however, that socialism did not fail because it presented a vision of a better society in its own, non-capitalistic terms, but because its program was carried out by means of a totalitarian government. The national government owned and managed the businesses and did not merely regulate them. There was an unchallengeable concentration of power in this government which became intolerable in the hands of someone like Joseph Stalin. Lord Actions saying about power corrupting and absolute power corrupting absolutely came home to roost in Stalins socialist (or communist) government.
Whats Next for our own Society?
When government and business power are similarly combined as in U.S. society today, corruption can also take place. It is true that we have Constitutional protections that the Soviet citizens did not have, but these traditions also can be (and are being) eroded. What we need to do is to separate the various institutions of power - government, business, religion, education, the media - and encourage a certain independence of each from the others.
More likely than this, there may be an economic and political collapse. The chronic borrowing by government and individual consumers and our trade deficit will create heavier and heavier financial obligations while the jobs to support this burden will be lost. A whole generation of college graduates, told that education was the ticket to a better life, will be cruelly disappointed. Then and only then, constructive change might take place. As the level of personal discomfort increases and people are thoroughly disillusioned by their leaders, political change might take place, and then economic change.
There may not necessarily be a revolution, as Ben Stein speculated, or an out-and-out aristocracy. The lesson of history is that in mature civilizations peoples attention shifts to other interests and concerns. The old abusive institutions remain but tend to wither away as fewer people tend to their needs or care about what they are doing.
Thats what happened after the two world wars. In World War I, the Europeans monarchies and colonial powers spent the blood of their people freely. Angry ideologies appeared and produced another war. But then what happened? The worlds people forgot about wars and angry ideologies and instead immersed themselves in popular entertainment. Mickey Mouse remained standing where Hitler, Stalin, and the Kaiser fell.
The same thing happened after the Thirty Years War, according to Arnold Toynbee. This war of unprecedented devastation and severity, waged between Protestants and Catholics, had the effect of turning Europeans off to organized religion and their competing theologies. Instead, European intellectuals became interested in exploring nature. Natural science increasingly attracted peoples attention while religion was ignored. In a similar way, the Crusades had the effect of discrediting the Papacy and instead promoting business organization, banking, trade, art, and ultimately the Renaissance.
Now we have the war on terror, the Iraq war, a possible war with Iran, nuclear proliferation, and assorted horrors brought by the Bush administration. Somehow or another, these problems need to be resolved. Someone will do it but not necessarily under our watchful eyes. A general sense of disgust has set in. Once Bush is gone, the rhetoric will subside. Hopefully, an honest, rational administrator will be elected to the Presidency who will assume the thankless task of repairing the damage.
Either the Israelis and Palestinians will reach some accommodation with each other or they will not. Maybe Iraq will fracture into several nations, or maybe not. Maybe the jihadists will continue blowing up people. Maybe the U.S. will attack someone else in the name of bringing them their freedom. Who knows? Its a continuing horror story that I, for one, wish to escape. It is my hope that history will move in another direction.
An Economic Vision
There remains the question of how Americans will cope with the heavy burden of debt left by this and preceding administrations? What will Americans do for a living now that the nations manufacturing base has been largely destroyed? Currency inflation remains a possible solution for debt. It would represent a departure from earlier traditions; but these are uncharted times. It does seem that economic globalization is an irreversible trend. The best response to its devastating impact on the U.S. economy would be to develop a corresponding political globalization, able to rein in and regulate the multi-national businesses.
All nations are threatened by unemployment, scarce resources, and environmental waste. National governments, together with the United Nations, need to cooperate to address their common problems. Governments have taxation as a tool to encourage or discourage certain practices. Tariffs are a form of taxation. Therefore, governments should have and use tariffs to regulate international business instead of agreeing not to use them. Tariffs targeted to the individual business rather than to classes of commodities or to nations of origin would give the international political community a means of ensuring that producing goods for export brings improved wages and hours and better working conditions to the workers employed in their production with minimal damage to the environment.
A possible response to chronic unemployment is a general shortening of work time. If work time is reduced in all countries, this beneficial change can be accomplished without harming any nation competitively. The appropriate level of work hours in a nation depends on its level of industrial development. Industrially more advanced nations can afford shorter hours than those with more primitive economies. The important thing, however, is that the trend of hours be downward so long as unemployment and underemployment remain, caused by investment in productive equipment. National governments, being sovereign, can choose not to reduce their level of work hours; but, if they do not, other nations should be permitted to burden their exported products with tariffs that would impose an offsetting cost.
Yes, to a degree this represents a globally planned economy. It is not socialism, however, because business and government remain separate power centers. If the U.S. economy collapses, however, one would assume that long-standing pejorative labels might not have the same impact as before. People would be demanding plausible solutions offering real results. Business would not be permitted to continue its current destructive practice of producing in one country and selling in another; sustainable economies require some balance in buying and selling products. Government would then be a watchdog guarding peoples interests.
If Capitalism falls or comes to an end, it may not mean the end of free enterprise or capitalistic businesses. It may not come in a violent revolution organized by socialists. Instead, capitalism may wither away as people lose interest in its program. Social advancement may take place by means other than achieving financial success in a career. Tomorrows population may realize that the personal commitment demanded for educational and career success amounts to accepting slavery - a kind of gilded slavery in which the allegedly successful one is not free. This arrangement may no longer be seen as enviable or cool but merely stupid. Who would want to waste ones life as a smiling slave? A community based entirely upon individual competition cannot stand. We must tell the beaters of those drums to be still.
Humanity will ever wrestle with the problem of scarce resources and their distribution in society. With more personal free time, however, other concerns can come to the fore. People have issues with their personal identity. They are naturally curious about the world. Some would want to put special effort into family life; others, into developing their own artistry or skill in a particular area. The economic obligation can be a kind of tax paid to society, real but not all-consuming. We can respect persons who assume that burden well, but not idolize them.
All those recent innovations in consumer electronics, telecommunications, and computer communication make it possible to have a rich life of images and sounds, and to travel the world, at minimal cost. Even the poorest person can have these things. It will be possible to integrate society as never before culturally and socially. People will naturally gravitate into this happier life if given an opportunity. Lets make the world safe for the next generation from the ambitious politicians and greedy business leaders who would deny them that opportunity.