The Challenges For Capitalism
Article 1: The Pursuit Of What?
Copyright © 2003 Dorian Scott Cole
This Web site explores the human condition that writers write about, and economic systems are a major part of the human condition.
This article series is about destructive tendencies within the capitalist economic system and the need to control the system so that it works for us, but not against us. Some specific ways are mentioned to gain control, however solutions are more typically worked out in the realm of consensus opinion. Topics examine economics, the role of business, the role of government regulation, competing against ourselves, the business tendency to create non-competitive arenas, the lack of business and personal responsibility, the effect of a "games" mentality by business and the public toward economics, and strategies for controlling the system without damaging it. The fundamental issue raised is that excessive competition hurts us all.
Economic ideologies can ruin us
I like the capitalist economic system as it operates in a politically democratic system. It seems to offer a better balance of financial control between individual economic interests and "social" economic interests, or "common good." Capitalism is, to a very large extent, a reflection of us. But it is often characterized as a "greed" motivated system. As a reflection of us, what we emphasize is up to us.
The other dominant economic system in the world today is socialism. There are a variety of degrees to which socialism is employed, including under both democratic and communist systems. Socialism emphasizes the common good, equitably distributing goods, often placing the common good above the interests and enterprise of the individual, so that individual effort is less rewarded. Individual economic gain is minimized. The state bears the burden of responsibility for the welfare of the people, and individual responsibility is minimized.
Countries with socialist leanings do a better job of controlling employment and medical benefits so that people stay employed and able to take care of themselves. They are sometimes criticized for having a poorer standard of living, including less capable medical systems.
Socialism comes at a price that many find unacceptable, such as a lower standard of living and less incentive (reward) for individual initiative. Unfortunately in the US, everything that begins to look like government responsibility for the welfare of people is reacted to with hysteria, labeled "socialism," and rejected.
This automatically means that the good things that government can provide for the people that large numbers of individuals find difficult or impossible to provide for themselves, are commonly rejected in favor of an ideological image. Capitalism, while increasing the overall standard of living, leaves a lot of destitute people in its wake. While it has great advantages, it is less than the panacea that ideologists paint.
Capitalism turns to poison when extreme ideology takes the spotlight and leaves the common good forsaken in the dark shadows. "Ideology," of course, is the simplistic, non-thinking person's way of dealing with complex issues, and leaves the future to the capricious nuances of poorly understood theory. Responsibility is denied, delegated to irresponsible theory.
People who buck any particular ideological notion are usually labeled with some supposedly unflattering label, such as "socialist," or "liberal," or "favoring a welfare state." However, there are no rules about how capitalism and free markets must work. Capitalism didn't just "happen" like some gift of divine providence. Capitalism is a product of our own direction.
While capitalism is seen as flourishing only in recent history, it is as old as trade itself, when people began bartering for items and negotiating their worth. We know that trade was present in the Sumerian culture over 5000 years ago. Its ancient pattern is reflected today in tribes in South America, when a tribe member negotiates skillfully with another tribe member for the best "price" for his daughter in marriage. Capitalism has no absolute policies, no defined parameters, no destiny to enrich mankind or destroy it. Capitalism is what we make of it. It is up to us to control.
The size of government is an issue. Most of us seem to prefer minimizing government. The more that government gets involved in our lives, the less individual freedom we have, in general, and the more we have to pay in taxes. While we are eyeing those taxes, we often forget their benefits, for example saving the cost of getting somewhere, or having more food and medicine for less money. But the size of government is a real issue. Bureaucracies typically become very cumbersome, and when they try to protect individual rights, they become so restrictive and tied up in red tape that they strangle us while serving us poorly.
Large government is unwelcome, but this doesn't automatically mean that every social program is going to cost us more money, add to our burden, and serve us poorly. For example, in our current medical care situation, while excellent care is available, many are poorly served for private medical care, and we all pay a high cost for our care either in money, or in poor health from lack of care.
The question is, "What is too much support," as in a destructive "welfare state," and what is beneficial and constructive support, such as medical care and social security. The fear is that government involvement in providing for the cost of medical care will be too expensive for government and also will kill the golden goose. We hearken to the philosophy that everyone carries their own weight.
As a society, we've explored the dangers of a large welfare system, seeing the resultant endless cycle of government dependence and joblessness that grows larger every year. We've also seen the dangers of too little involvement and the resultant poverty, such as being a single working mother, which can be a sentence to a lifetime of poverty. Finding the right balance is difficult. Does too much competition within the economic system prevent us from finding the right balance?
Business typically eschews regulation and other government involvement in business affairs, but screams for government involvement when it thinks the playing field stops favoring it. People always blame the government for a poor economy, and expect a cure from the government, even though the government often has little to do with the state of the general economy.
Government involvement is actually not optional. The founding fathers of the US, and the citizens of that time, held the opinion that collectively we could promote the welfare (health, happiness, and good fortune; well-being. b. Prosperity.)*1 of ourselves through our government. The government is not an independent entity here to rule over us, but something we established to represent us for our own benefit. The government is a reflection of our collective will. Promoting our welfare is not a side effect or an option, it was written into our Constitution:
"We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America."
Capitalism: a reflection of us
Free enterprise seems to have the effect of promoting the general prosperity of everyone, not just those who successfully make scads of money. It literally promotes the well being of all. Generally. While the US pays the costs for research and technological development, it benefits from the resulting products that improve the standard of living and well being of everyone. The US supplies these products to the rest of the world.
The US also provides economic aid, humanitarian aid, knowledge, and military assistance (security) to the world. Military assistance makes the world a safer place, and is often hidden behind the guise of "our national interest," but the entire world benefits.
While the US recoups some assistance money through monetary compensation for military action, and recoups some of the aid money through the purchase of US products (an action often specified by aid), these aren't profit-making enterprises. US citizens pay a large monetary price for giving US aid and assistance to the rest of the world. This is the other side of the equation in capitalism, a reflection of us. This is not a reflection of greed, but of generosity and outreach.
Big businesses within the US often support philanthropic causes, such as support of PBS programs and local arts. Captains of industry also give, such as Ted Turner and Bill Gates, who have given millions from their personal coiffeurs through their foundations to the UN, school systems, and other causes. The capitalist system is also a reflection of all those who are benevolent.
On the other hand, during the late 1990s and early 2000s, we saw greed in action. While the stock market was flourishing, everyone wanted their piece of the pie. People who had never considered dipping a toe into the scary stock market waters, were made fearless by dollar signs and jumped into the deep end of the pool.
With a strong wind of investment capital to be caught for a silly song, companies were formed around hot air promises. With high profit expectations pushing more concrete businesses, deceptive corporate accounting became routine in many companies. Because of these things and falling stock prices, most people in the stock market lost money, and many corporate officers and stock traders are on their way to prison. As a consequence, free enterprise invited more government oversight and regulation.
Capitalism is open to all motivations and forms of economic and social support, including greed, theft, individual philanthropy, government aid, and social programs.
Doing capitalism well is a balancing act. We need to understand as individuals and businesses when our pursuit of money becomes gluttony that prevents others from having enough; and we need to understand as a government, what is too much support, as in a destructive "welfare state," and what is beneficial and constructive support, such as medical care and social security.
What happens to our money? Our society is rife with rhetoric about our money. "The rich get richer while the poor get poorer." "Our jobs are being exported and we will have no jobs." "The Corporate Republicans want to cut taxes and give our money to the rich, while the Robin Hood Democrats want to raise taxes for the rich and give it to the poor." "Illegal aliens are taking away our jobs." "Foreign products are displacing our products - NAFTA and trade agreements are our enemy." There is some truth about the impact of all of this. But there is a lot of misunderstanding as well.
In some ways it doesn't make a lot of difference where the money goes, or who gets it. The acquisition of wealth doesn't build significant empires that have much influence over the US economic system or individuals - the US economy is simply too big for that. What is important is that money stays in wide circulation. Everyone needs to earn a decent living, and the primary key to this is everyone keeping money in circulation.
Rich or poor, people need to keep money in circulation. This includes spending it, saving it, borrowing it, or investing it. All of these keep money circulating. The only thing that hurts the economy is when people stuff their money inside a mattress. Otherwise, money is always working, constantly going from person to person.
Even taxes, which are a ~34% cumulative tax load by the time of retail sale of manufactured goods,*2 keep money circulating to the government and then back to people and companies. What hurts is when the tax money doesn't get to some people, or when taxes reduce our individual buying power. Unfortunately, tax revenues aren't distributed equally - they pay for government programs. If an area doesn't have an industry or public works program that caters to government programs, that area simply misses the money.
Generally taxes mean that money is put into circulation through the government. More people work and buy products because of taxes. The government automatically gets more money in taxes every year because there are more taxpayers, people's incomes go up, and there is more tax revenue on sales and investment income. The money raised is more than the amount needed to cover the increased costs of entitlement and other necessary programs. So the government has little reason to raise taxes. If taxes are raised, individual buying power is reduced.
An exception to higher taxes is when the government raises taxes to fund a program that helps the public save money - thus, they have more buying power. For example, a little money invested in filling potholes on the roadways saves people from expensive wheel alignments. Public inoculations at reduced cost keep down the costs of medical care (less hospitalization and treatment). This series will keep an eye out for exceptions.
Another things that hurts our economy is when the flow of money to other countries doesn't come back (typically a balance of trade problem). This was (and is) a problem between states as companies registered trucking fleets in states with lower license taxes, robbing other states of needed highway maintenance revenue. Now companies have a new tax dodge. Many US companies are moving their headquarters registration to countries with lower taxes so they can be more profitable. Corporate taxe money (that you and I actually pay) then go to another country, so we never see the benefit of these taxes. (Many foreign companies simply avoid paying US taxes, giving them an unfair trading advantage.)
We have problems in many areas. For example, the US has run a trade deficit for many years now - more products are imported (our money goes out) than are exported. The deficit is covered by foreign investment in our country's economy. While deficits and foreign investment are considered good free trade policies, we lose in two additional ways. Deficits also mean that profits of foreign corporations on US soil, and profits from investment in US company stock, also leave the US instead of going into US pockets, adding to the economic deficit.
Exporting some jobs to other countries helps the overall US economy because it increases trade with other countries. Trade means that we sell more of our other products, and these products are more likely to be higher profit items that require more expertise to create. Through trade, the entire world gains additional markets, which generally helps everyone. Our economy is hurt when other companies find deceptive ways to get around trade agreements. And if too many jobs are being exported, then the US economy suffers as individuals lose their jobs and none take their place.
Even the very popular and highly effective economic czar, Alan Greenspan, looked at the US trade deficit, and said that we have to cut benefits. He dared to suggest cutting the sacred cow, Social Security. Where are we in our capitalist economy when even the Treasury Secretary follows in corporate footsteps and suggests cutting benefits? Out of control international capitalism is very destructive, both to us, and we will see in future articles, destructive to other nations.
In free trade, the emphasis should be on "trade," that is "one thing exchanged for another of equal value" (metaphorically speaking - balance is the idea). Free trade should cease meaning huge deficits, and exporting jobs, intellectual capital, and profits. The most recent polls (early 2004) indicate that people are regaining confidence in the economy, but losing confidence in employment. There has been a strong trend against any kind of job stability for many years, and increasing trends in job movement to other countries is strengthening the awareness of this trend. To corporations, employees are simply another business "resource," and supply of this resource is simply going to the low bidder.
The most fair things that we can do for our economy is put people to work at good wages, keep our taxes reasonable, and keep our trade balanced. To do this, we have to continue increasing business, jobs, and markets. If prices remain steady or business expands, companies can hire more people. We all benefit.
On the other hand, if prices go down, then companies have less revenue and lay people off. This means that there are fewer people working and fewer people to purchase products, so we all have less. So companies have to become more efficient, create more products, or find new markets. Competition typically helps in this process by goading companies into higher efficiency, into creating new products, and into finding new markets.
Excessive competition drives down prices and revenue to the point that companies can hire fewer people. With less demand for products, we all can afford less. This, I believe, is the point at which various segments of our economic system frequently arrive. Competition gets out of control, as we compete against ourselves, and we all suffer for it. For example, a New Jersey plant closing in February 2004 just put 900 people out of work, and removed millions from the local economy. Those jobs won't be replaced overnight, and commonly, many in this situation never find work again, and the dreams of many others are destroyed. Other closings put thousands of people out of work at one time, and in 2000 - 2002 this seemed to be a weekly occurrence.
The US economy is hurt when competition drives manufacturers out of business because they can't be more efficient, create more products in their area of expertise, or find new markets for their products. These are the economic areas in which we need to have safeguards to protect the US economy and the individuals within it.
For example, we know the "brain drain" hurts other countries by making them less competitive. We are beginning to experience an aspect of this in our country as most of the engineering graduates in the US return to foreign countries. Our companies need engineers, who are retiring at a very high rate. On top of this, software, a high tech US strength, is being "outsourced" to countries with much lower wages. Perhaps software has become low tech? Are these reasons to protect our intellectual capital? More on "intellectual capital" in Article 6 of this series.
As I said in a previous article about business: "Today we invest our savings and retirement money in the stock market, and we cheer when we get 12 to 15% annual returns. And then we go to our favorite superstore and buy our products for the lowest possible price. Caught in the middle are the people who are running the businesses and creating the goods and services. Oops, that's us, too. We demand the most $ return on our investment, we demand high wages, we demand to pay the least for things, and the way the economy works, the person who gets stabbed in the back is simply us."
"...we need to take control of our lives... We have to remember, we're not just the people caught in the middle, we are also the people putting the pressure on both ends.
See the article: Is the Business of Business, Business? Do we want to live in a world in which money is its own reward?
Business itself suffers from overemphasized ideologies. Working in business, I noticed two distinct patterns. I have noticed the same thing about government. One is the spendthrift pattern, which believes that the more money that you throw at something, the better it will perform. In reality, things can only grow so fast, and more money is only money to waste. Investing in a new business has to be planned and gradual, providing enough strategic support, but not too little. The CEO of Outback Steak House recently said on the public radio program, Motley Fool, that his biggest mistake in business was trying to grow a new business, Carrabba's, too fast.
The other prominent pattern is the penny-pincher. This represents the belief that a business grows on its own with minimal investment, and supports itself. Nothing is further from the truth of how growth is achieved. Employees without the resources in time and capital for expenses, simply do nothing, and without employee support you get nothing - in fact they won't go after any new business because they know they can't support it without sacrificing their lives on the thankless altar of business. Investment in growing a business has to be done by adding people to do the job and giving the business financial and other necessary support.
You can neither pinch your way to financial prosperity, nor spend your way to financial prosperity. Prosperity comes from having a nice difference between what you earn and your costs, and to sustain it requires wise investment in the future. You have to invest with cautious optimism in what you want. No investment, no future.
Business, the economic engine
The economic engine that drives what we are able to achieve financially for all of us is business. Without business, we would likely revert to the lifestyle of many in 3rd. world countries. Manufacturing of products would diminish, medicine would cease to improve, and we would find it difficult to afford adequate homes, medical care, education, food, heat, public utilities, transportation, and communications. It is business trade that makes our modern world economically viable.
We have to stay aware of the role of business, and understand our changing times in which national and international competition are growing more intense. In the late 18th. Century, people began to tie their welfare directly to the industries that they worked for. Unions sought work and wage guarantees. Later, benefits such as medical care and retirement became tied to business. But companies are competitive, and as I have shown in previous articles, and again in this series, companies sometimes either have to trim benefits, or go under. Businesses cannot sustain "welfare states" any more than the government can.
While business is the engine that makes the economy work, it has to do what it does best, and tying other things to it simply can't continue to work in this highly competitive world. Business is too unstable to depend on for benefits - business is currently hard to depend on for income (jobs). Benefits need to be divorced from business and given stable footing. One challenge we face is whether this is done through the government, or through another independent medium established collectively by us. But if we leave benefits up to business, most of us will get squeezed out and very few will benefit.
In pursuit of what?
This article began with a very brief reflection on economic systems and ideologies. It is our own ideologies that will ultimately establish business direction. Business direction for publicly traded companies has currently been seized by investors, whose only consideration is making money, and business is spinning out of control with destructive consequences. We have to insist on responsible action, and define what those responsibilities are if we want to safeguard the future of all of us from economic collapse. More on responsibility in Article 5.
Many conglomerates and other companies consider themselves to be "international." They own many smaller businesses throughout the world and they have customers all over the world. This is good, and international trade in general is good. What seems to be going out the window is any sense of responsibility, by both large and small companies, to society. On the one had, I promote companies to be more free to make money - it benefits all of us. On the other hand, companies can't escape responsibility to society without destroying us.
Companies have developed without a social contract, except for commitments forced on them by governments or trade unions. A social contract needs to be developed, with a notion of what companies are responsible for by using us to make money. That responsibility is to those who support them and benefit from them: nations, employees, communities, investors, and the environment. Without that sense of responsibility, companies can economically destroy those who depend on them. Unbridled competition is driving companies to destructive activities.
Is money its own reward? What do we really want? Are piles and piles of paper with $ printed on them of any real value? Money has value only when it can accomplish something. People and corporations earn money to accomplish things. We have to complete the statement, "The purpose of business is to earn money to..." To what, to have piles of paper? No. Business earns money so that people and companies can accomplish what they want.
Simply making money for investors is an unacceptable capitulation, and one that is driving us all toward economic destruction through excessive competition. Shirking responsibilities to be more competitive is not acceptable. One major challenge for capitalism is to engage companies in this social contract for the competitive playing field to be level. (If not, then government control will be essential.)
What do people want? "Jobs that reward employees, that are sustainable in communities to support families and their dreams, that provide work venues for those who aspire to certain types of work, that create expansion capital, that reward investors, that support our world through taxes, and that safeguard the environment." We need to make that the social contract that is the driving force behind every company Vision and Mission Statement.
The challenge for our government, regarding capitalism, is that it needs to understand the role of business and also be engaged in the social contract. Unemployment compensation is not much help in economic downturns. It can't support people economically, and many people simply go off of the unemployment statistics to have no job, or be underemployment, or go on welfare. People lose the ability to support their families; and they lose essential medical benefits, and educational and retirement savings. Like welfare, unemployment compensation in these times ends in individual and collective economic failure for many people.
There is, I think, a better way. When companies are forced to withdraw work from an area, or during serious economic downturns, there should be economic assistance to find or create new jobs within an economically viable period of time, either through existing employers or through community economic developers and business incubators; plus a program to continue medical benefits and retirement savings, which should be made portable and permanent. So, instead of watching people fail financially or become a burden to society, putting people back to work would help the individual and the overall economy, and promote business. We have the necessary tools if we would just use them.
Community economic developers and business incubators could help to expand existing businesses or start new ones by 1) using government financial assistance, 2) leveraging (unemployed) employee skills into new business opportunities, 3) organizing the unemployed, 4) strategically advising development, 5) retraining, and 6) attracting investment capital, even before a company removes work from a community.
Business incubators, like the one at Georgia Tech, have a success rate of over 90% for assisting entrepreneurs in developing their business ideas, by supporting them with strategic business advisors to develop, finance, and launch new businesses. Supported businesses are excellent financial investments. Nothing that I am aware of prevents communities, states, and the Federal Government from organizing and supporting community economic developers and business incubators to keep people employed and the community prosperous, promoting the "general welfare."
The overall effect of the business and government suggestions in the previous few paragraphs should be to strengthen community economies, economically benefiting businesses, individuals, and the government through greater employment that would provide higher revenue to individuals, businesses, and government.
Other countries and people point to capitalism as if it was an independent entity that we serve, and which dominates the world. If we allow it to be, then it is. In reality, what capitalism is, is up to us. It is up to us to make capitalism serve us. But first we have to understand what we are pursuing. Each will have its own reward. Simple gluttonous greed will end in the destruction of us all because we are simply competing against ourselves. But a system that is controlled to benefit us all, will benefit us all.
Article 1 footnotes, references, bibliography
1. The American Heritage® Dictionary of the English Language, Third Edition copyright © 1992 by Houghton Mifflin Company. Electronic version licensed from INSO Corporation. All rights reserved.)
2. 34% cumulative tax load for manuf. goods on $100.00 retail: The purchase of ~$20.00 of raw or premanufactured material has 6% sales tax. Labor carries income tax of ~20%. Selling the product to the retailer at ~$50.00 has ~6% sales tax. The labor for selling the product at ~$100.00 carries income tax of ~20%. The cost of retail sales tax is ~6%. So by the time a product reaches the end buyer, it has accumulated a tax load of ~34%.
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