“A crisis is a situation in which a previously tolerable set of circumstances is suddenly, by the addition of another factor, rendered wholly intolerable. Whether the additional factor is political, economic, or scientific hardly matters: the death of a national hero, the instability of prices, or a technological discovery can all set events in motion.” — Michael Crichton, The Andromeda Strain (1970).
Columnist Steven Pearlstein, recently wrote a piece “Identity Crisis for American Capitalism” in the Washington Post. His column can be found here.
Is there a crisis? What is the additional factor renders the previous set of circumstances intolerable? It seems that the identity problem, if there is one, for American capitalism is more an ongoing conundrum that a crisis. But Pearlstein is right about one thing. Reasoned debates are always useful.
The author asks what “kind” of capitalism do we want, apparently conceding that an alternative such as socialism of some degree is unacceptable, or at least impossible in this country. Pearlstein opines that capitalism, like ice cream, comes in many flavors. These flavors may be taken by themselves or combined, and amid this year’s political campaign we should have a debate about which flavor, or combination thereof, we want in this country.
Pearlstein identifies seven varieties of capitalism: robber baron capitalism, managerial capitalism, state capitalism, entrepreneurial capitalism, worker capitalism, shareholder capitalism, and financial capitalism. He never defines what he means by generic capitalism, though, which should have been a starting point.
One could go into a long winded dissertation about the nature, nuances, contours, and ramifications of capitalism. In fact, many have. Adam Smith was the first exponent of it although he did not use the word. More recently, Ludwig von Mises, Friedrich Hayek, Ayn Rand, and Milton Friedman have written about it comprehensively. Karl Marx did too, though not approvingly. For these purposes, let’s just say that capitalism means a free market in production, trade, and consumption based on private property and the absence of coercive central planning.
Pearlstein’s attempt at delineating different types of capitalism, with some exceptions. is actually describing aspects of a mixed economy, with free trade emphasized or limited depending on time and place.
This author gives away his bias with his use of the pejorative Robber Baron capitalism which he alleges is the first kind of modern capitalism. He refers to the 19th Century entrepreneurs such as Vanderbilt, Rockefeller, Carnegie, Morgan, Stanford, and others who managed to identify early the potential for new technologies and create entire new industries. One of the reasons they were able to do it was their relative freedom from government interference. These businessmen made fantastic fortunes mainly because they were there first, not unlike of like some of our present day information technology entrepreneurs. Not sure who they were robbing, if anyone. The benefits, both short and long term, far exceeded the wealth they accumulated. And they didn’t shovel their wealth into a money bin for it to languish and stink, it went back into the economy and created more entrepreneurship and consequent wealth. I’m reminded here of Clint Murchison’s quip that money is like manure; pile it up and it stinks to high heaven; spread it around and it does a lot of good. (Don’t believe he hand Huey Long’s or President Obama’s method of spreading in mind, though.)
Pearlstein’s latter day entrepreneurial capitalism is really the same thing. Like the 19th Century innovators, the computer information industry has had the benefit of light regulation and interference, at least up until recently.
Worker capitalism is nothing new. The first capitalists were workers. Farmers, merchants, artisans and craftsmen, and small time community moneylenders have been around for a long time. These capitalists existed in antiquity, feudal times, and even under communism in the Soviet Union in micro economies. Pearlstein touts a “fad in the 1980s” where employee-owned firms were either bought from a retiring entrepreneur or brought out of bankruptcy by workers looking to save their jobs. That did happen more often in that era. Any of these businesses that succeeded, however, were really run, not by the rank and file workers, but by managers. Try running a business like classical Greek democracy – you get modern day Greece for sure.
What happened is that the workers became shareholders, and many of the businesses became publicly owned corporations. They ultimately became companies in the mode of Pearlstein’s shareholder capitalism. Large numbers of shareholders invest in publicly held corporations as a means of getting in on the profits, and hoping for increase in value to fund retirement, or even future financial independence. These investments are crucial for businesses to accumulate capital for growth and innovation.
The financial capitalists are the current bogeymen for the American left. Maybe they should be across the political spectrum. They are not the favorites of libertarians. In some ways, we have now “monster banks” akin to the Bank of the United States that President Andrew Jackson destroyed in the 1830s. If they are “too big to fail” they are too big — period. They got that way through cronyism, and regulatory capture. But this may be a too broad brush. Financial markets perform a useful function in directing money to the places that are likely to put it to the highest and best use. But if they are protected against failure, the incentive to make riskier investments is higher, and the quick buck is always more attractive. The sub-prime real estate market collapse is a perfect example. The government encouraged lenders to make loans they never should have made, and bailed out the ones with pull when that market collapsed. The millions of investors who were to small to be bothered with and were not member of the aristocracy of pull are the ones who got the shaft.
The final constructed category, state capitalism appears somewhat of an oxymoron – because it is. One economist described the European model as welfare state capitalism. I can work to provide a tolerable living standard for most everyone, and a darned opulent lifestyle for those who run the show. Come to think of it, free market capitalism does the same thing, only has the added benefit of allowing upward (and downward) mobility.
Nevertheless, unlike many of my libertarian friends, I believe the government has a role to play in the national economy. Obviously, it should enforce contracts through the judicial system. It should also seek to deter and to punish lying cheating and stealing. It has a traffic cop role in some activities and industries; air transport comes to mind. Where the government goes wrong when it tries to pick winners, and compensate losers, and uses coercion, either carrot or stick, to effect certain results.
Pearlstein’s main complaint about capitalism is that it produces casualties. Some participants lose. That is true; risk entails the possibility of failure – duh! For the able bodied and able minded, however, really losing means giving up, not occasional setbacks. The freedom and opportunity to succeed, and do it big, is what America is all about.