-Plutarch, 120 C.E.
Capitalism Has An End Point, As All Are About To Discover
Well, folks, it's been one helluva party. For the last two centuries, we have all been having a great time of it, most of us getting richer just a bit, year by year, and we have all become convinced that because this has gone on uninterrupted for most of a century, that it will go on forever. Why does it have to end? Didn't we learn what caused the last economic collapse and fix it - and put an end to boom-bust cycles, forever as was promised? The short answer is that, no, we did not learn the lessons from the last collapse (the main one being for government to not allow capitalists to speculate with other peoples' money), and no, we haven't fixed the problem (actually, we did fix them, but, one by one, we have done away with the fixes). So yes, we are about to go through it all over again. But this time, it will be worse than the last time for reasons we will presently analyze. And it could be much worse indeed.
"Capitalism is the astonishing belief that the nastiest motives of the nastiest men somehow or other work for the best results in the best of all possible worlds."
-- John Maynard Keynes Quoted by Sir George Schuster, "Christianity and human relations in industry" (1951), p. 109
Capitalism and capitalist economies always arrive at an endpoint - and, that by ignoring the consequences of the causes and/or trying to get around them with band-aid approaches, rather than accepting the problems and dealing with them full on, disruptions in the wealth-generating processes always occur, with unnecessary suffering and misery as a result - usually great suffering and enormous misery. And the greater and more complete the denial, the greater the collapse and more widespread the misery. It isn't necessary, and there is enough wealth out there for all to enjoy a good life, but as a result of greed and shortsightedness, capitalists and their allies, including especially those in the middle class whom they bamboozle into supporting their agenda unconditionally, end up poorer at the endpoint as the result of their greed, selfishness and deep denial. We will also see why the three causes of the endpoint of capitalism can actually synergize, and create a far greater disruption and more misery than would any of them alone.
The First Cause Of An Endpoint: The Creeping Concentration Of Wealth And Its Consequences
The correlation is striking. And yet almost no one notices it. Certainly no one in the mainstream media is talking about it, and you certainly won't hear about it from those screaming demagogues on Fox News.
In 1929, thirty two percent of all the national wealth and property in the United States was held as the personal property of the richest one half of one percent of Americans. Fourteen percent of all U.S. personal income was received by just one percent of the population. And that was the year of the great Wall-Street crash and the onset of the Great Depression.
In 1949, after five years of concentrated war effort in which the colossal fortunes of the super rich were taxed away from them to pay for the war effort, and the banking and securities industry reforms of the New Deal had taken root, resulting economic activity meant that any American could have a job if he wanted it, for the first time in a generation, the wealth owned by the richest one half of one percent of the U.S. population stood at 19 percent, and only 8.3 percent of all national personal income was taken in by the richest one percent of the population. Those who actually produced the wealth were keeping it, and what followed was the most rapid rise in wealth among the middle class in world history. It was the "golden age" of the 1950's, often cited even by conservatives, as the economic high-point in American history.Phillips, Politics, p. 241, Phillips, Wealth, p. 427 By the end of the Lyndon Johnson's administration in 1968, the poverty rate in the United States had fallen to nine percent - the one only time in all of American history when it has not been in double digits.
After 1976, the year when most concede that the American "golden age" ended, the concentration of wealth in the United States began an inexorable - and dramatic - climb. And it has been climbing ever since. From 14 percent in 1976, just seven years later in 1983, the ownership of the country by the richest half-percent stood at 26.9 percent. In 1960, the richest half-percent accounted for 7.55 percent of adjusted gross current income, and by 1995, they accounted for 11.25 percent. Including capital gains, that percentage stood at 12.5 percent. In 1995, the concentration of wealth began a huge and rapid increase as the "supply side economics" nostrums of the Reagan era began to really kick in - in 1982, the richest one percent of the population were taking in 12.8 percent of national income; by 1997, they were taking in 16.7 percent of national incomePhillips, Wealth, p. 428, and that percentage is still rising as of this writing.
Most members of the working classes and the middle class don't and won't really care how fast the rich are getting richer, as long as they are too. But the fact of the matter is that as the proportion of national wealth generation absorbed by the rich increases, it is and has been increasing faster than has productivity. Which can only mean that the poor and middle class have to be actually getting poorer as the rich are getting richer ever faster. In other words, the rich are not only getting the entirety of the results of economic growth, statistics suggest they are even taking existing wealth away from the poor and middle class.
Indeed, this is precisely what has been happening in the United States, and the statistics bear this out. Tax burdens are being shifted from the rich to the middle classes and poor, and at the same time, more than all of the productivity increases and economic growth in the U.S. economy have gone to the rich since 1976 - the difference is made up by a creeping disliquidation of the middle class. Of course, the mechanisms by which this is done are being carefully hidden and disguised, but are very real nonetheless, as are their effects. One mechanism by which this is being done, is George W. Bush's tax cuts for the rich, which have resulted in huge budget deficits, and the largest national debt in the history of the planet, by far. These deficits are financed by borrowing the money - in competition with mortgage loans, resulting in higher home ownership costs for middle-class homeowners. Another mechanism by which the middle class is being disliquidated is by relaxing or abolishing labor laws which benefit the middle class, resulting in the costs once borne by business now being borne by middle class Americans instead. The result is that an ever increasing number of American parents are discovering that there is an increasing chance they'll never become "empty-nesters" - their kids, even after getting college educations - can't earn enough to afford even to rent an apartment, much less buy a home, like they did. And that assumes they can even afford a college education, which is becoming increasingly rare for middle-class kids. The high-point of middle-class per-capita wealth was reached in 1978, when after-tax income for non-supervisory employees stood at an average of $10.40 per hour, and began a serious decline - by 1994, it had declined to $9.38 (in constant 1994 dollars)Phillips, Wealth, p. 133 and is still on the decline - and this does not even include the fact that benefits once enjoyed by working people have seen an even more serious decline. The number of Americans not covered by health insurance has climbed to more than 49 million - one person in six in the United States - and the vast majority of those are working people or the children of working parents (fully one in three children in the U.S. have no health insurance at all). Employer-paid life insurance, once ubiquitous, has all but been eliminated. So have private pension plans. And even 401(k) programs are seriously declining.
How is it that this has happened when both economic growth and productivity growth - supposedly the engines of middle-class wealth - are still increasing? It has happened because of one simple problem with unregulated and unrestrained capitalism - one that free-market enthusiasts simply ignore or are in deep denial about, and the rich themselves understand very well but are very careful to never talk about, while they discreetly exploit it. That is that money equals power. Hence, it obviously follows that the more money you have, the more power you have. Why do you suppose it is that Bill Gates, or George Soros, or other members of the ultra-rich elites don't just kick back and enjoy their wealth in lives of splendid luxury and spectacular idle leisure, but instead are driven to work sixty or seventy hour weeks? Why are they driven to earn even more, although most can't even begin to spend the interest and dividends, much less the capital on the wealth they already have? Do you suppose it is an addiction to work? No. It is that they know what most middle-class right-wing conservatives are carefully kept in deep denial about - money equals power, and the more concentrated the wealth, the more concentrated the power. The middle-class is deceived and kept in denial about this through promises rarely if ever kept, and faulty, even silly, and occasionally absurd analyses such as the "Laffer curve" and "trickle-down economics."
It follows then, that if wealth equals power, the concentration of wealth is equal to the concentration of power. And when you have power, you'll use it to your own advantage, not the advantage of others, and if you are one of the ultra-rich, that especially means the "Great Unwashed" - the poor and middle classes. You're not going to use it at your own expense - you'll use it to skew the playing field to benefit yourself, even if that means disliquidating the middle class. Hence, as the rich accumulate an ever greater concentration of wealth, they accumulate an ever greater concentration of power, and use it to benefit themselves, almost always by skewing the playing field to enhance their own ability to accumulate even more wealth, ever faster, by forcing the middle class into ever greater "labor flexibility" (read: economic desperation, and willingness to take and work at any job, regardless of how miserable it is).
The most obvious example of the power that the rich have to disliquidate the middle class is the oft-heard threat to move production overseas and close the factory. If workers don't accept the conditions of employment on offer, the work (or even the factory outright) is moved from the middle-class neighborhood to a maquila sweatshop in Latin America, or, increasingly more often, to a subcontractor's sweatshop in China, where even prison slaves are often used for the production of the same goods. Labor can't get much cheaper than that. But is it really necessary to do this, as the capitalists often insist? Consider that the cost of assembling a pair of Nike shoes in a sweatshop in China is just a few cents, versus a dollar or two in the United States. But have you checked out the price of a pair of Nike shoes in the shops lately? As a percentage of the sales price, the cost of paying labor a decent wage for the assembly of those shoes is insignificantly higher. Yet it makes a huge difference in the lives of the workers who make them. Even when the humaneness of the situation is set aside, and one only looks at the economic consequences of paying slave wages, consider how the economy in the Third World would be transformed if the workers paid to assemble Nike shoes were paid a disposable income comparable to what Americans have historically received - and how many lives would be transformed by simply paying a few people a decent wage.
This is something of which Karl Marx himself was not unmindful, and was fond of pointing out. The unrestrained pursuit of profit, he wrote, undermines profitability. What he meant by this, is that as capitalists relentlessly pursue the externalization of their costs (in the present case, the cost of living of the workers producing their goods), they undermine the economy on which they themselves depend for a market for their goods. How many more shoes would Nike be selling in the Third World if the people in those countries had more disposable income?
"The modern conservative is engaged in mankind's oldest exercise in moral philosophy: the search for a superior moral justification for selfishness."
-- John Kenneth Galbrath, 1946
The objection to this analysis that is usually raised by free market fundamentalists and their right-wing middle-class sheep, is that the rich spend money (and lots of it) too, and what money they don't spend, they invest. Well, that is all fine and good, but it ignores several economic realities.
The first of these is simply that the rich don't spend anywhere near as much money as would the middle class or poor if that same money was held by the latter, and in a consumption-based economy as capitalist economies always are, this matters - a great deal. This should be patently obvious when one simply stops for a minute to think about it - take, for example, the case of Microsoft Corporation and Bill Gates. Since its founding, Microsoft has earned approximately $150 billion in profits and equity. Of this, approximately $50 billion is now the personal property of Bill Gates. And yes, he has built a fabulous mansion in the Seattle area, as have some of the Microsoft billionaires that have shared in this wealth.
Now consider the fact that over the years, approximately 30,000 people have worked for Microsoft. If the profits and equity created by Microsoft had been shared equally among those 30,000 employees, each and every one would be worth about $5 million. Imagine how the economy of Redlands (and the Seattle metro area) would be dramatically transformed if suddenly there were 30,000 multi-millionaires now building mansions, buying fancy cars and boats, building handsome homes for themselves, hiring groundskeepers and domestic workers, and otherwise spending and investing in the local economy. Certainly more than the construction of a four or five well-secluded mega-mansions.
Then there is the problem of investment. It may be true, the free-market fundamentalists concede, that the mega-rich don't create as much demand for goods and services as would the middle class if the latter held all that wealth, but what the rich do provide is investment capital.
This analysis assumes that economic growth (and productivity improvements in the existing economy) is limited by the availability of investment capital, which the ultra-rich help provide. In fact, that is not the case. Talk to any investment banker, and he will quite readily inform you that the limitation he faces in writing investment loans is never the availability of capital with which to underwrite the investments, it is in fact a lack of qualified debtors instead. In other words, the limitation to economic growth isn't a problem of available money to invest, it is a shortage of suitable people and projects in which to invest it.
This reality suggests that wealth is already too concentrated for optimal economic growth. If the middle class were richer, more people, and better educated people, with ideas to try and businesses they are starting in need of investment capital, would be looking for that capital. But as it is, there is apparently a shortage of such people. So the investment brokers out there aren't writing as many loans or setting up as many initial public offerings as they could if wealth were more equitably distributed.
And there is another problem. It should be obvious that you can't sell something to someone with no money, but it would appear that the apologists for increasing concentration of wealth seem to have forgotten this. By taking money away from the middle class in an effort to externalize their labor costs, even existing corporations are depriving each other of the markets for their goods. Henry Ford, when he set up his first factories to produce automobiles, understood this, and initially, at least, paid his workers enough that they could afford to buy one of his cars. He knew that it is pointless to produce goods and services if there are too few people with enough disposable income to create a market for them. Yet, as a capitalist moves his carpet manufacturing plant from Georgia to Mexico to save a few cents per yard in labor costs, he is impoverishing the people who would furnish their homes with carpet - and who would buy Ford cars. When all other capitalists do the same, and no one is left who can afford to buy carpet, his business will go broke. Indeed, this is why Third-World nations are so poor. Few of them lack the actual capital and resources to create dynamic economies; it is just that the wealth is held in so few hands that there is no one with enough money to buy the goods that a new factory would make. Hence, if you can't sell it, you won't make it. And if you won't make it, you cannot offer anyone a job.
It should be obvious therefore, that the increasing concentration of wealth in an economy, as is happening in the United States, is obviously an unsustainable trend in the long run. Eventually, markets dry up because you can't sell something to someone with no money, nor can you create economic growth by investment if there is no one who is qualified to build and operate the factory in which you would like to invest. Hence, Karl Marx is proven right in the long run; the unrestrained pursuit of profit undermines profitability.
So where does it end? Markets begin to shrink and investment slows when wealth becomes so concentrated that no one can buy anything because they have no money, and no one wants to invest because they don't see a market out there for what they would like to produce. And investment also slows when qualified debtors become ever fewer and investment capital ends up going begging, or is invested in less productive vehicles, because that is all there is. The end point arrives when those who need the money and can use it effectively in the economy simply don't have any, and those who have the money can't spend enough of it to make a difference in creating the demand for goods and services that a consumer economy requires, and can't find adequately qualified debtors in whom to invest the rest. This may on the surface appear to be a bit abstract, but it actually happens in the real world, and it happens periodically and even quite predictably in otherwise stable societies.
Historically happened many, many times, not just in the American economy, but in many others as well. Just when actual end point arrives will occur different points in different economies, because varying economic circumstances alter the point at which the whole house of cards becomes too unstable to sustain itself and finally topples over. The reasons vary, but factors affecting the arrival of the tipping point can range from interventions by central banks, changing circumstances in how investments are regulated, the availability and utilization of foreign investments or investments made in foreign economies, and even the speed with which the middle class is being disliquidated (the faster this occurs, the greater the instability and the quicker the end point arrives). Because there is so much variation in how and when the endpoint happens, this self-limiting process itself is not obvious in what happens, and hence it is not often considered in economic histories. As a result, when the end point arrives, it is brought on by a precipitating event that usually itself gets the blame. In 1929 in the United States, it was the collapse of the stock market bubble. In Britain in 1900, the precipitating event was the evident approach of World War I and the preparations for it. In Holland in the 1760's, it was the collapse of the Great Tulip Bubble. In Spain in the 1580's, it was the reduction in the rate at which the ingress of gold and silver being looted from the New World began to slow down. In Fifth Century Rome, it was the invasion by the Huns that got the blame. But in each and every case, the real, underlying cause of the collapse, was the excessive concentration of wealth leading to a weakness in the underlying economy.
Does this mean that there is a final end to the cycle of building up, collapse and building up again? Usually, no. Ordinarily, if the underlying society is stable and reasonably insistent on democratic institutions, the economic collapse of the capitalist system will lead to great misery and suffering, and if the government is responsive, to reforms, changes in the law (particularly labor law and securities and banking reforms) followed by a slow rebuilding and recovery, and then the cycle will begin again as those reforms are slowly eroded over time. Usually, when this occurs, over a long period of time (50 to 100 years or so), the capitalists, chafing under the restraints of the reform laws, will campaign for a removal of the restraints, complaining that they are "outmoded" by "new economic realities" - as if the laws of economics had somehow been repealed. So the reforms are abandoned, and the whole cycle begins anew - with the same inevitable result in the end.
And that raises the obvious question of just where we are in the current cycle. As I write this, in February, 2008, we have been going through a great period of economic instability triggered by a collapse in the market for sub-prime real estate loans. The instability began as real estate investors with limited means (read: homeowners seeing an opportunity to speculate in real estate) began buying up real estate using mortgages that both they and the lender knew they could not pay back. They took out the loans assuming that the price of real estate would continue to rise, and that they would be able to sell the property at a profit, liquidate the loan before they became seriously delinquent on the payments, and walk away with some tidy little profits. The lenders who underwrote these loans assumed the same scenario, but if it didn't happen, they would package the loans into a "mortgage-backed security" and sell it (based on fraudulent representations with regards to the borrowers' credit-worthiness) to someone else, in order to get it off their balance sheets before it looked bad. Either way, they wouldn't get caught, and they could make a lot of money on the loan originations and sale of the securities.
To see why capitalism, when its wealth becomes excessively concentrated, brings about its own demise, it is worth examining to see just why this "sub-prime crisis" has led to such instability in the financial sector. First, the representations made to the banks who bought these mortgage backed securities, were essentially fraudulent - both the borrowers and the lenders understood the loans could not be paid down from the borrower's income, even before the contracts were ever signed. But since there was essentially no regulation preventing them from doing so, the mortgage originators were free to engage in the fraud as long as the mortgages were being paid and the sources of the investment capital that was underwriting the loans, either didn't find out that the loans underwritten were dodgy, or assumed the houses would be sold and the mortgages paid off before the payments were missed. The banks and brokerage houses who bought the securities weren't concerned either - to ensure that they got paid, they insured these securities with an insurance product called a "credit default swap," or CDS. Written by large, mainline insurance companies, these were contracts that stated that should the mortgagee default, and the bank holding the security wasn't getting paid as the mortgage contract required, the insurance company would pay up and the bank would get its money, and it would be the insurance company that would go after the borrower.
The problem was that there is no limit as to how many of these CDS contracts the insurance company could write. And for each one, they collected a premium, adding to their bottom line. As long as the money kept coming in, there was no problem. Write contracts, collect premiums, and make money - what a deal! But with every contract written, the potential liability increased - and increased the likelihood that a downturn in the economy, meaning that borrowers couldn't sell their houses at a profit, could result in huge liabilities on the CDS contracts and bankrupt the insurance company who wrote them.
That isn't even the worst of it. If it were just the stockholders of the insurance company who would be left holding the bag should the insurance company be driven into bankruptcy, that would be one thing. But when innocent people, who had no way to know they were assuming the risk of these CDS contracts get left holding the bag, well, that is another matter entirely, both morally and economically. Suppose that enough mortgagees fail to make their payments that the bank holding the mortgage-backed security decides that the mortgage-backed security is in default, and then goes to the insurance company to pay up. And suppose that this happens often enough that the insurance company is forced into bankruptcy. Now the insurance company fails, and
This is the fundamental problem with unregulated capitalism. The first and foremost incentive in the financial industry is to pass on risk to someone else, and that someone else is all to often someone who doesn't even know he is assuming it. The people working in the industry like to believe that they are abolishing risk, but they really are not - risk, once created is never destroyed until the underlying obligation which is at risk, is paid. What the people in the financial services industry are doing is to that they are actually merely disguising risk by passing it to someone else, like the pensioner in the above example. The incentives are perverse - they are to even lend other peoples' money on margin, to use for often highly speculative investments. The speculative investor gets the rewards, the actual owner of the money being lent out on margin assumes the risk without knowing it. As the financial services industry sees that it can lend out ever greater sums of cash without a collapse occurring, they take on ever riskier schemes, because it works, and has been for years. They get richer, while the owners of the money (read: you and me, or in our example, the pensioner) get the risk. Great job if you can get it.
So at the end of the day, this house of cards, just like any other Ponzi scheme, has to come to an end, and with the burst of the "sub-prime mortgage" bubble, part of it already has (as of this writing, February, 2008). Will this be sufficient to bring down the entire capitalist cycle, as did the stock market crash in 1929? There are worrying signs that it may very well be. For example, the insurance companies by and large are much larger than the banks, and have much higher levels of capitalization, if one is to believe the balance sheets they publish. But the securities market is currently not pricing a sub-prime mortgage-backed security that has a CDS contract protecting it at any premium at all over one that does not have one (a so-called "naked" security). Hence, it can be fairly said that the financial industry assessment is that the insurance companies are broke, but that the weeping and wailing and gnashing of teeth just hasn't been done yet. So if an insurance company has any obligation to you - if you own an annuity contract, sell it. If you are thinking of buying one, don't. If you have any life insurance policies with a cash value, cash them out, take the money and run.
If the mainline insurance companies that have underwritten these CDS contracts begin to fail, they could easily take the securities industry with them. That is because both are in bed with each other to the extent that each depends on the other for liquidity. And each is totally vulnerable to the failure of the other. The big securities brokers can't live without the insurance companies, and vice versa. They have been in bed with each other for a very long time, to the extent that the distinction between the two is blurry indeed.
Which means that there is a fundamental problem with the securities industry as well. How liquid is it, really? And whose money is at risk? Since there is no guarantee that the securities company can meet its obligations to you (you did read the "disclosure statement" you signed when you opened your securities account, didn't you?), the company is free to speculate with your shares or lend them out to someone else with which to speculate, so long as they pay up when you cash in those shares. But what happens if the insurance company is disliquidated by its involvement in securities owned by the failing insurance companies? Now they are pulled under. So when you go to your broker's office to cash in your shares and collect your check, you find the lights out and the door is locked.
Ah, I hear you say, the insurance companies and securities brokers handle so much of the country's money that the Federal Reserve would never allow them to go under. The Fed would ensure their liquidity by, if necessary, offering them no-interest loans to keep them afloat. Well, there are two problems with that scenario. First is moral hazard - if the Fed steps in to prop up the securities companies, and the securities industry knows they will, they are inviting the securities industry to take risks. Generally the riskier the investment, the higher the return - but if the investment fails, the Fed picks up the tab, so who cares? Another great job if you can get it. So the Fed is naturally very reluctant to do this.
The other problem with this scenario, is that the financial industry has grown so huge and so vast that even the Federal Reserve can't cough up enough cash to keep it afloat in a really serious crisis. Consider that the entire gross national product of the U.S. is about $47 trillion, and there are hedge funds out there with a level of capitalization nearly equal to that. If one of them failed, what would be the consequences? Glad you asked. The answer, is no one knows - it has never happened before in all of human history.
You might be tempted to think that the Fed can simply crank up the printing presses and start printing lots of portraits of dead presidents. Well, the numbers are now so huge that even the Fed can't physically handle the job. And even if it could, what would be the consequences? Print money and put it in circulation without a corresponding increase in wealth for it to chase, and you have something called "inflation." Remember those Whip Inflation Now buttons? Lots and lots of inflation is what you would get if the Fed simply printed enough cash to keep the banks, securities companies and the insurance industry afloat. The scenes in 1920's Germany of people taking a wheelbarrow load of currency to the store to buy bread and milk, well, those days would return the instant all that money finds its way out of the financial industry and into the general economy. Hyperinflation not seen even in Zimbabwe would be how the economy would have to be kept afloat, to the extent that it can be under such circumstances (and even that can't happen in the long run). Savings in cash and bank account balances would become worthless overnight, so gold and silver boullion coinage would make an appearance in general circulation, because it is the only currency people can trust - and the gold bugs' long-ignored warnings would be proven right. People who still have jobs in the few companies that can manage in the economic chaos, would insist on being paid daily, and would spend every last banknote before arriving home from work in the evening. Others, whose jobs are lost in the economic chaos, would be sleeping and begging in the streets - hey buddy, can you spare a hundred million? The economy would slowly grind to a halt as business after business is no longer able to cope with the economic chaos and the shrinking markets and increasingly difficult supply logistics. As people grow increasingly desperate for something, anything to be done to relieve their suffering, respect for law and order would break down, anarchy would appear and blood would begin to flow in the streets.
The alternative, of course, is for the Fed to let the players default on their obligations and allow the chips to simply fall where they may, forcing the owners of bad investments out of the market, thus avoiding both the moral hazard and the hyperinflation. But this entails an even uglier scenario, one that played itself out in the streets of America in the last collapse of the capitalist economy, back in the 1930's. The money in circulation would evaporate as it immediately got sucked up by the creditors of the insurance and securities companies suing to get what they can of their money. As money in circulation disappears, the price of everything would begin to fall dramatically - including, of course, wages. Mortgages and loan contracts would become unpayable and worthless, because no one would have the cash to pay them down, and since wages would fall, mortgage and loan contracts would suddenly become many times more costly than when they were signed. So debtors would have to default, creditors wouldn't get their money and the lending institutions would fail. Pensioners, dependent on now-worthless financial instruments, would now have no income and would starve. Companies in dire need of operating capital loans would find they can't get any on terms they can live with (who would take out a loan in a deflationary spiral, knowing that with time, it will steadily get increasingly expensive to pay back?), and they would curtail their activities or fail outright. People would lose their jobs and even previously creditworthy borrowers would default on their loans. Banks would foreclose and sell the huge inventory of foreclosed properties for pennies on the dollar - and eventually the banks themselves would fail as a result, locking their doors and keeping those who still have cash in bank accounts from getting access to their funds, while the bank's creditors are being paid off. Desperate bank staff, well aware that they will soon be unemployed regardless of what they do, would quickly rifle the safe deposit boxes for anything of cash value, no matter how little, and would do so with indifference to the consequences for their jobs. Those old, grainy films of soup-kitchen lines from the 1930's all of a sudden would begin to resemble a current, grim reality. Those who still have enough cash and are able to do so, would buy up distressed properties for pennies on the dollar, and become landlords to those few with the money to pay rent. But most people would just end up sleeping in the streets, homeless, while huge numbers of vacant, empty houses are slowly being rifled of anything of salvage value by desperate gangs of looters in the suburbs. The promise of capitalism and the American dream, indeed.
Which of these two ways will it end? Your guess is as good as mine. I do not know and won't even hazard a guess, other than to suggest that it appears that the Fed, in concert with other central banks in the rest of the world, appear to be preparing to attempt to steer a middle ground, maintaining enough liquidity to keep prices steady - neither going into an inflationary or deflationary spiral - while allowing some of the smaller players to fail. But such a policy is doomed to fail in the end, because the system will simply get more and more wobbly, as investors make ever riskier investments trying to cover their losses while hoping to get bailed out of they fail, and other players are disliquidated and seek to pass on their losses to others, mostly creditors, who have remained liquid, but are getting more and more wobbly. The instability will therefore increase until eventually the Fed gives up and is forced to choose one or the other of the above endpoint scenarios. But by then, the inability to resolve the underlying problems will have made the consequences much worse than they would otherwise have been, and far more innocent people will get hurt.
That Was Scary Enough, But What About The Second Endpoint Of Capitalism?
This is an entirely different endpoint scenario, one that does not involve economics, though economic realities certainly feed into it and will end up making the first endpoint scenario far worse than it would otherwise be.
As long ago as the 1970's, when Paul Erlich published his book, "The Population Bomb," it became quite evident to his readers that there are fundamental limits to economic growth that are imposed by the limits of the environment. Erlich suggested in that book that Thomas Malthus was right but that he didn't go far enough. That as Malthus suggested that the case for food supplies growing arithmetically while human need for food would grow logarithmically, Erlich contended that his analysis was correct but incomplete - the problem isn't just food, it is also limits to resources and environmental services. In fact, it was beginning to appear that the factor that would ultimately end up limiting human population would be environmental, not nutritional.
As humans, we rely on the natural environment for a wide range of services, upon which we are totally dependent, the most important of which are to absorb (or better yet, neutralize) our pollution and provide us with adequate supplies of clean air and water, as well as other things we need (such as marine fisheries, for example).
The problem arises when human populations need resources in the natural environment, the extraction of which conflicts with the production of resources which the natural environment provides for us. The most obvious example is forests - we depend on forests for most of the water we consume and the (almost) pollution free oxygen we breathe, but we also like to cut down the forest for the wood that it contains, the farmland it can provide and/or the minerals under its soil. So what is most important to us, the air we breathe and the water we drink, or the resources the forest contains?
To us oxygen-breathing, walking-around bags of water, well, we need oxygen to breathe and clean water to drink. First and foremost. But to the capitalist marketplace, which knows the price of everything and the value of nothing, oxygen and pure water have little, if any value. The fact that the forests provide a free service for the removal and disposal of huge amounts of atmospheric pollution is not accounted for on anyone's balance sheet, most especially the polluters,' but it is a service that is of vital economic importance nevertheless - without it, we would soon suffocate in our own pollution, so it is a valuable service to us indeed.
As Erlich argued so convincingly, human population is putting stress on the environment, and rising populations are increasing that stress. Our need for fiber, farmland and minerals are placing ever greater stress on the remaining few natural wild places, and will continue to do so at an ever increasing rate, as human population expands. And we are not expanding our population just a little, either. We are adding population equal to a city the size of Phoenix, Arizona, every two weeks. Every one of those people is going to go through a lifetime of breathing in oxygen that has to come from somewhere, drink clean water that has got to come from somewhere, and has got to get food, fuel, shelter and clothing from somewhere, and have someplace to put his trash and dispose of his pollution. Every single one - and that is millions more every week. Clearly, it is a daunting problem. Folks, we are simply running out of room.
I once owned a T-shirt that was printed and distributed by a mining company in Canada. On the back, it showed a drawing of Earth, and the slogan below it said, "99.9% Untouched By Mining." The obvious problem with that is that if there are merely 1,000 separate human activities out there that are as destructive as mining, the planet would be laid waste and barren as a mine tailings heap, and humanity would have no habitable place to live. Yes, we need to get our resources from somewhere, but why does there have to be so many of us needing resources in the first place? And why do we need to be so destructive about how we go about it?
We are destructive about how we go about it because our economic decisions are made primarily on the basis of price, not value, and this is where capitalism comes in. The capitalist system assumes that price and value are one in the same, and as explained above, they clearly are not. They cannot even be made to be (as some of the more radical free-market thinkers propose to attempt to do), by imposing a breathing tax on anyone who wants to breathe (yes, this has been seriously proposed). That tax would finance the ownership of the air, and the owner of the air would be responsible for maintaining clean air. The cleaner the air you want to breathe, the higher price you will have to pay to the owner of the air. Yes, this has actually been seriously proposed!
The problem is that at the end of the day, there are simply some resources held in common that have to remain the common heritage of all mankind, and their diminution, pollution or sale simply is not a practical affair and cannot be made to be. Even if the market cannot assign a reasonable price to the commons, the commons still has value, and that value has to be protected.
Another problem with capitalism and the environment is that the capitalist system assumes that our accounting system accounts for all costs, when it clearly does not. It also counts as economic activity, and a contribution to the national bottom-line, the depletion of non-renewable resources and the remediation of crime, social problems, natural disasters and pollution, but does not count as economic wealth-production the prevention of any of those, nor the conservation of non-renewable resources or the long-term benefits of the substitution of renewable resources. Our accounting systems simply assume that there are no resources out there that are finite and will ultimately impose a limit on growth of the economy.
Hence, our capitalist accounting system is clearly at odds with our environmental needs. Economists all recognize and most even acknowledge this (though there are a few holdouts among the free-marketeers of the Milton Friedman school), but little effort has been expended in anything other than a few academic studies, to actually deal with the problem. And because this problem is not being addressed, the problems are mounting.
For example, there is the problem of marine fisheries. It is now known that human activities are depleting the oceans and the depletion of marine fisheries in particular is at a wholly unsustainable rate. But since our accounting system holds that the increasing price of bluefin tuna, to take one example, means that this species of fish is becoming increasingly "valuable," which ultimately is a perverse incentive. It means that as the fish becomes more pricey in the market, the incentive to hunt the species to extinction increases along with it.
When I was a young man, what is happening today with bluefin tuna had already happened with sockeye salmon in the Alaska fishery. The response of the market to the high price of tuna in those days (and it was pricey indeed), was to encourage the development of salmon farms. And, the free-marketeer suggests, the same will happen with bluefin tuna. Indeed, where I live here in Costa Rica, a proposal has been floated for a huge bluefin tuna farm, which would raise bluefin to maturity and sale in Japan, where a single frozen bluefin tuna carcass today costs thousands of dollars. Sounds like an ideal response, doesn't it? Just create more supply.
Well, there's a catch. To grow out the tuna in this proposed farm, the young tuna have to be fed fishmeal. Where does the fishmeal come from? A lot of it comes from bycatch (species of fish of little value caught accidentally by commercial fishing fleets) but most of it comes from the offal left over from the processing of farmed fish. The market for fish meal is already huge - most of it is consumed by salmon farms in Canada, Norway and Scotland already. There just isn't enough to provide all the fishmeal needed for the growing number of salmon farms, shrimp farms, and now bluefin tuna farms, that are in operation or are being proposed.
So why not catch commercially, species of marine fish that are now being ignored? Well, the problem is that we are running out of species that are not commercially viable. We started out at the top of the food chain, with species like salmon and swordfish, and are proceeding down the food chain, devastating fisheries as we go until there is nothing viable left, and now we are fishing for maidenhair, a species that is at the bottom of the food chain. Any lower and our only option is plankton itself. As market prices are driven up by increasing scarcity, ever fewer species are still listed in the "abundant" category by the Marine Fisheries Stewardship Council. Most have already been fished well past sustainability and are headed for commercial extinction if nothing is done - many will soon go the way of Atlantic cod in Canada, which was once a symbol of that country and has not been commercially fished for a decade now. So now what do we do? It is now estimated that the environmental disruption caused simply by commercial fishing in the Caribbean has reduced that sea's overall biological productivity by between 90 and 95% - with the resulting collapse in whole industry segments that have been dependent on marine resources.
Then there are the rainforests. We depend on them for the very air we breathe. The Amazon alone, for example, provides 20% of the oxygen that us oxygen-breathers are consuming, but we are cutting down an area of it the size of Belgium ever single year to turn it to agriculture - an activity that generates little net oxygen production. In less than fifty years, that major source of oxygen will be entirely converted to soybean farms and cattle pasture, and then who is going to produce our oxygen - especially when the forests in the Congo Basin in Africa and in the Indonesian and Malaysian archipelagos are going the same way? What price does the market put on our very oxygen supply? Obviously, it puts a higher price on soybeans, but which is more valuable to us as human beings at the end of the day?
Of course, I haven't even gotten to the biggie yet. And that is the ability of the environment to absorb and neutralize our pollution. And of course the number one problem of pollution is the generation of carbon dioxide by the burning of fossil fuels and the destruction of tropical rainforests and arctic permafrosts. In case you have been on another planet and haven't heard about this, our placing of carbon dioxide into the natural environment faster than the environment can absorb and neutralize it has been happening at such a rate that it is affecting our climate - and with it, the ability of the environment to continue to provide even the services it does now, much less sustain the increase that will be needed with increase in economic growth.
The economic disruption to be caused by carbon dioxide pollution will be enormous indeed. What will happen in the capitalist accounting systems when we suddenly discover that we can no longer raise wheat in Kansas in its predicted 120-degree summers in the mid-21st century? When there is no longer any sustainable fisheries in the tropical oceans - the source of most marine fish today? When there are no rainforests in the Amazon, in Africa or in the Far East, and atmospheric oxygen suddenly begins to show a worrying decline, and atmospheric sulfur dioxide from the oceans begins to rise? What capitalist system is going to cough up the cash for the fix?
Mankind, driven by capitalist economics and its obviously faulty accounting, is clearly stressing the environment far beyond the ability of the environment to sustain the insult, and no amount of burying our head in the capitalist sand is going to fix that problem. We clearly have a huge problem, and it is getting worse with every passing day. And it is becoming clear that the rate of deterioration is even accelerating.
So where will it end? How will mankind's insult to the environment be brought to a halt? Well, it has been said (I believe it was Robert Heinlein, in a television interview) that the biosphere has an immune system, and it is trying to get rid of us. As it rightly should, he hastened to add.
If the planet's biosphere has an immune system, and it is trying to get rid of us, it is reasonable (if not to say prudent) to look around to see how that "immune reaction" might actually come about. And indeed, there are several possibilities.
There is the obvious problem of global warming. This will be a serious problem, and it will cost us dearly, but it will happen slowly enough, current models suggest, that while the economic pain and human suffering involved will be huge, it won't kill us off outright. We will eventually be able to adjust - growing our wheat in Alaska and the Canadian arctic instead of in Texas, for example. Siberia, too cold today for growing crops, will become prime agricultural land, especially for cereal crops, and it is huge indeed. We'll see a huge disruption - whole nations will disappear under the waves as a result of sea level rise, for example - but in the end we will adjust.
Less obvious is the problem of disease. SARS, HIV/AIDS, increasing incidence of tropical diseases in temperate regions, such as malaria and dengue fever, caused in part by global warming, in part by increasing air travel between tropical and temperate regions, and in part by increasing human population density. The degree to which each factor contributes is not clear, but there is one aspect of this that is very worrisome indeed. That is the genetic recombination of disease-causing viruses in a person or animal which is simultaneously infected with more than one.
Suppose, for example, that someone who is an active HIV carrier is also infected with avian influenza, and these two unrelated viruses should recombine genetically (yes, I know that HIV is a retrovirus, but retroviruses make RNA, which can then become a template for DNA, making genetic recombination possible, however unlikely this is to actually occur). Now, suppose that the influenza virus gains the genetic information required to attack and kill the same immune cells that are attacked by HIV. You may, under the right circumstances, end up with an influenza virus that could remain latent for long periods, but still be spread by air, rather than by sexual contact. Now you have a virus that could spread around the world, infect millions or even billions with lethal consequences, and become endemic before its spread is even noticed. Yes, this is a worst-case scenario, but it is still possible.
Now suppose that an economic collapse as described in the previous section, occurred simultaneously with the viral mutation and spread as described above. There is little medical care available to the poor, who are the principal agents for the incubation and spread of disease in human populations, and with unusually large numbers of people living on the streets and eating out of dempsters, the spread of such a virus could be rapid and thorough. Such a virus, if it had anything like the lethality of the HIV virus, would kill hundreds of millions, even billions. And it is not just that viral combination; there are many others that could be equally serious and devastating.
Combined with the economic dislocations and stress caused by environmental destruction, such a pandemic would cause untold suffering, especially if it coincided with (or equally likely, precipitated) an economic collapse of the capitalist system. Each would synergize with the other to make human suffering far more widespread and devastating than it would otherwise be. Imagine, for example, widespread disruptions in the banking system, causing disruptions in food, fuel and transportation, which would make fighting a pandemic an infinitely more difficult problem. Combined with environmental disruptions such as serious hurricanes, chronic and long-lasting heat waves, the unavailability of clean water, etc., and you can begin to see how the confluence of both environmental stress and economic failure can conspire to create suffering and misery on a truly vast and pervasive scale.
But Wait!... There's More!... There's So Much More!
There is one final problem with capitalism that imposes an endpoint on capitalist economic systems. And that is that as a small number of ultra-rich capitalists accumulate wealth, and therefore power, the temptation to meddle in the political system to use the coercive power of government to further skew the playing field their way will become too strong to resist. And when they do, their arrogance, hubris and self delusion will bring an end to democratic institutions - and bring about a fascist dictatorship, and the dictator inevitably will seek to control the sources of economic wealth.
Contrary to the endless propaganda with which every American is familiar, the capitalist system is fundamentally at odds with democratic institutions and ideals. This is because of the simple reality that democracy is wholly dependent for its proper functioning on transparency and accountability. And that is the opposite of how capitalism operates. The capitalist will insist that he must have trade secrets and business confidentiality to prevent competitors from stealing his customers, but a lack of transparency and accountability breeds corruption, arrogance and hubris. And this kind of environment is the exact opposite of what a functioning, healthy democracy needs to flourish.
As we have seen, the whole capitalist enterprise is geared towards concentrating wealth, and with it power. And eventually, the collusion of the coercive power of government, combined with the economic and political power of big business, leads to an unholy alliance, designed to neutralize and disliquidate the opposition, whether that opposition is political or economic.
And this is why the Republican Party exists. It is to enable capitalist enterprises to further concentrate wealth and power, and if possible and necessary, use the coercive power of government to make that possible. So it should hardly be a surprise when vice president Dick Cheney calls in the captains of the energy industry to create an energy policy behind closed doors - and the result is a doubling or tripling of the price of gasoline, a doubling of the cost of electricity and an engineered energy "shortage" that would justify a war to liberate "our" oil out from under "their" sand. To actually think that someone like a Dick Cheney (one of the most brilliantly successful brown-nosers in world history) and a Kenny Lay (the astonishingly corrupt former president of Enron Corporation) are going to get together behind closed doors to figure out how to better serve the public interest (at the expense of either one or both), is naïve at best, and downright self-delusionary at worst. Conspiring behind closed doors to figure out how to better serve the public interest is simply just not what these kinds of people do. But for the leadership of the Republican Party, it is how business is done.
Indeed, this is hardly surprising, given the history of big business, the Republican Party and the attitudes of many of its members towards fascism prior to World War II. It is well documented that the Republican Party sponsored Nazi propaganda broadcasts prior to the election of Adolf Hitler. Barron's, the widely influential business publication, published a cover article in the 1930's lavishing praise on Musoulini's Italian fascism, agreeing with Musoulini that it is "better called 'corporatism,'" and speculated on how it would be such a wonderful system of government for the United States. And the Bush family, from its founding through marriage into the Averill Harrington railroad fortune, has always had close ties to both big business and German fascism - the first Bush family fortune was made by selling arms to Kaiser Wilhelm in World War I. The grandfather of George W. Bush Junior, Prescott Bush, who made his fortune laundering money for the Nazi leadership (the bank he owned was closed by the Treasury Department for its activities on behalf of the Nazis in 1942), was involved in a fascist coup plot against the U.S. government back in the 1930's - and the plot very nearly succeeded. That plot was the subject of a recent BBC documentary. The Bush family is not the only Republican fascism problem - the Republican Party itself has been involved in bringing Nazi war criminals to the United States and protecting them while in the U.S., harboring them within the party's ethnic outreach program.Lee, p.226-228 Given capitalism's historical ties to fascism and right-wing dictatorships, especially in Latin America, it is hardly surprising that it would favor the development of fascist tendencies within the U.S. government itself. Even outside the Republican Party,
Given the unholy trinity of self-serving Republican politics, fascist "unitary executive" elitism, and big business driven by a single-minded pursuit of profits, it is more than a bit worrisome that such an alliance could bring about the end of democracy in the United States. And given the behavior of the George W. Bush administration has reached new heights of business-buddy cronyism, while vigorously going after its opponents in a style of which a European fascist would be proud (I know from personal experience - I am a victim of an assassination attempt, and am now living in exile). Indeed, from the behavior of the George W. Bush administration with its disregard, even outright contempt, for basic human rights and the rule of law - especially election law - the signs are not at all encouraging.
If big business, in collusion with the Republican Party, succeeds in subverting permanently the American democracy in order to build a fascist "corporatism," what will the result actually look like?
The Phalangist regimes of North Africa and the Middle East, as well as the Franco regime itself, may offer a guide, based as they were on the political philosophies of the Spanish fascist dictatorship (of Francisco Franco who was a firm believer in the business-government collaboration at the point of a gun, if necessary). Unlike Musoulini, Franco survived the Second World War, and his regime governed Spain for decades, so we can see what the long-term results of "corporatism" really are. In addition, the Phalangist political parties that Franco fostered in the Arab regimes of the middle-east and north Africa, were able to establish dictatorships of their own, and implement the "corporatist" philosophy of government in several nations that were not faced with an external war for their survival.
Under Franco, as well as under the Phalange Party dictatorships that became common in the Middle East and North Africa in the 1960s and 1970s, economic activity stagnated as business was conducted on the basis of political connections and permissions, rather than on the basis of merit or success in the market place. Power corrupts, and absolute power corrupts absolutely, so when business conspires with government to create a system of absolute power, the result is a corrupt morass of inefficiency and cronyism. In Spain and in neighboring Portugal, where a similar regime existed, neither country saw much economic progress at all for many decades while their economies languished under the heavy hand of a business-operated government. As western Europe flourished, Spain and Portugal remained behind. In North Africa under the Phalangist regimes, economic activity outside the tight business-government alliances practically ground to a halt. If "corporatism" is a good way to govern a country as Barron's had suggested, you couldn't prove it by what happened in Spain, Portugal, North Africa and the Middle East.
So when the George W. Bush administration proved to be singularly inept in the wake of Hurricane Katrina, it hardly came as a surprise that the response was so feeble, inept, corrupt and ineffective. That is what happens to government when it is run by business, and business, when it is protected from the brutal realities of the marketplace by the coercive power of government, becomes equally feckless and inept. Hence, if the leadership of big business and Republican Party politicians succeed in harnessing the coercive power of government to the service of big business, you can expect the economy to slowly deteriorate into a third-world style economy as the governmental power becomes increasingly tyrannical and unresponsive.
Because the tight collaboration of business and government eventually leads to a sump of corrupt cronyism and loss of economic entrepreneurship, an endpoint on the capitalist enterprise is imposed - when no one can buy or sell in the marketplace without political connections, the economy, as driven by buying and selling in a relatively free market as Adam Smith envisioned it, will slowly die. And indeed, this is what happened in the Phalangist states, and it is what will happen in the United States as the Phalangist collaboration of business and government increasingly takes root. This endpoint is not a sudden and dramatic endpoint, as is a market collapse scenario, or unpleasantly ugly and obvious as in the environmental collapse scenario, but instead it is a slow, inexorable process that very slowly creates an atmosphere of desperation and hopelessness from which an economy cannot recover until the "corporatist" regime itself is ended and the excesses of corporate capitalism are once again put under effective regulation. The "corporatist" Franco regime itself ended only when Francisco Franco died, and the reins of power were passed on to Prince Juan Carlos who saw the brutal inhumanity of the "corporatist" philosophy of government, and ended it (which nearly cost him his life). Many of the Phalangist regimes of the Arab world have been replaced. But the political parties of the region have learned from their corruption, and have taken on a sham appearance of democracy, while keeping the reins of power tightly guarded in a business-political elite. So at the end of the day, nothing has changed - Egypt is a particularly striking example, where the elite don't even maintain much of an effort at the appearance of democracy. So once capitalism has collapsed under this scenario, it will stay collapsed for a long time indeed. It may not even recover at all.
A Great And Awful Synergy Of The Three Endpoint Scenarios
And there you have it. Three separate endpoint scenarios of how the capitalist enterprise will inevitably be forced to come to an end - economic inefficiency brought on by its own corruption, environmental collapse brought on by the relentless pursuit of unsustainable resource extraction and pollution emission, and finally hopping into bed with coercive government in disregard of its corrupting influences. And it is not inconceivable that all three endpoint scenarios could actually unfold simultaneously, bringing with them untold misery, suffering, and destruction of the most basic of economic infrastructure, making the rebuilding process exceedingly slow and difficult, if not impossible over the short run. And if all three scenarios happen together, the resulting synergy could be truly awful indeed, coming suddenly and dramatically. Civilization as we know it may not even survive.
It would happen like this: A market collapse puts a squeeze on corporate profits, which cause the corporations to attempt to further externalize their costs by pushing for an escape from economic and environmental regulations. And government, controlled already by a business-oriented elite, pushes for a "unitary executive" to deal with the increasing restiveness of the population angered by declining standards of living and the increasing ubiquity of industrial pollution. So the environmental collapse is accelerated as environmental regulations are removed, no reforms are implemented to prevent the excesses that caused the market collapse, and government becomes repressive rather than responsive, in order to maintain the increasingly unpleasant status-quo. All three scenarios happening together will add to each other's effects. So a new Dark Age descends on the world. The dark vision of "Mad Max" and the "Thunderdome" movies of the 1980's come to bear an increasing resemblance to reality.
Indeed, it appears that we are actually in a scenario where all three endpoint scenarios are beginning to play out simultaneously. First, there is the evidence (the worrisome wobbles created by the subprime mortgage crisis) that the financial system, through its relentless pursuit of profit, even at the expense of prudence, has become dangerously unstable. Second, the global warming crisis has demonstrated an insistence on the part of capitalists to engage in deep denial (and resulting inaction) if acceptance of harsh, contrary environmental reality would threaten their unregulated free-market paradigm, and third, the collusion between the "unitary executive" (read: fascism) proponents in the Republican party and big business, especially media and telecommunications conglomerates - those businesses whose customers could use them for the pursuit of democratic ends - is carefully calculated to promote and maintain an unhealthy business-government collusion. And lastly, and it might even be said most importantly, there is the stubborn and deep denial in which the entire right wing in American politics is engaging, that none of this matters.
So where could it all end? What would it look like? If denial remains determined and complete among the right-wing, and if lack of vision and coherence continues to persist among the left, capitalism and the whole modern project it sustains, along with the natural environment that sustains the consumer economy could end up totally devastated - with just a few remaining people living a semi-aboriginal existence (at population levels similar to two millennia ago), ekeing out a harsh survival in a dried out, heat-scorched, resource ravaged, and nastily polluted land, getting by hand-to-mouth in a grim existence of unending struggle for just the basic necessities, much of their survival made possible only by salvaging the corroding rubble of the past, with hardly anything remaining of the culture that produced such devastation. It could be a grim future indeed, if capitalism ends with such a complete collapse. But when one considers the possibility of a synergistic collapse of all three scenarios happening simultaneously, the crash will be so steep and so hard, and probably so fast, and it will be so complete that it would likely end like that. And it will be said by future generations that capitalism ended not with whimper, but with a bang - and the whimpering went on for centuries.
There is a way out. It is possible to keep the capitalist system (or at least a more humane derivation of it) going indefinitely. It is possible to avoid all three scenarios. But it won't be easy, either to implement or to maintain. The question, therefore, must be how we are to do it. How do we capture the wealth-creating magic of the capitalist marketplace, while avoiding the negative, destructive effects of capitalism that would otherwise lead to capitalism's own demise?
The Way Out: How The Great Endpoint Scenarios Of Capitalism Can Be Avoided
In order to avoid these endpoint scenarios, we must tackle each of the three problems that lead to them. Only through concerted effort in tackling all three can the problems be overcome, and the market economy be stabilized, over both the short term and in historical terms.
The market instabilities inherent in unregulated capitalism can only be addressed by sensible, proper regulation. That is a cold, hard truth that is recognized at the end of every market collapse, usually only when the misery and suffering of the collapse becomes sufficiently severe that the population begins to question the wisdom of the capitalist enterprise and cast about for an alternative. Only in such a crisis that they can see that the whole capitalist model is under threat of being replaced, do the capitalists reluctantly accept the need for regulation. And as soon as the crisis is past, and the threat of revolution (economic or political) recedes, the capitalists begin to agitate for the relief from "burdensome" regulation. But if we are to maintain market stability, and with it the long-term stability of the capitalist enterprise itself, we must not listen to such cries, but recognize that they are self-serving and cyclical.
And this is a reality that must be accepted, like it or not, by capitalists themselves. They will have to accept the need for teaching this reality in schools of business - and universities themselves must accept the responsibility to research (through their schools of economics and business) just how effective regulation has been and what forms it should take in order to promote market stability. Business will not like this, and will fight against it - and will agitate against it in the business schools - but it must be done.
One of the principal causes for the urge for the capitalist to agitate for a relief from regulation stems from the very nature of the capitalist enterprise as being fundamentally socially unjust; i.e., those who actually produce the wealth - the lathe operator on the factory floor, the backroom accountant making sure that costs are accounted for and enabling management to know whether or not the enterprise is making a profit, these are the people that actually produce the wealth. While the cigar-smoking capitalist in the corner office on the top floor has convinced himself (and tries to convince the world) that he is the engine of wealth creation, at the end of the day he hasn't actually stamped a single machine screw or turned a single shaft. The capitalist, it must be recognized, is a traffic cop for wealth. He controls its flow through his own enterprise and to a degree through the enterprises with which his company does business. But that does not mean that he actually creates wealth, and that is a hard reality that must be recognized, regardless of how dearly he likes to think that he does. Those who work on the factory floor naturally tend to think otherwise; this is why business has taken control of the educational system to remove critical thinking and independent reasoning from young minds, and teach servility and unquestioning obedience in its place. It is why, in the United States, the labor-union movement has been more or less neutralized - endless propagandizing against it, combined with a teaching of servility and compliance has led to a population that does what it is told. And that, of course, is precisely the way both the capitalist and the fascist likes it.
Is the alternative the building of a strong labor union movement? I don't really believe that it is. What we have historically seen is that labor unions, like capitalist enterprises, tend to aggregate power to themselves, concentrating it to unhealthy levels, and as always, power corrupts. As evidence of this, one need look no further than the scandals of the Teamster's Union and its pension funds in the 1950's and 1960's, whose leadership freely allowed the management of the union to be regularly infiltrated and looted by organized crime. The result was that hardworking union members found themselves without pensions when they retired.
How then can we build a capitalist economy, while avoiding the concentrations of power that both create injustice and also lead to economic cyclical collapse? We will have to do it by changing the very nature of the capitalist enterprise itself.
Since Charles Dickens wrote of the squalor brought on by the Industrial Revolution nearly two centuries ago, and Karl Marx first published Das Kapital a century and a half ago, the question has arisen, over and over, as to how to create an economic system with the wealth-creating potential of a market economy, but without the social and environmental evils of capitalism. It has been a perplexing, difficult problem indeed, and many solutions have been tried, with varying degrees of success.
But in my survey of this wide range of experiments, one thing I have noticed - and this really stands out - is that all of the experiments that have been tried which have failed - ranging from the ownership by its employees of United Airlines, to the Mondragon Cooperatives in SpainKasmir, have lacked one thing which the successful experiments, ranging from industrial corporations such as Chatsworth Products, Inc. to small cooperatives such as the Solidarity Employment Agency in Baltimore, MD, always have - and that is direct control and management by the stakeholders themselves (mostly by the employees, but also with the involvement of the communities in which their facilities are located) Chatsworth is an industrial company which manufactures the equipment racks, cabinets and accessories used by telecommunications and computer companies to hold their electronic equipment in computer and communications facilities. Solidarity is a temporary employment agency owned and run by the "temps" themselves.
Imagine being able to pick your own boss. Imagine the concept that your boss works for you, not the other way around. And imagine how different (and remarkably more pleasant) the workplace would be, if the employees could fire an incompetent or tyrannical boss, or one who engages in favoritism or other such intolerable behavior. Imagine not having to check your basic human rights at the door when you arrive for work in the morning. How much more would you look forward to going to work in the morning, and how much more enthusiastic you would be during the work day?
Well, there are more than ten thousand corporations in the United States where that is in fact the case. Many of them, such as Solidarity, were organized by the workers themselves, while others were family owned enterprises that were bequeathed to the workers as the result of the death of a foresighted owner who had the friendship and respect of his employees. Still others, such as Chatsworth, were purchased by the employees when a parent capitalist corporation decided to shut down or sell off an unprofitable product line. In each case of the successful enterprises, the employees, through a variety of mechanisms, directly hire and fire the managers to whom they report. It is a direct democracy as applied to an economic enterprise rather than a political one.
Capitalists, and their well-rewarded lackeys in business schools and university economics departments, have long harangued against direct democracy in the workplace, insisting that it could never possibly work - that employees allowed to do so would quickly vote themselves pay raises that would bankrupt the firm, or vote out disciplined bosses, and they would then all be out of jobs. But experience has shown that this is not the case - the vast majority of workers who have access to the balance sheets and corporate planning (even in capitalist enterprises) can easily see why such a behavior would be imprudent, and avoid it. Indeed, when the company needs to raise capital or is facing a short-term cash flow crisis, employees will often forego pay raises that they would otherwise eagerly ask for, because they know they are investing in their future. And given a chance, they generally make wise choices in changing managers, because they themselves can often see the need that the enterprise has for discipline and rational judgment. Employees also reward competent managers and dismiss incompetent or tyrannical ones, because they are well aware that their own economic success depends on it. Employee loyalty is impressive in such employee-managed cooperatives, with profitability, employee loyalty and labor turnover rates that a typical capitalist enterprise can only dream of. Employee managed cooperative corporations achieve this routinely, because the employees know that they are working to make themselves wealthy, not someone else, and hence their mindset at work is entirely different. The result is that these directly-managed cooperative corporations are, on average, about 13% more profitable (and therefore more competitive) than are their capitalist competitors, and in some corruption-prone industries (such as oil and utilities, for example), the advantage ranges to as high as 17%. Wealth creation and sharing is equally impressive - some employees who joined Chatsworth in 1991 when it was owned by Harris Corporation and sold to its employees, have left Chatsworth with six figure checks (and in a few cases even more) in their pockets. I doubt there are very many of the employees of Harris, the former parent, who have done so.Greider, p.82-85 As a telecommunications engineer, I never bought Chatsworth's products when it was owned by Harris, as the product line was stodgy, unimaginative and not particularly useful, but after the employees took over, I began to do so - their product line quickly seemed to become just what I needed for many of the projects I was involved in (and I was quite unaware at the time that it was an employee owned and managed enterprise).
That employee-owned and managed corporations is offer a way out of the capitalist dilemma of cyclical wealth concentration and collapse is certainly not an idea that is original with me. As long ago as the 1950's, Louis Kelso, an investment banker in San Francisco, concluded that the wealth created by a capitalist economy had to be shared more equitably if the capitalist system was to be salvaged. He invented what he called the Employee Stock Ownership Plan, because he could see that the corruption and instability caused by concentrated economic power in corporate board offices was leading to economic and social instability that threatened capitalism itself. Kelso was a conservative libertarian, and dreaded what can happen in terms of wealth confiscation and income redistribution in an economic crisis such as the one the nation had been through two decades earlier - and he saw employee-owned corporations as the only way out. It was a brilliant plan that got nowhere until it was encouraged by U.S. tax law changes in the 1970's through the efforts of Senator Russell Long of Louisiana. Long's father, senator Huey Long, deeply frightened the capitalists after the last collapse back in the 1930's with his "Share The Wealth" campaign, intended to rein in the results of unrestrained capitalism and relieve the suffering it had caused. Kelso's ideas of social justice through employee ownership and management have had a profound, if almost unnoticed, impact on the cooperative movement. His vision of employee purchase and ownership of the nation's capital assets has been compared to the homesteading movement of the 19th century. But I would go one step further than even Kelso - I would insist that a successful employee-owned corporation not only must be employee owned, it must also be employee managed. The experience with employee-owned corporations, which are not under employee management (such as United Airlines) versus employee owned and managed corporations (such as Chatsworth Products or the Solidarity Employment Agency) has been unequivocal in my view. Employees really can run their own affairs, and run them better, despite what the cigar-smoking elitist occupants of corner offices across America would have you believe.
The employee-owned and managed corporation is called a "syndicalist cooperative" by social scientists who have studied the phenomenon. The studies of these corporations have been extensive, but have garnered almost no notice outside of academia, mostly because of the threat that the syndicalist cooperatives pose to traditional wealth-concentrative capitalism. The man in the corner office does not want you to know about them - especially how successful most of them are. Hence, he and his lackeys in academia and the mega-corporate media will never tell you about them. In fact, it is quite likely that he himself is in denial about what a threat they could pose to his customer base and your employee loyalty.
Because traditional capitalism, with its concentration of economic, and hence, political power, represents a threat to democracy itself, it is vital that the syndicalist cooperative movement be fostered in order to save democracy from capitalism. Indeed, the syndicalist cooperative is not only fully compatible with political democracy, but actually enhances it by encouraging participation in management decision-making by its members - a condition on which political democracy is also fundamentally dependent. Because traditional capitalism encourages, even requires, facile servility, it not only does not enhance political democracy, but actually serves to erode it by encouraging subservience to leaders, whether they be political or economic - and this has a deadly corrosive effect on true democracy. And that is a fact that is not lost on ruling elites. It is why fascism and wealth-concentrative capitalism have always been such close allies.
How to actually implement this movement on a large scale? Well, let us begin with tax policy. Corporations which exploit their workers ruthlessly end up creating social costs that are borne by society as a whole - a company that does not pay its workers a living wage, for example, will end up creating welfare dependency (sometimes for generations to come), and this is a burden that is assumed by society, through its tax structure and welfare policies. So corporations that pay substandard wages should bear a higher-than-standard tax burden - and this would encourage them to pay living wages. Second, tax policy should be redesigned to encourage stock ownership - and with it, voting privileges. I would also require that after the employees of a corporation own at least 51 percent of the stock, that they should be, at that point, by law entitled to transition the corporation to direct employee management. And finally, I would tax corporations which are not employee managed at a much higher rate than those which are. It only stands to reason, since wealth-concentrating capitalism imposes an economic and social burden on the rest of society, that burden should - must - be shifted right back onto the back of the capitalist who creates it.
Since any democratic system - whether economic or political - depends on a well-educated population, there must be a fundamental overhaul of the public educational system, away from the system which exists now, which is geared towards teaching servility, obedience and mindless acceptance of what is provided from above, and towards a system that encourages, even requires students to develop habitual thought processes that are based on reason, critical thinking, questioning and rational judgment. The program of reforms I propose is somewhat more detailed than are appropriate to go into here, and will refer readers to another essay on this site for the details. Needless to say, it will be difficult, expensive and time-consuming to implement, but the resulting improvement in worker productivity will be far more than worth it in the end.
For any enterprise to be excluded from the ability to externalize its costs, it must be accountable to all its stakeholders, not just its employee owners, its suppliers or its customers. There is the matter of the community in which it operates. To a large degree, this participation by the larger community is in part made up for by the fact that the employee owners go home to their families and neighbors, and are answerable to them. But there is the matter of the larger community, not directly involved in the enterprise, but which must nevertheless deal with the consequences of the presence of it in the community. There are the matters of pollution, resource consumption, and the like. How is it that we are to be able to prevent even an employee owned and managed corporation from doing what market-based corporations are always tempted to do, and that is to externalize their costs? First, I would suggest that accountability is key - the corporation must be accountable to the community, and that means that its business license - even its corporate charter - should be subject to community review, and if it can be shown to be operating in a manner contrary to the public interest, that charter should be denied. This can be enforced by a media worthy of the name - local television should, in my opinion, be locally owned, not owned by large, absentee national or international corporations. Again, this can be enforced through tax policy (especially for newspapers), and in the case of radio and television stations, broadcast license policy. Cable television operations as well as local telephone companies should be considered to be common-carriers and should be regulated as such - meaning that they cannot discriminate against legal paying customers nor censor what information their wires carry. In other words, we need to create the tax and regulatory conditions that foster the rise of a media industry worthy of its Fourth Estate responsibilities.
So, at the end of the day, it is possible to save capitalism from itself. Not easy, but it is possible. But to save capitalism from itself, we must persuade those on the political right that the capitalist system needs saving, and we must convince those on the political left that it is worth saving. There is a rational, proven alternative to wealth-concentrative capitalism. The big question we face, is are we courageous enough to implement it? If so, let us get on with it. If not, we can only accept with resignation our grim fate.
Grieder Greider, William, The Soul Of Capitalism, ISBN 0684862190 (2003)
Kasmir Kasmir, Sharryn, The Myth Of Mondragon, ISBN 0791430049 (1996)
Lee Lee, Martin A., The Beast Reawakens, ISBN 0316519596 (1997)
Phillips, PoliticsPhillips, Kevin, Politics Of Rich And Poor, ISBN 0394559541 (1990)
Phillips, WealthPhillips, Kevin, Wealth And Democracy, ISBN 0767905334 (2002)
Books Which I Recommend
The Predator State is a discussion by James K. Galbraith of why free-market fundamentalism doesn't work, why the capitalists themselves never really believed in it, why they promote it relentlessly anyway, and why the conservative street still believes as if it were a religion. Galbraith, son of the Nobel prize winning economist John Kenneth Galbraith, and a noted economist in his own right, is warning in this book that unrestrained capitalist accumulation allows the capitalists to hijack the coercive power of government, and turn it into what he calls the Predator State, serving the ends of the oligarchy with complete disregard of the public interest as if it didn't even matter. It is an excellent book-length analysis of the third reason for the capitalist endpoints that I have discussed above. If you read no other book in this list, this one should be it.
The Soul Of Capitalism is William Greider's excellent analysis of the inherent social injustice of capitalism, some of the problems that injustice leads to, and what can be done about it. As far as it goes, I think it offers a great solution to the problem of how to create an economically just and productive economy, but it falls short of the question of how to actually implement some of the proposed solutions.
The Silent Takeover by Dr. Noreena Hertz is one of the best books I have seen on the evil results of business-government collaboration and what the results will be in the long term. While her analysis is incomplete (I think she fails to appreciate the full environmental and social consequences of the corruption that the alliance leads to), she is nevertheless right on target with her analysis of the consequences for democracy itself of that alliance
Bailout by Irvine H. Sprague is an insider's account of how poor or nonexistent regulation leads to instability and collapse in the capitalist financial system. The author should know - he was the former chairman and director of the Federal Deposit Insurance Corporation, the government-sponsored corporation that insures nearly all bank deposits in the United States. He was forced to stand by helpless to stop it while deregulation of the Savings and Loan industry in the Reagan era quickly led to the largest moral-hazard crisis and bailout in the financial world's entire history.
Globalization And Its Discontents was written by Joseph E. Stiglitz, the 2001 winner of the Nobel Prize in Economics. It is a discussion of how the consequence of unbridled finance capitalism in collusion with government is leading to social collapse around the world, how this has come about, and some of the possible remedies. It is a fascinating book. This insider's account is very accessible and is a truly fascinating read, in spite of its ponderous, academic-sounding title.
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