The Betrayal of Capitalism
“The idea that the markets are always right was mad.” This was the reaction of French Prime Minister Nicolas Sarkozy to the meltdown in global financial markets. He blamed the current financial crisis on a betrayal of the “spirit of capitalism.” He argued that capitalist economies should never have been allowed to function without strict government oversight and regulation. He was right. It remains to be seen whether capitalism can survive the betrayal.
During its early stages of development, economics was called political economy. Classical economists such as Adam Smith, David Ricardo, Thomas Malthus, and Karl Marx were clearly as concerned as much about philosophy and politics as what we today call economics. They had clear ideas concerning whether economic choices were good or bad for nations and right or wrong for humanity, though obviously not always agreeing.
Over time, however, academic economists sought to distance themselves from the social and ethical consequences of growing industrialization by retreating to scientific empiricism. They began relying on the observable and quantifiable choices of consumers and producers. They accepted the preferences revealed by those choices as inherently right and good, or at least left such matters to the philosophers, sociologists, and political scientists. Philosophy and politics had no place in the new economics, other than dealing with “market failures,” which they thought to be few. The “spirit of capitalism” had been betrayed long before the financial meltdown of 2008.
Economic systems have acquired their names – capitalism, socialism, communism, fascism… – from their sources of dominant economic power or authority. Under socialism, workers – those who make up the vast majority of society – are the dominant source of economic power. Communism focuses the socialist power of workers on their local communities. The word fascism is derived from the Latin word for bundle, and economic power is centralized in strong national governments. In capitalist economies the capitalists hold positions of dominant economic power or authority – meaning those who have money and own buildings, equipment, technology, and other means of production.
The early capitalists were wealthy individuals – those who Marx called the proletariat. They were a class of people distinct from the working class or bourgeois. The long struggle between socialism and capitalism has been essentially a class struggle between those who do the work and those who control the means of production. During the early days of corporate power in America, wealthy individuals, such as Ford, Rockefeller, Carnegie, Vanderbilt, and Mellon, dominated corporate decisions. They had the capacity, if not always the inclination, to express their individual social and ethical values through the decisions of their corporations. Today, however, the most powerful among those who control the means of production are not individual capitalists but corporations. Capitalism has been allowed to degenerate into “corporatism.”
Today's largest corporations are fundamentally different from the large corporations of the past. Most are not owned by a few wealthy friends or business associates but instead by thousands, perhaps millions, of unrelated individuals scattered all around the globe. Many of today's capitalists are not particularly wealthy. They may be workers in the corporations in which they own shares or may own shares in corporations with which their companies compete. About two-thirds of the shares of today's large corporations are held by mutual funds, pension funds, and other institutional investors. Most individuals with money in these funds don't even know which corporations their funds are invested in at any given time.
Certainly there are still few real capitalists left – perhaps Warren Buffet, Rupert Murdock, and T. Boone Pickens would quality. Corporate managers certainly have power and control over capital, but they are controlled by the corporation. A corporation is a legal entity separate from the people who formed it or now own it; a distinct “legal person.” The dominate power and authority in today's U.S. economy is held by the corporations, not by the capitalists who own or manage them.
Even the wealthy shareholders are not capitalists in that they do not control the corporations in which they own shares. For example, the wealthiest 10% of American own about 85% of all publicly-traded stock, with the top 1% accounting for close to one-half of all corporate ownership. However, even these individuals have no real ability to influence the management of these corporations; their only real leverage is their ability to buy or sell shares. Corporate stockholders are too numerous, diverse, and transient to express their personal social or ethical values through the corporations in which they own shares. Consequently, today's large corporations are driven by the myopic motive of maximizing economic returns for their stockholders – the only value that today's corporate investors seem to hold in common. We no longer have capitalism in America; we have corporatism.
Corporations owned by families or a few committed shareholders function much as individual proprietorships or partnerships. Their corporate decisions reflect the social, ethical, and economic values of the individuals who own them. If they want to forego economic opportunities that compromise their personal values and ethics, they are quite capable of doing so. If they want to make long-term investments at the expense of short run profits, they are free to do so. On the other hand, managers of large, publicly-traded corporations are compelled to maximize short-run economic returns. If the value of their stock drops, their job may be in jeopardy, regardless of the long run benefits of their decisions for their company or for society. Today's corporations have no sense of good or bad, right or wrong; the spirit of capitalism has been betrayed for the sake of corporate profits and growth.
Sarkozy was right. We should not expect today's corporatist economy to function without strict government oversight and regulation. Only real people – natural people, not merely legal people – are capable of forming and expressing social and ethical values. Lacking such values, an economy cannot logically be expected to function for the good of society, regardless of the rationalizations of today's neoclassical economist. Only the people, working through government, can restore the spirit of capitalism.