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American Capitalism has Failed and Needs to be Replaced

October 3rd, 2011 · 5 Comments · Business Management

Participatory Capitalism is the Answer to What Ails Our Economy

It is news to practically no one that the American economy continues to bumble and stumble along at a disheartening low level of activity. Fourteen million people who want to work cannot find jobs, and new unemployment claims continue to rise. Home sales stagnate, prices fall, and foreclosures mount. The sad state of the economy has millions of Americans questioning whether capitalism really works. A recent national survey, for example, showed that 75 percent of those polled say the country, meaning our capitalistic economy, is on the wrong track.

And it is. But it isn’t capitalism per se that has failed us. It’s the new breed of capitalism that has pushed us off course. And it can be fixed.

Capitalism Worked Well for Thousands of Years

There is evidence that capitalism existed in a rudimentary form among Assyrian merchants as early as 2,000 BC. Over the ages, capitalism has evolved into many configurations, but the basic tenets of the system have remained steadfast: Capitalism is an economic system under which a country’s trade and industry are owned privately, rather than by the government, and those who take the risk to invest in the success of a venture receive the rewards.

Under traditional capitalism the employees who provide a service to the enterprise receive wages, but do not have an ownership stake. This means the workers receive their agreed upon compensation, irrespective of whether the enterprise makes a profit or a loss, but have no rights to the profits. That does not mean, however, that workers do not take a risk. If the enterprise is not profitable, the workers risk loss of benefits, reduction in pay and even unemployment.

The early European immigrants to America were by definition risk-takers who sought the opportunity of religious, political and economic freedom. Well before the revolution, this fundamental desire for freedom planted the seed of capitalism deep into the furrows of the American economic system. The adoption of the US constitution in 1787 only served to codify America’s commitment to capitalism and rightly so. The incentive of private ownership and the motivation of profit, combined with the actions of the government to encourage individual freedom and effort, are the primary factors that allowed this country to develop its bountiful resources and become the world’s political and economic leader. Americans and capitalism were meant for each other.

Capitalism tends to evolve through a number of iterations and American capitalism is no exception. Early American capitalism was a form of Mercantilism. During this time the young American government viewed the development of private business interests to be in the best interests of emerging national well-being and economic stability; and it took an active role in developing private enterprise. Once a solid base of private enterprise had been established, the system changed into what is called Free-market Capitalism. (For America this was during the late 19th and early 20th century.) Under this form of capitalism the government withdraws and allows the “free-market” to find its equilibrium in terms of supply and demand and prices. The government views its role as limited to protecting property rights (but not necessarily individual rights). During the 1930s – in response to the Great Depression – President Roosevelt guided America into what is called Social-market Capitalism. In this phase, while there is still private ownership of production, the government does become involved (lightly at first) in regulating the actions of business in the areas of competition, prices and consumer protections. Also during this period the government will begin to provide “social safety nets” with programs such as social security, unemployment benefits and labor rights.

Where Capitalism Took the Wrong Turn

America has now moved into a form of capitalist evolution called Corporate Capitalism. Under this configuration the basic elements of free-market and private ownership remain, but the system is dominated by hierarchical, highly bureaucratic corporations that are fixated on narrow self-interests for profits with little or no concern for the best interests of the nation, society or workers. And therein is the problem.

As corporate capitalism takes hold, mergers, acquisitions and technological advances create larger and larger corporations at the expense of smaller ones. This results in the construction of higher “barriers to entry” which diminish the incentive to innovate and reduce potential for real competition. This causes private capital to become concentrated in what is nothing short of an oligarchy of private capital.

When private capital is concentrated in the hands of a few, it facilitates the creation of vast political and economic power that can’t be effectively checked, even by a democratically organized political society. One need only make a cursory review of the current election financing system to see this harmful concentration at work. In a recent ruling (Citizens United v. Federal Election Commission) the Supreme Court gave license to corporations to spend unlimited amounts in election campaign financing. The power of this concentrated private capital to influence elections can easily overpower the electorate, strangling the free-flow of information to the electorate and severing their connection with the elected representative. As a consequence, the voter is deprived of objective information to make election decisions and those elected as beneficiaries of corporate financing are less inclined to represent and protect the interests of individuals.

An even more daunting threat posed by corporate capitalism is when economic power becomes so concentrated in larger and larger institutions that the failure of only a few of these corporate oligarchs can trigger the collapse of the entire system. We came to understand the cost and pain of this potential catastrophe when the phrase “too big to fail” entered the lexicon of economic discussion.

The Antidote to Concentrated Capital and Political Influence

When the power of concentrated private capital is allowed to combine with the power of political influence as it is under corporate capitalism, it is not unusual for corporate profits to soar, while employment remains flat or actually declines. The truth is that corporate capitalism is a corrupted form of capitalism, so much so that it should not even be called capitalism. It is corporate capitalism that has failed the American Dream and needs to be radically reformed. To regain the vibrancy of a growing economy, America should institute a new form of capitalism called “Participatory Capitalism.” Under participatory capitalism, ownership is redefined and everyone who takes the risk of working with an enterprise and has the ability to add value are allowed to share in the value created by their efforts.

What makes capitalism the most efficient and equitable economic system devised by man is the simple idea of risk and reward. It’s called “having skin in the game.” Capitalism offers individuals the freedom to risk their personal capital in an enterprise with the understanding that failure of the enterprise will mean the loss of their capital, while success of the enterprise will translate into a significant increase in capital.

The great historical capitalists of America – Rockefeller, Ford, Carnegie, Harriman, Durant and multitudes of others – all accepted the risk of investing their personal capital. They arrived on the scene when America needed the infusion of huge amounts of capital and commitment to build the infrastructure – factories, transportation, steel and energy – needed to lay the foundation for economic growth. These great entrepreneurs truly had “skin in the game,” and it showed in the results they achieved. Of course, they were lavishly rewarded for the risks and efforts they took, but they earned and deserved it.

The Era of the Fake Capitalists

Today that system that worked so well to stimulate the American economy is despoiled and infected with fake capitalists. Those who run the gigantic corporations of today no longer have any real “skin in the game.” And yet, they expect to be rewarded – in the form of obscene salary and bonuses – as if they did. Few of these individuals have put their personal capital at risk and any ownership they have was given to them by the board of directors. If they do fail, their fall is cushioned by the comfort of multimillion dollar severance packages.  How can this be called capitalism? It is even stretching the term “capitalist” to apply it to shareholders. When someone buys stock in Ford or General Electric today they are not putting capital into the company so it can expand and grow. They have no material power to add value or make a difference in how the company performs. The capital they “invest” goes, not to the company, but to the person from whom they purchased the stock. This is no more than a form of gambling.

Actually, in a world of participatory capitalism there is nothing wrong with the concept of compensating the CEO (after all, he is really just an employee) on the basis of how a corporation performs over time, except that it does not go far enough. Today there is a new type of “capital” that is needed to build the future of an enterprise just as much as the cash of Rockefeller and Harriman was needed to build the infrastructure of the economic system. Modern capital can be defined as the education, experience and commitment of the employee that is invested in the enterprise. The employees of an organization are no longer automatons hired to perform tasks, but highly educated individuals who have the talent and power to add value to an organization and thereby determine its future. If individuals are willing to invest their personal capital of talent, experience and commitment in a company, then they should share in the value they add. In reality, these brave souls are the true capitalists of the day. It is no coincidence that private equity firms – who are putting old-fashioned cash into a company – will not invest unless there is a wide swath of ownership and risk shared by those who work at the company.

What will save capitalism in America is a return to the basics of capitalism that demands true risk and offers reward for those who have the power to add value to an enterprise and invest their capital – in any form – that gives them “skin in the game.”

And the Moral of the Story …

Two actions are needed in order to re-invent real capitalism in America: It starts with balanced participation of government to re-establish an environment that assures true competition, creativity and innovation. As the “trust-busting” efforts of government in the early 20th century opened the way for widespread economic opportunity, the government now must use its regulatory authority as an “oligarchy-buster” to make sure that no enterprise becomes so large or reckless that its failure will threaten the entire system. This should be combined with the creation of participatory capitalism that recognizes a new definition of investment and ownership. It is one that allows those who take the risk of adding value to an enterprise to be rewarded by participating in the value they add.

To do so will bring a re-birth of true capitalism to America and with it a revitalization of the economic effort that created the economic power of America.

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