Tag Archives: Capitalism

Resurrecting The Middle Class Would Give New Life To America

There’s been a lot of finger-pointing and talk about the decline of the American middle class, but politicians show little will to take action.

It has only taken about 40 years, but our politicians have finally come to recognize the long-term challenges to American economic vitality that will be caused by the decline in, if not the elimination of, the American middle class. Not that they have shown any signs of possessing the MiddleClasscreativity, courage or will to do anything about the issue, but at least they are doing what they do best: giving lip-service to a problem.

For 200 years the celebrated promise for Americans – what made America great – was the promise of upward mobility. Unlike citizens of other countries who were locked into a rigid caste system with no hope of escape, Americans (at least the free, white male ones) were assured that if they worked hard and persevered, they would be rewarded with upward financial and social movement. Each generation had the opportunity and promise to rise higher than the last. And it was this prospect of doing better that fueled the American economic engine; at least that was the case until about 40 years ago.

Beginning in the 1970s a number of factors coalesced to break the promise of upward mobility for the middle class.

  • One dynamic was the emergence of what was called economic globalization. That meant American workers had to compete against workers in other, less developed countries, who often were paid far less for far more work.
  • Economic and tax policies of the government began to favor corporate rights over individual rights and policies that gave preference to capital (owners) over labor (workers) were implemented.
  • There was pushback against labor unions that had been overreaching in their demands.

There were other factors as well, but the reality is that pressures on the middle class have not only reduced the opportunity “to get ahead,” but have worked to push the middle class into downward mobility and greatly increase the disparity between the wealthy and all others. Every one of the 50 states witnessed  its share of middle-class families shrink during the past decade while those in the top 1 percent captured all the income gains. It was sinful to allow this to happen, but it is a crime that our political leaders are doing nothing to resurrect the opportunity for the middle class, other than to talk about it and point fingers at each other.

Giving New Life to Upward Mobility for the Middle Class Calls by Understanding and Responding to the New Economic Reality of Capitalism


It is difficult enough for politicians to deal with realities as they know them, but it is virtually impossible for them to respond with constructive action when the old realities are changing. In such a conundrum, politicians only fully understand the blame game that accuses others for problems caused by a changing reality. (Or even their own inaction.) Worse, they confuse reality with truth, and they are two decidedly different things.

Reality is the imagery of an accepted belief at a point in time that is based on the experience and knowledge available. But unlike truth, reality is subject to change. Reality is not rigid; it evolves with increased knowledge, perspective and experience. For example, there was a time when “reality” declared that the sun and all other planets revolved around the earth; and a time when the earth was flat. Institutions and beliefs firmly tethered to the realities of the past become an anachronism in the world of new realities that ultimately will destroy their very purpose and existence. The bottom line is painfully obvious:

Today’s political leaders are trapped in the imagery of capitalism as it was in the past and this prevents them from creating a new type of capitalism needed to meet new realities.

Needed: A New Definition of Capitalism and a Capitalist

The theory of capitalism is based on the simple idea of risk and reward. Capitalism offers individuals – capitalists – the freedom to risk their personal capital in an enterprise with the understanding that failure of the enterprise will mean loss of their capital, while success of the enterprise will translate into a significant return on the capital invested. Capitalism comes down to being willing to put “skin in the game.” The great historical capitalists of America – Rockefeller, Ford, Carnegie and Harriman along with multitudes of others – all accepted the risk of investing their personal capital.

The early capitalists arrived on the scene when America needed the infusion of vast amounts of capitalism-2capital to build the infrastructure – factories, transportation, steel and energy – required to lay the foundation for economic growth. These great entrepreneurs truly had their own “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.

Today, there is a new reality for capitalism and the concept of being a capitalist. If this new reality is accepted and encouraged by our leaders, it can resurrect the cherished idea of upward mobility for the middle class, while stimulating a vibrant new American economy.

Creating the Reality of Participatory Capitalism

In the old reality of capitalism large amounts of cash capital was contributed by the few and the rewards were limited to the few. The economy of today and tomorrow still demands investment, but what it needs is recognition of a new type of capital to fund success. It is not the type of capital necessary to build a railroad but rather the type of capital that built Facebook, Twitter, Google and Instagram. The new reality of capital comes in the form of education, experience, creativity, innovation and technology. This new type of capital is not a bastion of the few, but is controlled by and can only be invested in a business by the well-educated, thinking and creative employees of today. They should no longer be thought of as cogs, but as capitalists, because their talent is invested in the business and they are key to its success.

Restoring the American Dream of Upward Mobility

The path to reviving the middle class is to consider and treat today’s well-educated, thinking Ladder-Headeremployees as capitalists not captives. In the same way that the Rockefellers of yesterday were not willing to risk their capital without the promise of potential reward, the employees of today will not risk their capital – their education, experience, creative brilliance and loyalty – unless they have the promise of potential reward beyond the simple quid pro quo of an obligatory paycheck. And if they are given this opportunity the rewards for all can be immense.

The new reality of capitalism should be defined as: Those who have the ability to add value to an enterprise and do so are allowed to share in the value their invested capital creates. It is what could be called participatory capitalism that is open to all, not just a few. Participatory capitalism allows all employees to invest their personal capital in the enterprise in exchange for the potential to receive a return on that capital.

Implementing Participatory Capitalism

The government could use the same economic policies and tax incentives that triggered the decline of the middle class to resurrect the middle class. The government could offer an incentive for a company to distribute 25 percent of its gross profits to all employees by not taxing the profits distributed and in fact offering a tax credit for that amount.

One-half of the distribution to employees could be paid as a “dividend” on their investment; the other half of the distribution could be placed in a 401K type of trust – tax free for employees – and available for distribution at retirement (helping to solve another pressing problem). The end result is that employees – when treated as “investors” in the company – and the company are in positions of parallel. What is good for the company is good for the employees. The more “capital” they invest in the company, the better chance they have to receive a return on that capital. Of course some will argue this approach is not capitalism but socialism and that profits will be reduced. They will be wrong. If capitalism is good for the few, it will be even better for the many. Participatory capitalism will focus everyone on a single goal that will create higher profits and greater reward.

Others will suggest this approach is nothing more than Pollyanna that would destroy capitalism, but the reality is that today’s form of Corporate Capitalism is destroying capitalism. Under this corrupted form of capitalism the basic elements of free-market and private ownership remain, but the system is dominated by hierarchical, highly-bureaucratic corporations and obscenely wealthy individuals fixated on narrow self-interest for profits with little or no concern for the best interests of the nation and society; let alone the survival of the middle class. Allowed to proceed uninterrupted this constricted capitalism will lead (if it has not already) to an oligarchy of wealth.

What will save the middle class and capitalism itself is to recognize the lost truth of capitalism and return to the fundamental premise that offers reward for those who have the capital – in any form — to invest in the enterprise. This approach gives everyone the chance to have “skin in the game.” And this creates the incentive to work and to add value. It is what true capitalists do. Participatory capitalism will achieve that and bring with it a rebirth of a new upwardly mobile middle class. If this happens, as in the past, America will be better for it.

Building a Better Brand of Capitalism

If the benefits of capitalism are good for one, they would be even better for all.

In a Wall Street Journal article (July 28, 2012 ), “Why Capitalism Has an Image Problem,” the writer argued that the only thing wrong with capitalism is that it has an “image problem.” Indeed it does, but the Journal errs when it suggests that the problem exists because people just don’t understand the value of capitalism and that it can be corrected by some slick public relations campaign. It’s not that people don’t understand capitalism; it’s that capitalism does not understand people.

Capitalism has been at the core of the American financial system; driving it to starry heights of economic performance unmatched in history. For all its faults, there is no question that capitalism is the most democratic, efficient and effective business system yet devised by man.

Capitalism, in fact, is really a synonym for “individual freedom,” because it allows – indeed encourages – individuals who have an idea and the courage to risk it all to “go for it” in hopes of achieving the dream of economic reward and freedom. But maybe the globalization of economies, combined with the sluggishness, stagnation and moral corruption of “crony capitalism” now rampant in American business (where the rich take care of the rich at the expense of others) are indications that the capitalism we have known is becoming obsolete. If American is to continue its world economic leadership, there may be a need for a new brand of capitalism.

Remembering the Henry Fords and John D. Rockefellers

The classic image of capitalism is that of the “rugged individual,” motivated to take risk and driven to use experience, creativity, diligence and perseverance to virtually singlehandedly build a great business empire that affords economic freedom for themselves and their families.

This is referred to as “individual capitalism” and it worked well in the early stages of economic development in this country, a time when huge amounts of capital were needed to invest in the infrastructure of the economy. The system called for strong, domineering, egocentric entrepreneurial individuals who would bravely step forward to invest the needed capital, take the risks and receive the rewards. This brought about the attitude expressed by many that it is the individual entrepreneur who is solely responsible for the success of a business; excluding all others from the benefits of capitalism.

The old model for capitalism also viewed the workers not as individuals, but as objects of production, cogs of the system if you will, who needed to be tightly monitored, directed and controlled. Much like other materials and resources of production, workers were considered “human resources” who could be hired, fired or outsourced as it benefited the business. (It was this attitude that gave rise to “efficiency experts” and “time-and-motion” studies, because workers were looked upon as just “another machine” that could be engineered for productivity.) But those are outmoded concepts that need to change if capitalism is to survive.

What America needs today is a new brand of capitalism called “collaborative capitalism.”

The good news is that “collaborative capitalism” would be easy to adopt since its principles are based on concepts of “individual capitalism” that have already been proven. The most difficult challenge to adopting this new brand of capitalism would be to overcome the old-fashioned thinking – still held by many today – that success under capitalism is achieved through the singular effort of the “rugged individual” and not as a result of a collective effort.

Traditionally, the rewards of capitalism went to those who put at risk the capital needed to fund the business. That same principle should apply to the new brand of capitalism, but what needs to change is the definition of “capital.” That concept should be broadened to include not just money, but also the talent, experience and the ability of the worker to add value to the organization. This is often referred to as “sweat equity;” meaning that experience, talent and effort are worth as much as money contributed to an organization. It can be argued that in today’s world, the value of this new “capital” is more scarce and valuable than the old idea of capital; at least they are on a par.

New Times Demand Change

The time is right for a new brand of capitalism, because the core of the American economy has been transformed from making to thinking. Manufacturing as a percentage of the total economy has declined from almost 25 percent in 1970 to just over 10 per cent in 2010. At the same time, in 2010, the services sector – which includes scientific, technical, finance, retail and technology – made up 67.8 percent of total GDP. Clearly the nature and structure of the American economy has changed and capitalism needs to change to keep pace and remain relevant.

The fundamental precept of capitalism is the incentive to achieve freedom of action and economic security that motivates an individual to take a risk, work hard and create value. We know from experience that this incentive works for the individual who has risked the old type of capital, so why shouldn’t it work for those who risk the new type of capital? For a company to be successful today, workers need to be more than automatons performing tasks in a time-and-motion model. In an economy based more on thinking than making, the success of an organization is dependent on the “capital” contributed by workers when they are creative, innovative, self-directed and involved.

This leads to what should be the new rule for capitalism:

Those with the ability to add value (new capital) to an organization will be encouraged to do so when they are allowed to share in the value they help create.

The adoption of this rule would do more than improve the “image” of capitalism; it would transform capitalism into a modern economic system that is more efficient, effective and inclusive than the old system. Capitalism would become relevant, not just for the few, but also for the many.

Making it Work

Actually, it would be a simple process to implement collaborative capitalism. Just as those who contributed capital in the past received shares of stock representing ownership in the organization, those who contribute the new form of capital – the employees – would receive shares of stock representing their ownership in the organization.

This is not the same as stock options or stock grants, usually offered to top management. Nor does it envision universal ESOPs (employee stock ownership plans) that represent only indirect ownership and have often been used by management to maintain control. What is being proposed here is honest-to-goodness real and direct stock ownership “purchased” by all employees as part of their total compensation. Employees would be compensated in two forms: Cash for the tasks they perform and stock for the capital they contribute. To maintain the integrity and honesty of the new collaborative capitalism, the class of stock owned by management, outside investors and employees must be the same.

There are many advantages to be gained by adopting collaborative capitalism:

  • It creates “parallel interests” for management, employees and outside investors. One group does not benefit unless all benefit. It encourages everyone to work for the benefit of the whole.
  • It offers all the great benefits and incentives of the old style individual capitalism – freedom and economic security – to all involved in the ultimate success of the organization; not just a few.
  • Employees naturally become more loyal and dedicated to the success of the organization, because they don’t just have a job, but are real capitalists who own their job.
  • It would eliminate the corrosive elements of collusive capitalism that has pitted the haves against the have-nots, because all will become the haves.
  • It will re-energize a new middle-class that will prosper not just as workers, but as capitalists themselves.

Adopting a form of collaborative capitalism does not mean workers will manage the organization, any more than shareholders run companies now. But in addition to doing their job, it offers workers the same respect, information and input afforded to other owners, because they are also owners. Nor does this new brand of capitalism eliminate the need for strong, individual leadership, but it does channel this leadership for the benefit of all, not just a few.

And the Moral of the Story …

Modern capitalism does have an image problem. More and more people see capitalism in negative –even evil – terms as an economic system that uses exclusion, collusion and immoral (if not illegal) activity designed to accumulate power and wealth in the hands of fewer and fewer, at the expense of all others. The problem is not with capitalism, but with those who have failed to recognize the changing environment for capitalism or have consciously corrupted the concept of capitalism.

The solution is not to eliminate, restrict or regulate capitalism, but to take advantage of the natural benefits of capitalism – individual freedom and economic security – by expanding capitalism. If capitalism is good for the few, it would be even better for the many. Capitalism should be expanded by recognizing that there is a new form of “capital” needed by today’s “thinking” organizations and that success is achieved by the collective efforts of many who work in parallel to share the benefits of real capitalism.

Collaborative capitalism will not only improve the image of capitalism, it will save it.

Romney and Those of His Ilk are Doing a Disservice to Real Capitalism

The essence of capitalism is risk of loss versus reward for gain — not gain for loss.

Look, you may like Romney (and dislike Obama) and he may win the election this fall and go on to be a good president, but don’t kid yourself into believing that this guy is some great exemplar knight of capitalism. To brag about Romney’s success as a capitalist is akin to loan sharks bragging about what a great success they are as bankers. (Come to think about it, bankers and loan sharks share a lot in common, except loan sharks are smarter, kinder and gentler.)

Clearly, Romney has been successful in business. After all, not many of us have nine-figure financial statements, Swiss bank accounts, investment shelters in the Cayman Islands, multiple multi-million dollar homes and a few extra millions to build a private elevator for our expensive cars. (Guess I am just jealous that I don’t have an elevator for my cars.) But despite the financial success achieved by Romney in business, it does not add up to the real sum of capitalism.

Capitalism and Americanism

Capitalism is not perfect, but it is clearly the most efficient and effective economic system ever designed. When operating at its best, capitalism is as fair as it is cutthroat and as rewarding as it is cruel. This optimal result is the essence of real capitalism whereby risk is balanced by reward.

When the dynamic of risk and reward is out of balance, however, the virtuousness of capitalism begins to degrade. And when it does, true capitalism transforms even the most democratic of economic system into the most despotic of systems. Worse, the few who game the system reap artificial rewards at the expense of many.


The prototype capitalist formula is designed for a savvy individual — an entrepreneur — who can identify an opportunity to provide a new product or service and then exhibit the courage to invest in meeting the perceived need. And to understand and accept that if the effort fails, the investment — and maybe more — will be lost. But if successful, their reward will be substantial.

So long as capitalism is practiced under this general formula, capitalism is synonymous with a value creating, job stimulating opportunity; but when these principles are violated, the result is not capitalism, but a kind of economic mongrelism.

The Mixing of Capitalism and No-Risk Economics

The financial calamities of 2008-09 offered a good – if painful – laboratory to observe the result of the machinations of many who violated the principles of capitalism. Until this era, if someone had asked us about a “bail-out,” it is a good bet that most of us would have equated the term to either getting out of jail or removing water from a leaky old boat, to keep its occupants from an unrequited dunking. Now we know that a “bail-out” is really the term for keeping executives out of jail or removing the risk from a leaky corporation, to keep it from failing. How can it be called capitalism when greed for even more reward causes individuals and companies to take risks (gambles, really) that fail, only to be “bailed-out” so that the penalty of failure is nullified?

Capitalism works well when those who undertake it understand and accept that if they take a risk and fail, there is a price to pay. It may be good business, but it is not real capitalism to work the system so that if the risk fails, you win and if the risk is successful, you win even more. And that is the business that Romney was good at, and it made him wealthy beyond what even the most dedicated real capitalists could imagine.

The reality is that Romney became wealthy by being a successful “bottom feeder” in the free enterprise system. The business model for Romney’s business success was to pool other people’s money and then buy a struggling company at very low, bargain-basement prices. His group would then restructure the company by downsizing (firing people), outsourcing (firing more people), slashing costs and improving the balance sheet. So far, so good. But then, rather than trying to rebuild and grow the company, Romney and his cohorts would use the improved balance sheet to secure huge loans against the company.

Again, this is not necessarily bad, but rather than using the bulk of borrowed capital to invest in the growth and development of the company in order to create value and jobs, the Romney group sucked out most of the loan funds to recoup their investment, plus pocketing a sizable gain.

Then, the company was left to fend for itself. If the company ultimately failed – as many did – under the burden of debt laid on by Romney and his accomplices it was of no concern to them, because they had already washed their own risk from the equation by recouping their investment and a tidy profit out of the initial loan proceeds. And, if the company did happen to survive and do well, Romney and his group still profited even more on the upside.

There is nothing at all illegal (although one might question the morals) about the approach to business taken by Romney and his groups but don’t confuse this economic activity with real capitalism, and don’t hold Romney up as a great hero of capitalism. Real capitalism is about the systematic creation of value, not the systematic exploitation of it. The Romney group’s strategy, like those of other famous corporate raiders such as Al “chainsaw” Dunlap, Kirk Krekorian and Irv “the liquidator” Jacobs, was not based upon creating value or jobs in the companies they acquired, but upon a sophisticated form of “financial engineering” that was designed to exploit value that had already been created.

It is this type of approach toward business that allows Romney to indigently defend his success and wealth, while failing to understand why even those who support him cringe when he casually comments that he “enjoys firing people,” and that he “does not worry about the poor.” This mindset is simply the result of his experience and perspective on business and capitalism.

There are actually terms that have been ascribed to describe Romney’s approach to capitalism. It is sometimes called “destructive capitalism,” and other times “exploitive capitalism.” One term that has never been applied to Romney’s approach to business is “creative capitalism.”

And the Moral of the Story …

Capitalism is about inspiration, innovation, inventiveness and vision all mixed in with copious elements of risk and reward. With real capitalism, if you want the rewards that come with winning, you have to be willing to accept the losses that come with losing. The true capitalist seeks the reward that comes with creating value and jobs, not exploiting the system.

The problem is not that Romney has employed sophisticated financial engineering to achieve remarkable levels of success as an “exploitive capitalist,” but that he is using this experience as his primary qualification to be president. The sole objective of the exploitive capitalist is to take advantage of the plight of others in order to make a profit. Under this approach there is no need or desire to create value, add jobs or spread the wealth. The only thing that counts is “What’s in it for me and my friends.” That may be a great way to get wealthy in business, but is that really the type of experience and mindset we need in a President?