Capitalism is what this country has been attempting to export to the world and the world has decided it might not have been a gift but a curse. The constant TV coverage of the G-20 protesters puts a face on that opposition. According to Newsweek, “Capitalism is under siege, its future unclear.”
Whatever capitalism used to be it is surely not what is manifesting now. The growing uproar after the bailouts began has made it clear the majority of the public, including those in the corporate world, are not at all clear what capitalism really is. Let”™s look at the core economic principles of the U.S. economy as they existed only a short time ago.
The basis of capitalism involves the willingness to deal with risk. Financial theory says that the cost of capital to an enterprise should rise in line with risk. This is fundamental to capitalism. (It implies that you do not run to the government when you run into trouble.)
The ability to adapt to changing technology, to remake itself, to survive change, is essential for a vital economy. The process that keeps the economy strong, sometimes called “creative destruction,” meaning allowing corporations that can”™t make it to fail, creates the dynamism that has been the engine of the American economy.
The story of John D. Rockefeller and Standard Oil is a textbook example of incredible adaptability and willingness to accept risk, in establishing an entirely new industry. Bill Gates story, as told in “The Outliers,” also illustrates the flexibility, and incredible hard work, involved in establishing a new industry. Capitalism thrives in this country because of the ambitious, striving character of the American psyche and its willingness to take risks.
Over the years controls have been placed on unfettered capitalism which, contrary to the hue and cry that they stirred up at the time, did not kill the fun. The Anti-Trust Law (1890), Securities and Exchange Commission (1934) and the Environmental Protection Agency (1970) have not, apparently, exacted undue hardship. Generally the costs of new laws are merely passed on to the customer anyway.
The mess we are in
There is another voice that is still a part of the analysis of capitalism ”“ Ayn Rand. Her book “Atlas Shrugged” has continued to be a best-seller years after it was published. Rand endowed capitalism with a new code of morality called “rational selfishness,” also called “libertarianism.” She claimed that this system is the most efficient because it allows people to act in their rational self-interest. Incredibly, this description appears to perfectly describe the economy today if you leave off the rational. It is said we are in the age of greed. That may be more complimentary than is justified. All levels ”“ government, business and the public ”“ seemed to have taken leave of their senses, to put it rather quaintly. How else to describe the mess we are in?
In spite of Daniel Henninger”™s claim in his Wall Street Journal column “Is this the end of capitalism?” where he states that overbuilt housing tanked the U.S. economy, there is plenty of blame to go around. The government has consistently backed home ownership as fulfilling the American Dream, thus setting a goal in the mind of the public that would be frequently unattainable.
Housing was not cheap, as Henninger claims, but money was cheap, thanks to the Fed”™s inexorably downward pressure on interest rates, especially with the even lower teaser rates the banking industry found acceptable. Meanwhile, the regulations set in place to keep the banking and investment sector in line were either modified or ignored. The overseers, the SEC and the Federal Reserve, in particular, went to sleep, apparently content to leave the economy to its own devices. The banking and investment firms, sensing a rare opportunity, created numerous new and incomprehensible strategies to pile up assets in order to expand their global footprint. And so we wound up with a monumental housing bubble, the true enormity of which we still have not seen.
The mess yet to come?
So now we have this massive pile of rubble, otherwise known as the remnants of the U.S. economy. Whatever happened to “creative destruction?” Without claiming that the bailouts are just going down a black hole we have to wonder what happened to the ability of certain American corporations to weather downturns without turning to the taxpayers for help. The answer is simple: Good business practices were jettisoned by many of the largest corporations, those “too big to fail,” in the interests of piling up profits.
The opportunities brought on by this crisis should not be missed ”“ U.S. capitalism, if not the world”™s, desperately needs to be recalibrated. Here is what is currently purported to assess the vigor of the U.S. economy ”“ the GDP, gross domestic product. This has been the gauge for how the economy is doing, quarter to quarter, year to year. Given the prominence of this number-one would think more people would be aware of what is actually included in that number.
For instance, the more money spent on health care, in other words the unhealthier the American public becomes, the higher the GDP. The more natural, and frequently irreplaceable, resources are used the higher the GDP. The cost of disasters, natural or man-made, factor into the GDP as a plus in the health of the economy because they create jobs.
The way the GDP is determined appears to ignore the basic principles of accounting, which factors in the assets and the liabilities of an enterprise. In fact, corporations that are in trouble seem to have forgotten the importance of simple double-entry bookkeeping. This is troubling enough but factor in the impending uncertainty of our energy supply and the increasingly erratic climate and you have a nation that has been living in dreamland for decades. Just what kind of economy do we have and how is it preparing us for an even more turbulent future?
Surviving the Future explores a wide range of subjects to assist businesses in adapting to a new energy age. Maureen Morgan, a transit advocate, is on the board of Federated Conservationists of Westchester. Reach her at mmmorgan10@optonline.net.
