Tuesday, April 28, 2009

The challenge of tinkering with capitalism

By Dan Danford

A friend of mine (and a very bright guy) was recently pondering the merits of socialism. I think he’d concede that Cold War ideologies carry little influence today, and that capitalism easily won that battle (not so easy for citizens behind the Iron Curtain, however). Yet, I also think he’d like to soften capitalism, and make it friendlier and more compassionate. He’s a sensitive guy, and he likes to help as many folks as possible.

Capitalism got us here. No doubt, socialism could never create the living standards we all take for granted today. No rewards for creativity or innovation results in neither of those things, and they've been responsible for myriad advances in everything from safety to medicine.

But, he’d recognize that war as already won, and suggest that today’s world calls for a different model, somewhere between yesterday’s extremes. A different point along the capitalizm/socialism continuum.

Unfortunately, creativity and innovation swing somewhere in that balance, too. Personal recognition and reward for exceptional effort are the very essence of capitalism. I’d suggest that many Americans who aspire to creativity and innovation do so precisely because they've been freed from challenges inherent to earlier socialistic regimes.

Compare the relative accomplishments under both systems in the 40s, 50s, and 60s - especially the standards of living among middle classes. There's no real comparison where it really counts: how the typical, usual, or normal citizens live their daily lives. The human quest to see result for our efforts - in a nicely manicured lawn or a well-prepared family meal - extends into the public and workplace.

Noted financial journalist C.W. Barron once noted that "everything can be improved," and I agree with that. Society keeps evolving and the problems and solutions are increasingly complex. I don't tout capitalism because it's morally superior, but because it's done more for more folks than any other contemporary system. Certainly, it could be better, but it's just as certainly been better than socialism.

Corruption is always a problem. Corruption exists under every social system (damn it!), but capitalism stands alone as the only system that has raised so many people out of poverty and despair worldwide. It's frustrating, perhaps, but capitalism mostly works.

Personally, I’ve grown quite weary of the whole "corporate greed" theme. I suppose it is inevitable, given the situation with bank bailouts and Wall Street shenanigans. Most of us work for decent companies, though, which exist to serve customers. They are profit-making organizations, but those profits fuel our entire system.

Basic economics. At its simplest, there are just two basic types of economic activity. Producers and consumers. Producers are farmers and businesses, and maybe some professionals. They are, in essence, the people who create, grow, manufacture, or provide valuable services for a profit.

Everyone else is a consumer. All of us consume things, of course, but many people work in jobs that consume, too. Take public education, for instance. There’s no question that teachers do meaningful work, and contribute mightily to society. So do judges, and fireman, and legislators. Still, it’s important to note that they all are paid with tax money.

The same thing goes for other government workers, social agencies, non-profit and charitable groups. The money that flows to them in taxes or other support originates from society’s producers. Those groups, in turn, pay their workers who pay their taxes and consume more goods. But the spigot of money flows directly from farmers, and businesses, and other people and firms who support them.

According to a recent article on federaltimes.com, the single largest employer in Kansas City, Missouri, is (are you ready for this?) the Federal Government. Think about that for a second. Now think about this: no producers, no taxes, no money. Wages and taxes from producers and their employees cover the entire cost of education, social agencies, and government.

I don’t make excuses. I despise criminal or unethical behavior, but - although numbers in the news often seem quite large – crime is such a wee part of corporate America. Yet, some folks think every business is bad and every MBA is a crook. Often, these mistaken souls are teachers, social workers, and civil servants who live and work (one way or another) downstream from corporate profits.

No easy answers. I understand my friend’s points. There's clear need for regulatory and government activity, and unhampered capitalism can be dangerous. There’s a definite role for government and a need for balance.
But I also fear unintended consequences. Some of our most regulated activities – medicine and public education, to name just a few - display ample reasons for concern. Regulation itself can create massive barriers to entry, and monopoly status (check out the pharmaceutical industry). Consumer pricing, access, and service suffer because well-intentioned regulations favor incumbent vendors. Incentives for creativity and innovation fall idle.

Personal recognition and rewards are the very essence of capitalism. They are the key elements missing from socialism. Until those statements are reconciled, there is little hope for success in socialism.

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