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.

In a free market economy, should government get involved in business?

Like most Americans, I am keeping a watchful eye on the bailout of the auto industry. Generally speaking, I’m a free market guy, so I tremble when the government gets involved in business. On the other hand, Peter Lynch famously advised, “Go for a business that any idiot can run - because sooner or later, any idiot probably is going to run it.” American automakers seem to prove his point.
Part of the problem, of course, is that government is already involved with these companies. Over the years, various programs from tax breaks to emission standards to union workplace rules created an artificial marketplace for American autos. In themselves, most of these things seem good, but the combined consequences, intentional or not, impact the markets, for both consumers and manufacturers. When times are good, the impact may look slight. Nothing looks slight today, however.
Are some companies too important to our citizens and economy to fail? Clearly, there are some very important people who think so. They argue that carmakers and the suppliers who support them employ millions of people who would be at best temporarily or at worst permanently displaced. That’s a huge additional burden for a country already disabled by a huge recession. Plus, the manufacture and sale of autos plays a large role in our national economy, and global trade. These are powerful arguments and, for now, they seem to have won the day. The government stepped in, loaned them money, and assumed an oversight role.
In that oversight role, they kicked out one top executive and ordered Chrysler to consummate a quick merger. Those are big steps, and they raise a lot of eyebrows on Wall Street.
I think the jury is still out on this issue. Like so much else in business or government, we’ll look back on this with a lot more clarity. I have concerns about government saving some businesses, but not others. I’m skeptical that career politicians know enough about business to make good personnel or other decisions. I cringe when Congress acts on polls taken in the barber shop or union hall. Still, with all these concerns, I’m hopeful that steps already taken avert disaster and keep good people working. These are unique times and call for unique measures.
More than anything, I fear unintentional consequences. So many good ideas in government create a dark side consequence. Sadly, many great ideas are short-term, but the consequences are long-term. That’s my concern about government intervention. Maybe this time is different.