Wednesday, March 30, 2011

Capitalism


"The merchants will manage the better, the more they are left free to manage for themselves"
Thomas Jefferson

It's difficult to discuss any of the isms without generalizing in the extreme. The common ones that come to mind and perhaps all of them, have in common the one reality of dependence upon a hierarchy. A government, or other political body is at the top, meddling in the name of constituencies that would rather not be meddled with. Given this shelter from reality, most isms gravitate toward giganticism and monoplolism. Not healthy, except for the gigantic monopolies and even for them, only in the short term.

And yet in the face of this, capitalism has proven itself as a builder of wealth, creator of innovation and a dream machine that is the envy of the world.
There is no force on the face of the earth equal to the desire of man to work in his own best interests. The price of dreams is consumerism and we pay that price in many currencies, from double-wage earner families to the constant barrage of advertising that strives to make us want more and need less.

What's needed to save the American Dream is to build more and consume less. Our ability to innovate and build is in danger of coming apart.

The original Henry Ford was the first and last American automobile manufacturer to build market share by bringing prices down and wages up. As soon as Detroit succeeded in driving Packard, Hudson and Studebaker from the business, they concentrated on profit and still do today, pushing prices ever up. It took Japan to wring the shoddiness from their product as the remaining big three of autos got complacent with their near monopoly. Even then, before competing with the Japanese product, they lobbied long and hard for protection. Protection from what? Protection from a better product.

What's wrong with capitalism as we practice it is complicated and it's hard to argue against such a successful product, that's brought such great wealth. But there are things wrong and one of them is the corporate need to satisfy an ever more voracious investor in short term earnings. Sound business fuels a major part of its own growth through retained earnings. Another is the concentration on quarterly profit to satisfy that investor, lest he flee to another company with his cash. A third is the constant expansion of profit at any cost, the flogging of product through advertising and takeover strategies. They're all tied to one another.

Capitalism needs capital and huge amounts of money are flashed around the world in seconds, looking for the quickest, safest, largest return. Thus retained earnings are discouraged, the solid capital base that brings us all through hard times. The tax structure and volatile investor strategies both work against sound balance sheets. To hold earnings is to become a takeover target.

There's a price for this too and the price is a rollercoaster of upsizing and downsizing, a workforce looking over its shoulder, hesitancy to innovate and management that maximizes quarterly profit and then moves on like a hired gun. In the face of all this, it works. Except when it doesn't work and then the road gets bumpy. How bumpy we have yet to see, but when too much money chases too little investment opportunity, stocks climb to thirty and forty times earnings and the stage is set for a crash. The only thing that drives such markets is the gamble that the top has not yet been reached and that's irrational from an investment point of view, only rational for gamblers. Snake eyes will come up. It always has.

Debt cripples capital and our debt grows at geometric rates. Taxes on earnings cripple capital, yet what we choose to tax is earnings. Weakening currency cripples capital and our currency is weakening world-wide. Homes and automobiles are outrageously costly due to a weakening currency.

The capital for capitalism is all but gone, lost to a credit-card government. We don't need to balance our books in ten years, it must be done now. It will be painful, but not so painful as a crashing economy. It will be difficult, but not so difficult as losing our world markets. It will take time, but not so much time now as later. The engine of our prosperity is at risk and we continue to put off the oil change and valve-job, joyriding instead. Proper maintenance may yet preclude a burned-out engine, but the old car needs:

1) Higher taxes on consumption, lower on earnings.
2) A wind-down of subsidies, agricultural and industrial.
3) A Federal Reserve system charged with creating a strong currency and less interested in controlling the economy.
4) Decentralization of a majority of governmental services.
5) Policies directed toward pulling down trade barriers, allowing us to do what we're best at, to compete.
6) Privatization of an increasing number of government services.

Americans have proven over the entire life of our country, their inventiveness and ability to bring solutions to any social, environmental or business need. Our increasingly centralized government has shown itself without a clue in solving any of these problems in a rational and long-term way and yet it continues to tinker. Those who have never run a corner drugstore, never met a payroll, never met the competition of another product, continue to tell us how we should run our production and capital markets.

The result is a nation drowning in debt, a currency weakening world-wide and a population under the age of forty who will be left holding the bag and sweeping up the debris of those decisions.

We as a nation of individuals are committed to clean air, to freedom of choice, to equity among our ethnically diverse population, to fairness and opportunity. The driving force behind all of those principles is and always has been a sound and vibrant capitalist economic engine. The axiom that money has never produced a good idea, but good ideas always produce money has never been more true. I don't have all the solutions and you don't have all the solutions, but we as a nation of individuals are capable of any and perhaps all of those solutions.

Capitalism never builds from the top down, always from the bottom up. Capitalism always disintegrates from the top down, never from the bottom up.