the hypocrisy of american capitalism

Whew! Its tough to type, “the hypocrisy of American capitalism” just knowing that so many folks have “dyed in the wool” faith in their own personal capitalism. So lest I leave a potentially controversial statement out there for too long, let me get straight to the point…

In my opinion, capitalism is supposed to be about, as Joseph Schumpeter and others before him described it: creative destruction. Capitalism’s long-term health requires that innovative entrepreneurs enter the economy with new innovate ideas and products and that this is the force that sustains long-term economic growth, even as it ends up destroying the value of entrenched businesses that have long-term track records of success.

Think: the creation of Apple’s iPod destroying the record business. People didn’t stop loving music, far from it, people actually have clamored to have it more in their lives. Instead, the old way of getting access to music has changed, and forever.

Creative Destruction is the implicit assumption behind the efforts of businesses and pro-business politicians when they aggressively pursue deregulation and free-trade. The capitalists in the United States have long argued about the evils of “government interference” in markets. These folks have steadfastly lobbied government to dis-empower regulators to let capitalism reign free. These same forces have fought hard for the U.S. government to protect their interests overseas and to work at their behest to encourage the lowering of protective trade barriers in other countries. The unswerving faith is that capitalism works best when coupled with freedom. Freedom from the interference of meddling governments.

Unbridled capitalism solves all sorts of problems argue its proponents. Poverty in the Third World is there because consumers there do not have access to cheap capitalist goods. Instead, it is argued, import tariffs artificially raise the price of imported goods and drain away the little bit of income that consumers in poor nations have to spend on goods. The inevitable result they say is that poor nations cannot accumulate wealth. Etc. Etc. Here in our own country since the mid-1970s nearly every single piece of legislation that regulates an industry has been questioned by business interests and very many of those pieces of protective legislation have been whittled away.

In short, the notion of “creative destruction” has been institutionalized (note the double entendre) into our very way of being.

The other part of the capitalist equation that is considered a necessary condition for its full flowering is that the mechanism of capitalism rewards intelligent risks and punishes un-intelligent risks. Because of the ability of free-markets to naturally provide feedback to investors in the form of investment gains and losses, capitalism is extraordinarily efficient. In fact, when there is an artificial mechanism in place (say interest rates that are too low) then risks are not priced well and then unnecessary risks are taken on because their prices are too cheap. Think: the mortgage crisis. All of this is another way of saying “hands off,” or in the economic/business school parlance: “laissez faire.” “Government, get your hands off my capitalism!”

All of this is fine, and you probably know where I am headed with this, but what happens when those same, not so-Creative Destructionists run into problems at their own business? Or, when those same Laissez Fairies (no gay slight intended) lose out in the capitalist marketplace for a change, instead of winning? You guessed it, then the government, long-shunned and reviled, is demanded to jump into the choppy capitalist waters, fend off the sharks, and underwrite a decade’s worth of dumb ass decisions.

Who are the leading lites (think diluted beer) leading the fight for a government bailout? AIG: arch-friggin‘-capitalist; GM: arch-friggin‘ capitalist; Fannie Mae and Freddie Mac: arch-friggin‘ capitalists. Folks, capitalism doesn’t work if capitalists can’t lose money. These people cannot have it both ways. They simply cannot. The government, and tax-payers, are not friggin‘ parents to your teen-aged-ness: despised and rebelled against for trying to keep you grounded in reality, but desperately needed when you screw up. As a humorous aside, I think that each of these business leaders looking for public aid should publicly be made to come before Congress in t-shirts that say, “I want my Mommy!”

So where do I stand on all of this? My opinion is that capitalism’s foundation has to be a strong system of ethics. This is because the machinery of capitalism is all about competition and winning (think warfare conducted with money). What would happen if the sports we watched had no rules whatsoever? Can you imagine football without rules? That would be called a melee. Heck, even the UFC, despite all of its masculine, chest-thumping trappings, has rules.

Can you legislate ethics? No, of course not. But you can use incentives to create an environment in which bad behavior has a high cost and good behavior has a high reward. If we can legislate against murderers, why can we not legislate against underhanded business-people? And here is another bit of hypocrisy…we legislate against murderers because most of us are not murderers, but we avoid tough legislation against business-people, because most of us are business-people. We have no empathy for the murderer because we cannot imagine ourselves in his shoes. But because we can imagine ourselves as a business-person then we cannot legislate against them. Think about it.

So what has to change? We need to put back in place some of the Depression-era legislation that protected us for almost 80 years. We also need new legislation and regulation that takes care of managing some of the results of all of that creativity and ingenuity that blossomed over those same 80 years. Think: hedge funds.

Have a brilliant and relaxing weekend everyone!

Jason