Sustainable Capitalism

Why Should We Care about Sustainable Capitalism?
Sustainable Capitalism is the best hope for America. It is based on incentive for all, not just those on top.

What is Sustainable Capitalism?
Sustainable Capitalism is what capitalism should be. It is capitalism practiced in the way it was meant to be; capitalism that works and is sustainable. It is more benevolent than the corrupt form of crony capitalism practiced today in that it requires participants to take a more long run view and no cheaters are allowed. Sustainable Capitalism rewards all economic participants by sharing rewards more evenly across the labor spectrum. Management and labor are both forms of labor. They are partners instead of warring factions in the supply function of capital.

Is the American form of Capitalism Working?
From a socioeconomic perspective, it is easy to see that the current form of capitalism practiced today in America has failed. First, there is an inordinate inequality in the distribution of wealth. The quality of life for the vast majority of Americans is rapidly declining. There is no public safety net and millions are unemployed, underemployed and without health insurance of any kind. Some argue that all of this is the fault of lazy Americans who have borrowed beyond their means in some sort of consumer frenzy. The truth is that real wages have been declining due to globalization. As a result, many Americans have been forced to resort to borrowing to simply retain their existing standard of living. Most people are borrowing out of desperation, not out of choice.

What’s Wrong with Capitalism Today?
This skewed accumulation of wealth has been no accident – it is the direct result of public policies designed to profit transnational insiders also known as crony capitalism. This is true not only in America, but throughout the world. So-called “free trade” agreements have allowed foreign interests in the form of both public governments and private hidden investment bankers to rig the global economy in their favor to the detriment of labor. Secondly, unchecked corruption has led to an imbalance of power in favor of the wealthy and to the detriment of those less well off. Elected representatives no longer represent the electorate. Rather they represent the highest bidder. But these are political problems. The problem with capitalism itself is that labor is not well incentivized. It’s not just that wages need to be higher; more workers need to be given the opportunity to participate in profits in a meaningful way. If more companies pursued policies along this line, productivity would skyrocket.

Survival of the Fittest?
Some argue that a wide disparity in income is the “natural” outcome of capitalism - a kind of Darwinist outcome where “only the fittest survive”. What they really mean is that the meanest and the most ruthless, diabolical and corrupt survive. Remember playing sandlot football when you were a kid? Did you ever run into a game where some kids just started making up their own rules? That’s what capitalism has devolved into today – a global supply chain where the most ruthless run everything. We must understand that capitalism completely unchecked (meaning without proper incentives and effective guidelines providing disincentives to cheating) will always lead to corruption, and eventually to revolt. This has occurred all throughout human history and will continue to occur because it is part of human nature.

Capitalism does not require Democracy
Some confuse democracy with capitalism. Does capitalism require democracy to work? If China is an example, the answer is clearly no. In fact, capitalism appears to work rather well in a communist dictatorship! So capitalism does not require democracy to work. It does however require the economic participants of a country to move in the same direction (in the case of China, using a combination of self-interest and the barrel of a gun). The result? They've beaten the US at its own game. What did we do wrong? As Dr. Reich points out in his book “Supercapitalism”, we moved from democratic capitalism to super capitalism. In democratic capitalism, management and labor work together to further the common interests of the country to which they both belong (in this case, America). With super capitalism, there is an unnatural excessive tension between management and labor. Labor belongs to the country, but management belongs to no country. Let’s connect the dots...

Supply-side Economics leads to Supercapitalism
745px-Laffer-CurvesvgIn the 1980s, a professor named Arthur Laffer popularized the notion of supply side economics. He introduced the “Laffer curve” which demonstrated a net gain in government revenue when taxes were cut (he did not invent the curve, in fact he said he learned it from Ibn Khaldun and John Maynard Keynes). This became the underpinning of the Reagan Revolution to which the Republican Party still holds firm today. The political notion derived from this school of thought is that taxes should be low because government is incompetent and expensive and that further, low taxes may generate enough revenue to produce whatever government is needed. The first part of this argument, that government is expensive and incompetent, is difficult to argue against. The latter part has never really been proven either way because government spending only grew under every Republican administration. But the point to be made here is that this (possibly correct) notion of an incompetent government has led to the incorrect conclusion that the marketplace can take the place of government; or that government is altogether unnecessary. When this cavalier attitude is taken to an extreme (that the marketplace is always good), it is easy to see how supercapitalism has become so successful. The political spectrum becomes merely an extension of the marketplace susceptible to the highest global bidder. Producers have created global supply chains and have sought the lowest costs available in order to maximize profits. Left unchecked with no allegiance toward the wellbeing of a particular country or people, we can expect to see what we see today – capitalism run amok.

Short-run “Success”, Long Run Failures
As a result of supercapitalism, all business today in America is geared toward the short run. Successful quarterly earnings have become the preferred means of judging a company’s merit. The problem with this practice is that policies favoring short run returns always negatively affect long run returns. Short run policies are shortsighted.

Climbing the Corporate Ladder
Americans have come to settle for a form of capitalism that does not work in that it is not sustainable. One area where these failures are evident is in the separation of management from labor. The entire notion of aspiring to
be a manager is a grand mistake. In reality, management is a labor task, just like any other. It is not a “higher form” of labor. Managers should exist to enable labor – to serve them, not rule over them. An effective manager is one that knows the business as well as any other laborer. In fact, management should not even be a title or a job description. Instead, the task of management should be passed around, like taking out the trash. When we instead reward people for being managers, we foster an environment of needless contention in the workplace.

Public Policy Implications
How should public policies implement sustainable capitalism? Unfortunately, past efforts to “right the wrongs created in excess capitalism” have failed because they have been focused on income redistribution. This strategy always fails and is thought by many to be morally reprehensible. It is really just stealing gussied up as benevolence.

The key to sustainable capitalism is to provide incentives everywhere. Self-interest does not necessarily have to be overly selfish. Greed is good? Balderdash! Here is the definition of greed:

Excessive or rapacious desire, especially for wealth or possessions

The key concept here is that of excess. So excessive self-interest skews healthy self-interest toward undesirable outcomes.

We are not arguing for excess regulation – rather we need effective regulation. How do we get effective regulation? The same way we get positive outcomes in the private sector – by providing adequate incentives.

Private Sector Implications
A good example of sustainable capitalism is the notion of stock options. Stock options were popular in the early 1990s when many startups offered them to employees (before outsourcing and insourcing destroyed the high tech industry). Every employee is given an opportunity to purchase ownership in a company after they prove themselves worthy over a period of time. This provides an incentive over and above their normal income to produce at a higher level and to reap the rewards of their efforts. Long term bonuses are another tool that can be used to implement sustainable capitalism. And an attitude of looking out a little bit more for each other’s interest couldn’t hurt, either.