Home > Uncategorized > (I’m irked and encouraged by the) anger and confusion, even among libertarians, over ‘Capitalism’

(I’m irked and encouraged by the) anger and confusion, even among libertarians, over ‘Capitalism’

Yesterday I stumbled across a blog post by Joel S. Hirschhorn, a self-described libertarian who is author of Delusional Democracy, the Chair of the Independent Party of Maryland and co-founder of Friends of the Article V Convention (www.foavc.org), one of the first of the growing movements to rally citizens at the state level to seek to check excesses by the federal government.

While I think Joel is right to be angry about the state of ‘capitalism’ and of our politics, he doesn’t quite have his finger on the problem and thus his proposed solutions seem quite a bit off.

Joel’s post is here: Two Capitalisms; he urges that we learn from Germany; I abjur. I quote below key passages:

Maximizing financial returns to reward corporate bigwigs and stockholders even though the actions greatly harm the US economy and society results from US companies practicing bad, immoral capitalism. Think of this development as the conquest of Wall Street over Main Street, of those who make money over those who create and make products, of those who promote economic inequality over those who value the middle class.

The power elites that have succeeded in perverting capitalism have also succeeded in making much of the American public so dumb and distracted that they no longer function as informed and effective citizens, which has allowed the government to be hijacked by the rich and powerful through a two-party plutocracy.

Selfish capitalism was exemplified by the role of Fannie Mae in creating the economic disaster by perverting the housing market, as conservative David Brooks correctly concluded; he noted “the leadership class is fundamentally self-dealing;” it practiced “shameless self-enrichment” which produced disastrous results.

To be clear, the conflict is not between capitalism and socialism, the way right wing ideologues talk, but between the good and bad kinds of capitalism, which those on the left need to learn how to talk about. Bad, greed-driven, too-big-to-fail capitalism has ruined the US for all but the rich which have sucked off much of the nations wealth.

A fine analysis by Harold Meyerson on the difference between the highly successful German economy and the dismal US one drives home the crucial differences between the two forms of capitalism. The need is for the US to learn from the more successful German, good form of capitalism and develop policy reforms that could rejuvenate the US economy by curbing the bad form of capitalism. The ideas that Republicans keep advocating are all wrong because all they want to do is promote bad capitalism, which only serves the interests of the rich and powerful, not ordinary Americans, not the middle class, and not workers. Peter Coy has also assembled great information on what can be learned from other nations.

The German economy makes the US one look like it is on its deathbed. The German tripartite system has business, labor and government working together. Faced with the same competition from low wage developing countries and the entire globalization condition, Germany has a booming manufacturing sector that constitutes almost twice the share of the economy than that in the US. And even in the current global economic recession German unemployment is 7 percent. The tripartite system has kept German labor unions strong and, therefore, protects the middle class whose pay has risen at roughly the same rate as top incomes. This is in stark contrast to the rich-getting-richer and unionbusting situation in the US. Indeed, the top 1 percent in the US are seeing their proportion of total income rise dramatically, even as their German counterparts are seeing their share of total income shrink. German corporate boards are required by law to have an equal number of management and employee representatives. By law! Germany’s stakeholder capitalism benefits the many unlike the US where selfish capitalism benefits the upper class and brutalizes everyone else. Corporate power has not captured the German government the way it has hijacked the US government.

While I agree with Hirschorn that corporations (shareholders and executives) have slipped from responsibility to the communities  in which they operate and have captured government, this is a consequence of initial favors given by governments to corporate shareholders, and subsequent and consistent pressure both by corporations and those whom they affect for greater central controls on corporations. In smaller societies like Germany, Singapore and Japan, a sense of strong social responsibility by corporations remains, but the broader US market has allowed gamesmanship and moral hazard to flourish (with the ultimate game of using government to build barriers to entry, guarantee markets, and to shift risks to shareholders and society as a whole).

Our answers cannot lie in more government, but on rolling back the government interventions that insulate corporations (and their shareholders and executives) from markets, communities, and from the adverse consequences of their behavior. What interventions?

  • The whole regulatory state, which substitutes political battles and micro-management for stricter enforcement of private and community property rights;
  • Public company regulations, which raise barriers to capital markets (and thus barriers to entry) and which substitue a busybody by inept and corruptible government for shareholder vigilance;
  • Deposit insurance, that substitutes a card-house of prudential government regulations – that encourage moral hazard and games by bankers, traders, investment bankers and rating agencies rather than prudence – for oversight by depositors and their proxies; and
  • The initial government grant of limited liability to shareholders, which not only encourages shareholders not to worry to closely about the risks that ‘corporate’ actions pose to third parties, but has fuelled the growth of the regulatory state and external pressure by advocates of the ‘precautionary principle’.

Anger over our perverted ‘capitalism’ is perfectly fine and appropriate – nay, essential. But let’s have some clearer thinking, please.

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  1. TokyoTom
    July 6th, 2011 at 11:39 | #1

    FD, the “agent – principal” problem you describe is very real, but not a primary consequence of limited liability. It is a rather attenuated result, to be sure, but one more clearly seen as a consequence of the “public company” regulations that in effect free management from shareholder supervision.

    While in public cos shareholders typically have no real voice, that is certainly not the case for private (non-listed, closely-held) companies.

    Of course the rise of public, government-regulated capital markets is itself a product of the creation of limited liability corporations.

  2. FDominicus
    June 19th, 2011 at 06:28 | #2

    Well there is but one problem with limited liability. The stock holders have nearly no way of “influencing” the managers. And the managers do everything they can to be among themselves, with as less liability than possible. And so it goes. The stock holder does not have influence the managers gets grossly overpaid and if things turn bad they are a off an away for another round of stealing.

    Because property rights are restricted more and more, people just “put” their money somewhere hoping to find the “less” worse company.

    But otherwise I just think you’re right.

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