The Fight for the Soul of American Capitalism

One of the most remarkable issues that should be the center stage in the Republican race to the White House has slipped under the radar of much of the Occupy Movement, the nation and the news media; the issue of what defines capitalism. A few weeks ago during one of the Republican debates in Florida Newt Gingrich challenged Mitt Romney on the virtues of private equity firms and whether or not they add jobs to our economy.  This week before the primaries in Michigan, Rick Santorum attacked Romney for opposing the bailout for Detroit but supporting the one for Wall Street. So, who’s right and who’s wrong? And why should Americans care?

Capitalism is at a crucial stage in its evolution and politicians looking to define its future only need to look at its recent history to see how it has influenced our culture. Since the early days of Adam Smith capitalist economies have gone through 3 distinct stages of upward emergence: a pre-industrial society defined by rural/agricultural values, an industrial society defined by the values of the industrial revolution, and a post industrial society, which is more aptly known as the New Economy. Somewhere along the line in the last 30 years the promise of the new economy was sidetracked and calls to bring back the values of the old economy grew louder by the day.  This is a fight between what remains of the values of the industrial economy and the promise of the new economy if it’s able to evolve and redefine itself.

The ideas for this new economy gained traction in the 1970’s when it preached the values of the clean and white color work of a labor force composed mostly of the service industry, science, knowledge and technology. There will be no heavy lifting in this economy. Manufacturing was quickly becoming a thing of the past. The Reagan era ushered in its values by systemically deregulating every aspect of the industrial economy. Reagan went on to lay down the platform of this new expression of capitalism by curtailing the growing influence of labor unions when he famously fired 11,000 striking air traffic controllers. In doing so he sent a message to American corporations that the scales of fairness have tipped heavily in their favor. While all this was happening Economist Milton Freidman’s  Monetarist ideology that preached the virtues of “only money matters” was taking America by storm. Corporations loved it and with Alan Greenspan becoming the man in charge of money the shift to the new economy was complete. In the  years that followed the Clinton and Bush administrations brought Reagan’s reformist agenda to the banking industry, which gave impetus to financial engineering and placed Wall Street and the bankers squarely in charge of our economy. This was the sidetrack not the initial vision of the new economy and any definition of the future of capitalism must include this observation.

Although prosperity has grown much quicker under this expression of the new economy the unfair redistribution of wealth is very telling of its virtues. This economy favored the stockholder, which excluded much of the working class while the industrial economy catered to the wider stakeholder. CEO pay was roughly 32 times average worker pay in an industrial economy while under this economy it’s more than 330 times. A worker in manufacturing on average makes $18 an hour, while a service worker averages $9 an hour. Economic power under an industrial economy was distributed and diverse, under this economy it’s concentrated and follows the dictates of Wall Street.  Asset values and output under the industrial economy were known and measurable, under this economy they’re vague, notional, and rarely understood. This is the primary reason for how  our government was able to design an effective bailout package for Chrysler and GM. The average well informed, industrial-age business manger understood the challenges the auto industry faced, while very few individuals around the world understood the challenges Wall Street faced. Under this sidetracked economy, gambling with billions became legal and it was clothed in sophisticated algorithms formulated by geniuses in suits whose practices culminated in the financial crisis of 2008. Wall Street was upset at Detroit’s bailout because it lost the bet that would have allowed it to collect 100 cents on the dollar through an insurance policy called a credit default swap if Chrysler and GM were to fail.

This should bring to an end the argument about the toxic and unhealthy practices of Wall Street and bring the debate on which form of capitalism is best, but it isn’t that simple. Wall Street is here to stay, but its practices have to evolve and be made to serve the whole economy. Just as worker abuses were common in the early stages of the evolution of an industrial society, toxic practices are part and parcel of a still emerging knowledge society. Politicians need to look to hire geniuses that understand Wall Street but are committed to serve their country in order to intelligently design the pathways for proper emergence. In the age of financial engineering, this is one element of what I call Smart Government. Politicians preaching the virtues of manufacturing have to also understand that innovation has completely revolutionized the process of manufacturing and its business model has to stand on its own and have the directive that it must compete with emerging economies on its own merits.

Above is a brief summary of 2 of the 5 elements that form the pillars of what I call “Functional Capitalism” which are detailed in my upcoming book about how to design for a future economy based on the emerging science of value systems.