Since the Industrial Revolution in the 18th century there has been a fundamental conflict in the economic system among ultra-capitalism, democratic capitalism and collectivism. Ultra-capitalism, or mercantilism, was the prevailing system and had the support of the wealthy and powerful. Profits were based on suppression of the wages and benefits of the workers in a culture of fear and intimidation. Concentrated wealth was used to concentrate political power. Imperialism dominated other nations for perceived economic benefit. Hard currency was hoarded to fund the next war. It survived and grew through the support of the establishment.
Democratic capitalism is the economic system in which more wealth is produced and distributed broadly based on the participation of the workers motivated by a fair share of the improvement. The work culture is trust and cooperation. It holds that free trade can unite the world in economic common purpose and stop the violence. It has survived and grown based in its innate social and economic logic.
Collectivism has had the support of the reform minded intellectual community responding to the exploitive nature of ultra-capitalism. Instead of synthesizing Smith. Marx, and Mill in order to advance capitalism to a new mode they applied their reform energies to changing the political system.
Collectivism, in the form of socialism and communism, tried to centrally plan the economy in order to better distribute wealth. It failed because central planning cannot assimilate complex, rapidly changing data, only the spontaneous order of the free market can do this job. Central planning also rules based, not results based, an environment that de-motivates the people. Both the inefficiencies of central planning and the de-motivation of people reduce the amount of wealth created thereby limiting the intended better distribution.
Democratic capitalism depends on financial motivation from ownership participation in a work culture of trust and cooperation. This culture in turn depends on the education and quality of managers. Democratic capitalism continues to grow and demonstrate its superior capacity to build and distribute wealth but it has been limited by the lack of assimilation by the intellectual community and by the lack of visibility in education. It is not offered to liberal arts students as the way to improve the human condition, nor is it offered to business school students as the way to manage for superior performance. Every generation of democratic capitalists has to reinvent it by trial and error.
Despite this handicap there are more than 25 million American wage earners who now have ownership participation plus the more remote ownership represented by pensions and 401 (k) savings. Employee ownership is promulgated and supported by organizations such as NCEO (National Center for Employee Ownership) and the Beyster Institute. Books on the subject such as Jeff Gates Ownership Solution include enthusiastic testimonies from senior Republicans and Democrats along with Martin Luther King Jr’s widow. The author of Russian perestroika, Mikhail Gorbachev, a 20th century visionary, described worker ownership as the central issue that can transcend the conflict between capitalism and socialism in order “to create a new sustainable civilization.” Despite this broad support as the long sought “third way,” democratic capitalism is still not offered in the universities, the American political structure is even more dominated by ultra-capitalism, and the academic debate is still between ultra-capitalism and collectivism.
Students with an opportunity to examine democratic capitalism would discover, contrary to prevailing intellectual views, that the most effective form of capitalism is moral. Religions and democrats would find common cause with communism in democratic capitalism because of its belief in the worth and potential of each person, or as Marx expressed it: “the greatest development of each is the condition for the greatest development of all.”
A democratic capitalist education should include a study of Adam Smith’s first book on benevolence along with his second book on the Wealth of Nations, in which he outlined the economic system that could provide the ultimate benevolence-the elimination of material scarcity in the world. The conflict between ultra-capitalism and democratic capitalism would be resolved if enough citizens understood the few conditions that Smith specified for its success, peace, neutral money, that is without influence on the commercial process, and control of the speculators with borrowed money. The education of students in democratic capitalism could continue with study of Marx and Mill in mid 19th century. After identifying concentrated wealth as the continuing impediment to economic freedom reaching full potential, both proposed worker ownership as the way to build more wealth and distribute it broadly. Marx also identified world wide economic common purpose as the force that would erode the influence of the warrior state. Mill avoided Marx’s fatal error and integrated the benefits of worker ownership with private property, competition, and skilled management.
America for over two centuries has provided the opportunity for more people to live well than any other system in human history. It has, however, functioned well under full potential because of a fundamental disagreement in how the political-economic system should function. Thomas Jefferson believed in a system based on the involvement of independent thinking, educated, citizens. His ideal was reflected in the Declaration of Independence and the Constitution. Alexander Hamilton, on the other hand, believed that the new nation would depend on the involvement of the wealthy and powerful and that privileges would have to be given them to gain that involvement. The new nation was structured according to Hamilton’s elitist philosophy, not the democratic optimism about people of Jefferson.
America was a new start to history according to Thomas Paine. It was the ‘Happy land where the hand of genius was free ??” according to the Marquis de Condorcet. Its mission was to combine democracy and free market capitalism in a synergistic way. It never has and from the beginning democracy and capitalism have been in tension.
It failed because both democracy and capitalism reach full potential only from the participation of well-educated people. It failed because the political structure provided non-democratic privileges to the few that resulted in concentration of wealth. It failed because citizens were not educated in those matters requiring reform.
Reform of the American economic system is urgent but conceptually simple. It is the flip side of the reasons for its failure beginning with citizens educated in financial matters sufficiently to demand that currency and credit are, in fact, controlled for the general welfare, not for the benefit of the speculators.
Americans still celebrate the democratic theory but the political-economic reality is still the flawed operating system installed by Hamilton as Secretary of Treasury in Washington’s first administration. The privileges were mainly the opportunity to speculate with borrowed money free of government control of asset inflation in stocks and real estate. It is this flaw that has caused repetitive recessions beginning in 1818, including the Crash of’29 and the Great Depression, the Bubble economy of the 1990s, and the recession now beginning in 2006. Currency and credit has been controlled, not for the general welfare, but rather for Hamilton’s constituency, the wealthy and powerful with the present result record concentration of wealth and a diverting of much of the peoples’ pension investment money into consumption by the finance capitalists.
ERISA mandated in 1974 full funding of potential pensions, that is, money taken out of companies and presumably invested for future gain. This enormous new flow of cash, seeking good investment, was instead diverted to Wall Street where much of it is going into annual consumption by the finance capitalists. The fundamental discipline of capitalism, to invest present surplus for future gain, is being contradicted with a large part of the cash going into consumption. The greatest investment opportunity in the history of capitalism was lost and the mission to protect pensions failed for both private and public plans. The funds are not there for these plans, nor Medicare, social security, and government pensions including the military. The country is broke while the feast goes on!
The only thing that can make this picture worse is a country already at record levels of private and public debt growing at 50% faster than the country’s GDP. Debt is not a bad thing if it is going into investment for future gain. American debt, however, is funding consumer spending and the military-industrial complex, not investment for long-term gain.
America had two extraordinary opportunities during the last quarter of the 20th century. In combination they represented the world’s best chance for peace and plenty from the synergistic combination of democracy and capitalism. One was ERISA whose mission was the protection of pensions but whose enormous capital mandated for investment provided the opportunity to democratize capitalism. The other opportunity was the world moving toward economic common purpose dramatized by China and India taking about one-half billionpeople out of extreme poverty in a decade. Instead of leading in economic freedom at home and economic common purpose abroad, America was trapped by earlier mistakes of its leaders and tried to use its military power to change countries. Instead of the world’s biggest economy joining China in economic common purpose, the American military-industrial complex was systemically trying to make China an enemy to support their one-half trillion dollar annual budget. China in the meantime is making commercial arrangements and inviting countries around the world: “let’s get rich together.”
Both political parties are intimidated by the military-industrial complex and their regular “call to arms.” The most fundamental ideological battle is between those who believe that war is inevitable and those who think that reason is ready to prevail in the relations among nations and people. Taiwan is already being set up by our military support as the next matter of “national honor” that can provoke war with China and more young people sent to other parts of the world to be killed and hurt.
Democratic Capitalism, The Way To a World of Peace and Plenty examines democratic capitalism and the conflict with ultra-capitalism. This second book examines how Americans have a special responsibility as citizens of the world’s most powerful nation to examine and act on matters that will determine how humans will live in the 21st century. Citizens will find that reform of the American economic system must be the starting point. Economic freedom has been demonstrated as the way to eliminate material scarcity in the world but it is now functioning at a fraction of potential because of record concentration of wealth. Until citizens reform the economic system America will not be able to lead the world in economic common purpose, the only alternative to continued violence.
After the world is united in economic common purpose and the standard of living is visibly going up then young people in all cultures will pressure their governments to provide them similar opportunities. The Singapore experience demonstrated that movement from tyranny to economic freedom is actually easier in authoritarian countries than democratic. The participation of independent thinking people in companies free to compete will in time encourage all freedoms. While an authoritarian country can move faster to economic freedom its most productive form ultimately requires democratic freedom. Once the freedom genie is out of the bottle, however, it will spread from the economic sphere to all political freedoms.
American must face, however, the fact that both participatory democracy and free market capitalism are now seriously flawed. American policy is not based on the “will and wisdom” of the people filtered by an “aristocracy of talent and virtue,” it is lobbied by a few for either greedy purposes or for an ideology inconsistent with democratic principles. America has not spread democracy in the world we have regularly used covert means, CIA, to get rid of democratically elected leaders from Iran to Guatemala. America is making a mockery out of free market principles by allowing easy credit to fund disasters from hedge fund LTCM (Long Term Capital Management) to hedge fund on top of a gas line, Enron.. America proclaims free trade while continuing with thousands of tariffs and worse hundreds of billions of dollars for rich farmers that raises prices for poor consumers and deprives farmers in poor countries of their best change to work their way out of misery.
It is not a proud record but reform is not complicated: return to the Founders’ democratic ideal of a country of, for, and by the people. After the universities and popular media provide the knowledge the people will get it right in the long term. Their informed consensus will displace the egregious mistakes of the few.
The people can learn Adam Smith’s conditions for the success of free markets and use democratic power to modify the political structure and distribute wealth broadly. People will learn the refinement of Smith’s free market by Marx’s and Mill’s cooperative work culture and worker ownership that both builds more wealth and distributes it broadly. People will learn to prioritize economic common purpose in the world as the only way to stop the violence. It will take time but as the standard of living visibly goes up the violence will go down. Young people in totalitarian countries will view the good life on TV and the Internet and, in time, will demand the same opportunities.
This is the way to a world of peace and plenty.