Book Cover

Democratic
Capitalism,  The Way to a World of Peace and Plenty
by Ray Carey

Hard/Softcover/Kindle - 5 May, 2004, Available on Amazon.com

Ray Carey presents the theory and practice of democratic capitalism by coupling his experience with a synthesis of the thought of Adam Smith, Karl Marx, and John Stuart Mill.  The empirical evidence is clear: democratic capitalistic companies produce superior results, and nations that support economic freedom and keep money neutral improve the lives of their people.


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Course 4:23

Letters

Carey Center for Democratic Capitalism 

Feb 25, 2005

Cato Institute
1000 Massachusetts Ave.
Washington, D.C. 20001

            I hope that this letter can add focus for further discussions.  My proposition is that our country’s economy is in the middle stages of a “financialization” in which financial services dominate the job growth economy rather than support it. The threat that this presents to free markets is huge, complex, and fast moving. Cato is one of the few organizations with the free market mission and the sophistication to turn back this tide, if not tsunami.

            Concentrated wealth is at record levels and has provoked the usual outrage from the “have nots” and their representatives, along with the usual nonsense from the “trickle down” representatives of the “ haves.”  This concentration, with visible evidence of individual greed, has helped change our international image from the beacon towards freedom to an arrogant bully trying to run the world.  Less attention is paid, however, to broad wealth distribution, as a critical  principle in Smith’s economic dynamic to spread wealth around the world.  Free markets work when additional volume reduces costs and prices that then allow more people to buy if they have spendable income. (Democratic Capitalism, 278-284)1 Henry Ford figured this out in 1915 and raised wages to $5 a day so his workers could buy the model T’s. Globalization is now managed on the mercantilist philosophy in which profits are presumably maximized by suppressing wages and benefits. (p.182, 193). This cannot work in the long-term because people need money for reciprocal purchases in order to energize the economic perpetual motion machine that can eliminate material scarcity in the world.

Kevin Phillips in Boiling Point called attention to what financialization can do to great nations: first Spain in the 16th century, Netherlands in the 18th, Great Britain in the 20th, and now our turn?  The manifestations are a shifting of taxes from capital to the middle class, shrinking of manufacturing, an explosive growth of financial services, and record concentration of wealth. (p. 258). Profits are now so good in financial services that they seem insulated from the big cash settlements required by so many cases of wrong doing.

In your mission to support free markets you properly identify the ideologues of the American Empire who push a strong government agenda that is in contradiction to the proper role of America, which is to spread the benefits of economic freedom around the world. I regard, however, the ideologues of the liberalization of capital markets as an equal threat to America’s future. The two in combination are truly scary.  Apparently the ideologues of the liberalization of capital markets quit studying Smith before they got to the part about neutral money, and control of the speculators. Financial services have grown from 4% to 40% of total corporate profits with  the share of total S&P market capitalization up to 25%. GM and Ford make 125% and 157% of their profits from financial services, that is, they are losing money on cars. Imagine what the overall numbers would look like if we followed Smith’s advice and treated financial services as administrative expenses to be subtracted from the wealth of nations

The financialization threat to our long-term economic success is the result of mistakes caused by the lobbying of Wall Street and the inability of Congress to dig deep and get it right. These mistakes are in fiscal and monetary matters that few have the financial sophistication to examine and challenge. The two big mistakes were Nixon floating the dollar without an alternative stabilizing mechanism, and ERISA pumping $100 billion a year into Wall Street with no examination of whether the money went into investment in the job growth economy or only into pushing up stock prices. There was similar lack of examination of how much it cost to get from savings to investment. The mutual funds, for example, contradicted the laws of supply and demand by raising their prices at the same time that the volume of their business was growing strongly. (p. 204) These two mistakes caused the excessive liquidity and volatility that provoked the financialization of the economy. Inattention to the fundamentals of this savings-investment equation continues in the discussion of privatizing social security, that is, where does the money go, and how much does it cost to get there?

 Greedy CEOs are a popular target as many were seduced by ultra-capitalism with millions of stock options. (pp.118-123) All CEOs, however, were pressured to choose short-term earnings over long-term growth. The short-term choice gave some the high P/E to acquire other companies. Others were forced to sacrifice long-term plans because they knew that if they did not protect their high P/E they were easy targets for the take-over artists. (Chapter 8) M&A activity is heating up again but with a new twist, the presence of the hedge funds including lots of wage earners’ pension money.  They will do new damage with their large war chests, unregulated status, and knowledge of how to play games with derivatives. 

In Democratic Capitalism I examine the rise of ultra-capitalism in detail but only after a full examination of democratic capitalism, its philosophy and protocols. (Chapters 4&5) Despite the clarity and comprehensive treatment of democratic capitalism by Adam Smith, Karl Marx and John Stuart Mill, and the experimental verification by Robert Owen, (chapter 3) it has never been presented as a coherent whole for student examination in Business or Law schools or, for that matter, in the liberal arts despite their mission to improve the human condition. There has been a massive intellectual default during the whole industrial revolution by those who could have presented the good capitalism but have preferred to stay with their contempt for commerce that has persisted from the time of Plato.  The result is that democratic managers must continue to reinvent democratic capitalism.

The democratic capitalist proposition has not changed: investing in people in a moral environment maximizes profits. Owen demonstrated this synergy of quality of life, moral values, and profits in practice. Mill later connected the dots among these crucial components but few paid attention then and now. (p.49) If democratic capitalism is not examined in the university, and is rarely mentioned in the popular media, as Bill Greider asked in one of his books: Who Will Tell the People? I hope that Cato will examine this opportunity.

Fortunately the problems are susceptible to simple solutions that are detailed in my book: they include tax-free dividends for low-and-middle income wage earners, (pp.183, 193) a change in measurement of corporate performance from quarterly and annual e.p.s. to a three year running average of sales, cash flow, and profits,  measured against predictions (p. 395) and a steady reduction of the borrowing leverage for speculation.  These actions would activate the trillions of dollars of 401(k) and pension money that are now subsidizing Wall Street, move the stock market away from its casino function back to being a source of equity capital for growth, and regulate speculation with borrowed money, the persistent impediment to capitalism functioning at full potential. There are other actions needed in support of democratic capitalism including reform of the U.N. but they are not relevant unless lives are being improved and the world is uniting in economic common purpose. (pp.482-493) The intention of our Founders to harmonize democracy and capitalism was partially accomplished and the concept is still attractive to a huge democratic majority—if properly presented. They now have little influence on the political process but represent the potential voting power to support reform once an agenda is defined.

I appreciate that you  find my book of interest  and hope that others at Cato have read it. It is the product of 30 years of running companies, including 18 as Chairman and CEO of ADT, and then almost 20 years of intensive study about what free markets need to function at full potential. Full potential meaning feeding, sheltering, clothing, educating, and providing good health for over 6 billion humans, and meaning the substitution of economic common purpose for violence in a world now trapped by reciprocal atrocities. Chapter 10 includes ten hypotheses in a logic trail that leads, according to my analysis, to a world of peace and plenty. Please study hypothesis # 1 that requires validation before proceeding to the other hypotheses. It argues that Marx was right when he rearranged the economic system, culture, and political structure to give priority to economics to be assimilated by the culture with government then restructured in its support. Acceptance of this hypothesis has profound implications.

Cato concentrates on the pathologies of collectivism, which you do very well. You do not, however, in your examination of the role of government in the free market, emphasize acceptance of Adam Smith’s qualifications for the free market to function. The “peace, easy taxes, and a tolerable administration of justice” is understood by most, but the specification for neutral money and control of the speculators, (prodigals and projectors as Smith called them) does not seem to register with many.  Neutral money was highlighted by our Founders as the responsibility to “control currency and credit for the general welfare” The importance of neutral money has also been emphasized by 20th century free market philosophers such as Friedrich Hayek who identified the worst sin of government as non-democratic privileges that result in money having a dominating influence in the commercial process. We are in the grip of the Great American Contradiction that frees what should be controlled, and controls what should be freed. The government tells companies what shoes to wear and ladders to use while simultaneously deregulating monetary matters and suspending market disciplines. (pp 263-265)

From the time of Hamilton the wealthy and powerful have enjoyed privileges to speculate with borrowed money resulting in economic panics from 1818 to 1929.  In the past quarter century, however, this impediment to free markets has escalated into a dominance that threatens permanent damage to our economy.  Imperial overstretch, budgets deficits, and current account deficits puts America into uncharted and dangerous territory. Reform must begin by purging ultra-capitalism (chapter 7) and moving to democratic capitalism in the domestic economy followed by leadership of the world to the benefits of free markets. How did the most successful free market economy in history give up economic leadership for the use of military power to run the world?

Please consider that Collectivism with all of its micromanagement waste and inefficiencies is the Democratic response to concentrated wealth from privilege. In a vague way the Collectivist thinks that they are justified to tax and spend because they see the enormous concentrated wealth and know that much of it is the product of government privilege. Our government is polarized between those protecting privilege to concentrate wealth and those trying to redistribute it. This grid lock can be broken only by discovering that democratic capitalism is the superior free market system, based on traditional values, that improves the human condition thus satisfying the missions of the left and the right. The problem is that no one, except those enjoying the feast, understands the fiscal and monetary policies that provide the privileges and consequently the free market continues to be corrupted. This is where I believe that Cato has a unique capability. You have the mission to support free markets, the financial sophistication to understand the corruptions and solutions, and the infrastructure to promote real reform. 

I argue that the best way to defeat collectivism is a move to democratic capitalism that not only distributes wealth broadly but before that creates more wealth. Once wage earners are enjoying a “capital wage” along with their labor wage they will pressure government to copy democratic capitalistic principles and restructure from rules based micromanagement to results based decentralization and empowerment.  Conversely, the “starve the beast” Republican plan now being followed, in combination with the expected economic decline, can cause social tensions worse than the Great Depression that came close to destroying this great democratic experiment.

In my first letter to your President Ed Crane in 1989 I identified ERISA pension money as the reason that Wall Street was able to dominate Corporate America. At that time, you will remember, the world was a promising place with economic freedom spreading to Eastern Europe, South America, and Southeast Asia.  I was convinced that the end of Communism was the beginning of the world of peace and plenty, and that the parts of the world still full of violence and misery would gradually be changed to economic freedom by the pressure of their people who could see the benefits of economic freedom on TV and the Internet. I used Singapore as the case study in how economic freedom can improve lives in an authoritarian government with political freedoms following once the freedom genie is out of the bottle. (pp. 449-451) Despite this encouraging progress the competing momentum from ultra-capitalism caused me to warn of an insidious development as our economy was becoming steadily more financialized.

Democratic Capitalism, in chapter 7, defines ultra-capitalism as the combination of old-fashioned mercantilism that treats the wage earner as a disposable cost commodity, and finance capitalism that is dominant over, not supportive of, the job-growth economy. Chapter 8 is a play that depicts the terrible choice facing CEOs, and chapter 9 is  “Enron, the Poster boy for Ultra Capitalism.”  It argues that while Enron may be about greedy executives it is, more importantly, about how the Wall Street-Washington nexus provides government privileges for the easy credit that allows an Enron to happen.  Several chapters of my book are a textbook about democratic capitalism and promote a “capital wage” through tax-free dividends for low-and-middle income wage earners. Also presented are ways to create more wealth and spread it broadly through profit sharing and ownership plans like the Care and Share that I designed and put in place at ADT. These plans are the most motivational because the wage earner has to put up some of their own money.  These plans will not work unless the culture is changed to participation through trust and cooperation. (pp. 45-47)  (United Airlines gave worker ownership a bad name because they did not change the culture.)  . 

I have a tendency to concentrate on the evils of ultra-capitalism and not describe the wonders of democratic capitalism sufficiently. This is because ultra-capitalism is the bone in our economic throat that must be removed before the benefits of economic freedom can be released again. I hope to have the opportunity with CATO to present why democratic capitalism is the most profitable because it is moral. Not quite conventional wisdom about any type of capitalism, but I think it is a proposition that can be validated. Similarly, the conventional wisdom that the government and the culture must contain the “animal spirits” of a economic system that is amoral at best, and more likely immoral, is reversed because there is evidence that the moral environment of democratic capitalism actually spreads a benign infection to the contiguous community. This should not be surprising as trust and cooperation is the natural condition of humans and will be carried into the community from people in companies that encourage this culture. I also propose, contrary to conventional wisdom, that the Great Depression did not destroy the theory of free markets finding equilibrium. The cause of the Crash of ’29 and the Great Depression was speculation with borrowed money in contradiction to Smith’s classical economic theory, followed by three monstrous mistakes by Hoover. The free market will find equilibrium if currency and credit is, in fact, controlled for the general welfare. (pp 209-216).

Another case study that I believe is critical to understanding the economic threat is the damage done to the Asian “Tigers” in 1998. Rubin and Clinton jawboned emerging economies into taking down cross border capital controls so that “free capital could roam the world looking for the most efficient investment.”  A good theory but in practice it became speculative capital rushing around the world looking for a quick chance to make money. The lack of controls of hot money (short-term loans) and currency speculation  (or even the threat of it) drove the currency down as much as 70%. It had been clear since Soros defeated the British in 1992 that the speculators with borrowed money have more power than the central bankers.  Basel I, written by the central bankers club, BIS, in Switzerland, did not find ways to monitor the quality of loans by requiring a matching component of long-term money and, in fact, wrote reserve rules that encouraged short-term loans. Neither did they have ways in a crisis to automatically convert short-term loans into long term. Hot money was able to rush in and out at great speed.  BIS  is now working on Basel II but these deliberations can take six years and there is no evidence of popular participation. The money tree is now $2 trillion a day in Forex, $1.2 trillion a day in derivatives. Soros warns of calamities ahead if we do not learn how to purge the instabilities. Who is representing the people in Basel II? 

Indonesia, the world’s largest Muslim nation, was the poster boy of how to improve the lives of people through economic freedom because it lowered the number of those under the poverty line from 40% to 10% in a few decades by standard free market moves.  American led ultra-capitalism then drove the Indonesians living in poverty back under 50% in a matter of weeks. Another Muslim, the prime Minister of Malaysia, called currency speculation unnecessary, unproductive, and immoral at a speech at a World Bank meeting in Hong Kong.  Footnotes to this tragedy: Indonesia became a location for terrorist training and funds; the popular media did not understand the economic causes and turned it into a political event easier to report; and finally the “Tigers’ did not even need more capital because of a high level of savings. The earlier opening up of Indonesia for foreign investment was real investment with real people working, not speculative money going into their stock market or excessively risky ventures. The Treasury Department and the IMF then treated a liquidity problem with standard cures and further slowed down growth. (pp 278-284). Joseph Stiglitz examined the confusion between a liquidity crisis and a capital crisis in Globalization and Its Discontents. (p. 280)

It is the ideologues of the liberalization of capital markets that I want to address in this letter, but before I leave the ideologues of the American Empire I want to call attention to Niall Ferguson’s 2004 book Colossus. Ferguson wishes that we were imperialists like Great Britain because he believes that Empires must stay and manage like the British did. In other words, we have the worst of both worlds in that we start actions like an Empire, but do not follow up with the requisite administration. Contrary to Ferguson’ sentimental and sanitized retrospection of  British imperialism, Joseph Nye, former Dean of the Kennedy School of Government and former Secretary of Defense, positions America as a leader towards economic common purpose and a strong team player in containing the violence. The title of his book summarizes it well: The Paradox of American Power, Why the World’s Only Superpower Can’t Go It Alone. (p.486)

In FDR’s view World War II was fought for two reasons, certainly to defeat Fascism but also to end Empires in the world.  Subsequently the British left India but unfortunately DeGaulle was repositioning France in the worst possible way and refused to leave Vietnam or Algiers until a lot more blood of young people was shed. Later America followed the French into Vietnam and 54,000 young Americans lost their lives.        

Back in 1987 Prof Paul Kennedy of Yale called attention in The Rise and Fall of Great Powers (p. 170) to “imperial overstretch” that precedes the fall of great nations. America now represents about one-third of the world’s economy but one-half of all military spending. The share of the world’s economy is shrinking while the percentage of military spending grows. This spending, combined with the financialization of our economy, has put this great democratic experiments in jeopardy. According to Hegel, the humans’ move toward freedom is one of struggle and contradiction with three steps forward and two back. Is it possible that for the first time we are in serious danger of two forward, three back?  If true, what a tragic, unnecessary failure.

Additional matters for discussion include:

In support of my call to Cato for help I resort to one of Cato’s Letters dated November 26, 1720:

National credit can never be supported by lending money without security, by raising stocks and commodities by artifice and fraud to unnatural and imaginary levels, and consequently delivering up helpless women and orphans, with the ignorant and unwary, but industrious subject, to be devoured by pickpockets and stock- jobbers, a sort of vermin that are bred and nourished in the corruption of the state.

I hope that we have learned from our misfortunes so that we may expect that no privileges and advantages be granted for which ready money might be got. I dare pronounce before-hand, that every scheme which they themselves propose to make their bubble and roguery thrive again, will be built upon the life and misery of this unhappy nation.

If our money be gone, thank God, our eyes are left. Sharpened by experience and adversity we can see through disguises, and will be no more amused by moon-shine.

Sharpened by experience and adversity these questions remain:

      Are financial services progressively dominating the economy?

      If so, is this a serious threat to the free market economy?
                       
      If so, will the Cato Institute analyze and recommend actions?

Sincerely.

Ray Carey

1 All references are to my book Democratic Capitalism , available on Amazon.com and n this website.

Ray CareyRay Carey

Ray Carey learned through managing companies for 33 years how to change the work culture to provide employees with their best opportunities to develop and contribute. This experience began as a 28 year old plant manager and later president of an electric motor company, and concluded with eighteen years as president , chairman, and CEO of ADT, Inc.

See Carey's autobiography of his work career in chapter two of his first book,

Democratic Capitalism, The Way to a World of Peace and Plenty.

For more information about Ray Carey and his advocacy of democratic capitalism, visit the pages of this website.


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Democratic Capitalism: The Way to a World of Peace and Plenty

Capitalism produces wealth from market freedom and competition, democratic capitalism maximizes wealth from worker participation. Their sharing in the improvement sustains motivation and adds consumer income that increases economic growth. The value system is trust and co-operation, the impediments are mal-distribution of wealth and violence among nations and people.

Surplus wealth was built by firing workers engaged in growth programs and by not increasing wages for productivity gains. Corporations avoiding taxes left $6 trillion of this surplus sitting in foreign accounts. The distribution of this surplus depends on a critical Board decision. It should be returned to the workers in wages, dividends, and profit sharing that add to economic growth, but managers influence Boards to repurchase shares to hype the value of options while hurting economic growth.

The workers are now capitalists through their pension funding, but they are not yet organized to influence policy. Finance capitalism continues to dominate the economy and influence politicians. Reformers who should correct this capitalist perversion do not understand wealth production from democratic capitalism; instead they concentrate on the political structure that distributes wealth.

CCDC June 27, 2017

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