Msgr. Richard M. Liddy
Center for Catholic Studies
Seton Hall University
May 25, 2010
Dear Msgr. Liddy:
Five years ago, you pointed out the commonality between the “insights” of Bernard Lonergan and my work on democratic capitalism. Lonergan predicted accurately that the prevailing system would lead to catastrophe. Lonergan also commented that “the new system for our collective survival does not yet exist.” I think that it does exist, but lacks visibility.
I have read your spring 2010 Lonergan Review with interest. I was, of course, pleased to see the extensive quotations from my book, Democratic Capitalism, in Joseph Bishop’s “Lonergan’s Economic Perspective.” My warning in 2004 was about how speculation with borrowed money would deflect capital from the job-growth economy, a repetition of the 1776 warnings by Adam Smith. (see article # 4 on web site www.democratic-capitalism.com under “Introduction to Democratic Capitalism.”)
Lonergan took the atypical position that the boom-and-bust business cycle, like the one now victimizing so many, could be controlled. This is the subject of the essay #19 “No More Recessions,” now on my web site. The article proposes that our government already has the tools necessary to contain the business cycle in the up direction by preventing asset inflation in stocks and real estate if only the same determination that is applied to preventing price inflation will also be applied to curtailing asset inflation.
Lonergan also wrote extensively on the distinction between “the basic circuit and
surplus circuit.” Here again he was prophetic because since Lonergan’s time,
American capitalism has perverted the “flow,” as he called it, from basic to surplus. The “flow” has essentially stopped because the surplus has been used for stock buy backs and deals, rather than for investment in growth and dividends to wage-earner capitalists. Over a trillion dollars has been wasted during the past decade on stock buy backs, a Wall Street favorite, to hype the stock price. Most do not recognize this perversion of capitalism that in 2006, for example, took $585 billion more stock out of the market than was issued in new stock for growth. This is a dramatic example of how Wall Street has abandoned its prime social function: moving savings into job-growth investment.
Besides this mal-distribution of corporate surplus, for the past quarter century “shareholder capitalism” has used quarterly earnings per share as the nearly exclusive focus for rating corporate performance, thereby pressuring companies to sacrifice long-term growth plans for short-term earnings. At the same time, virtually every deal was acquire and fire, and private equity became buy it, strip it, flip it, the common denominator being cutting back on growth and firing people.It is tragic to think of how many innovative new products, the “surplus circuit” in Lonergan’s words, that were arbitrarily terminated. These additional perversions of capitalism are examined in essay, # 20 “A New, Improved Capitalism.”
Wage-earner capitalists are now a major source of capital through pension savings, but the capitalism that traditionally exploited their labor has now learned how to exploit their capital. Worker-capitalists have become passive victims while the rules written by Wall Street and Washington damaged their savings; charged them 10 times the rate that index funds charge for handling their money; and forced them into risky investments because no-cost money has destroyed their bond income. Sensitive to this destructive potential, Lonergan challenged us to find “creative solutions.” I respond: How about a tax-free “Repair America Bond” that takes part of the remaining $2.3 trillion of 401(k) savings out of Wall Street to repair the $2 trillion of overdue infrastructure work? Perhaps this is the solution to “too big to fail”: Let us downsize finance capitalism by taking the money away.
Information Age industries have learned that the democratic moral work culture is necessary to release the cognitive power of their people, their prime resource.
Thousands of case studies of the pioneers in the new system indicate that the management philosophy is bottom up, decentralized, and empowered rather than hierarchical command-and-control and that the inherent morality gives each the opportunity for full development in an environment of trust and cooperation. With this philosophy, which certainly should be familiar in Catholic Studies, the whole shall be greater than the sum of the parts. The demonstrable fact that the moral is more profitable sounds radical, but was proposed by both Marx and Mill in 1848 (see articles # 10 & 11), and it had been empirically verified before them by Robert Owen in his spinning mill (see article # 9). The difference now is that the natural morality of democratic capitalism has become a competitive necessity in Information Age industries. This responds to Lonergan’s challenge: “From moral theorists economic precepts must arise out of the economic process itself and promote its proper functioning.”
Good work is being done on this alternative at the Rutgers School of Management and Labor Relations (David Finegold, Dean). Rutgers now has more than 30 fellows at different universities around the world, including a Carey Fellow, and also a new book by Professors Blasi and Kruse, Shared Capitalism (University of Chicago Press). I hope that there will be an opportunity to explore the potential synergy between their unique work on worker ownership, and your continuing study of the requisite culture.
The “reforms” coming out of the Washington-Wall Street nexus are cosmetic and they are already back to business as usual evidenced by 25 hedge fund managers “earning” an average of $1 billion each in 2009. The alternative with required reforms will have to come from determined citizens aided by reform-minded educators.
I think that the democratic capitalist alternative is well defined including the actions required to shift government support to it and away from finance capitalism. I hope to have the opportunity to examine this alternative with you and your associates at the Lonergan Institute.