April 11, 2011
Dean Nitin Nohria
Harvard Business School
Dear Dean Nohria:
The opportunity for HBS, described in my letters of March 28 and April 3, to educate MBA’s in democratic capitalism will lead towardsa world of peace and plenty.
Selected events below trace human history from folly and violence to peace and plenty. The freedom-based economic system has demonstrated the capacity to provide “plenty,” while economic common purpose can provide “peace” in a benign inversion in which the standard of living goes up, and the violence goes down.
Greece at the time of Plato: The mode of production was slavery, wealth was concentrated, war was celebrated, commerce demeaned, and force used for economic gain. Not much to learn about social progress here.
Serfdom in the Middle Ages: The mode of production had advanced slightly from slavery, wealth was concentrated, wars proliferated, and force was used for both economic gain and religious conflict. Europeans began five centuries of using force supported by gunpowder and naval skills to colonize the world.
Early 17th century: The firstBritish settlers in America tried communal ownership of land and property. Within six months, more than half of the 200 settlers in Jamestown and Cape Cod were dead, mainly from starvation. New leaders blamed the failure on the absence of property rights that destroyed incentives and then solved the problem by giving the settlers three acres each.
1776 American Revolution: British statesmen, such as Edmund Burke, took many years to convince George III that Great Britain was better off trading than fighting with America.
1776 Adam Smith’s “plenty” (article # 4): With potentially enough for everybody, there were no reasons to fight over scarce resources. Smith in his first book emphasized trust and cooperation as the requisite culture, and in his second book emphasized individual ambition as a motive force. More wealth would be produced and distributed broadly when managers harmonized these two.
1800 Immanuel Kant’s “peace” (article # 5): Nations must take the same action as “savage man, namely, to give up brutish freedoms to seek security in lawful constitutions.” Violence has been contained since by civic structures but not yet by global ones because the U N needs reform and support.
1815 Owen’s capitalism (article # 9): The mercantilists tried to maximize profits by suppressing wages and benefits while Owen made better profits from investing in higher wages, shorter hours, early education, better housing, and a culture of trust and cooperation. The mercantilists even flogged eight-year-old kids on the night shift in their “capitalism” that disgusted most of society.
1818 Recession: The Founders wanted diffused political and economic power. Hamilton, as the first Secretary of the Treasury, disagreed and gave privileges to the rich and powerful to speculate with borrowed money. The Panic of 1818 was the result. Thousands were out of work and hundreds were put in jail for inability to pay $20 debts.
1820 Post-Napoleonic Wars: Wealthy and privileged British collaborated with their government to deflate the currency, purge the effect of war-time inflation, and restore their riches to pre-war levels. Ludwig von Mises thought that the resulting “calamitous economic hardship” caused the “anticapitalistic agitation from which Engels and Marx drew their inspiration.”
1835 Andrew Jackson won a fierce political battle by vetoing the national bank. His favored state banks, however, failed to keep easy credit from the speculators and caused the Panic of 1837.
1848 Marx: Almost a democratic capitalist (article # 10): Marx’s visions included affirmation of each individual’s opportunity to reach potential, a change in the culture from alienation to cooperation, motivated workers adding productivity from ownership participation, and the warrior state’s becoming irrelevant through economic common purpose.
1848 Mill adds the moral dimension (article # 11)” Mill integrated private property, competition, and morality to the thinking of Smith and Marx to complete the synthesis that is democratic capitalism. “It is scarcely possible to rate too highly this material benefit, which yet is nothing compared to the moral revolution in society that would accompany it.” Most academicians are familiar with Mill’s On Liberty but few have read “The Probable Futurity of the Labouring Classes” in his Principles of Political Economy.
1870 Post-Civil War: Americans copied the British and put many out of work in order to deflate the currency and restore the assets of the wealthy to pre-war levels.
1900 Marxists: Marx had provided the fundamentals of the work culture but the Marxist destroyed them in a fatally flawed political structure. Central planning did not work because it cannot assimilate complex fast changing information and de-motivates the people. Marx’s culture of trust and cooperation became instead the killing machine of the 20th century.
1913 The Federal Reserve Board’s mission; The American government organized the Federal Reserve Bank in response to repetitive recessions and liquidity crises. Its ugly mission, however, was to determine how many people had to be put out of work to prevent price inflation from eroding the asset value of the few.
1929 Crash and Great Depression: The crash was caused, as usual, by easy credit for the speculators that deflected capital from the job-growth economy. Hoover fumbled his way into the Great Depression by raising taxes retroactively to 63%, shrinking the money supply 30% in two years, and encouraging Congress to start a global tariff war by enacting Smoot-Hawley.
2007-08 Disaster: Besides speculators with borrowed money deflecting capital, the “liberators of capital markets” promoted deregulation based on their misunderstanding that free-markets forces apply to finance capitalism. Smith argued rightly that money is a simple medium of exchange and that the costs of finance capitalism were a subtraction from the wealth of nations.
2011 Domination by finance capitalism: Despite the economic disaster caused by finance capitalism, wealth continues to be concentrated with the top 1% holding 35.6% of the nations’ wealth up from34.6% in 2007. If the top 25 hedge fund managers paid ordinary income taxes, not 15% capital gains tax,the government would have $4 billion available to save teachers’ jobs.Question: your government took dramatic, quick action to put the Wall Street perpetrators back in business, why are tax loopholes like this still making the rich richer and the poor poorer?
Most measurements show America in decline following the pattern of other nations that allowed their economy to become dominated by finance capitalism. HBS could lead in reversing this desperate trend by reforming finance capitalism and promoting democratic capitalism.
Once the impediments are removed, democratic capitalism will expand through its own economic and social logic managed by an increasing number of MBA’s motivated by its social benefits and trained in its protocols.
Ray Carey ‘50