Some of the more hyperbolic conservative writers are fond of tossing about charges of “socialism” or even “communism,” when addressing the economic proposals of progressive or liberal advocates, as if the latter were anti-capitalists. Perhaps part of the problem can be analyzed by first making it clear that I am a Democrat BECAUSE I am a capitalist; not in spite of it. Let’s start with a clear and commonly accepted definition:
“Capitalism: an economic system in which investment in and ownership of the means of production, distribution, and exchange of wealth is made and maintained chiefly by private individuals or corporations, especially as contrasted to cooperatively or state-owned means of wealth.” [Dictionary]
That’s simple enough for most people. The production, distribution, and exchange of things for money (wealth) is conducted by private individuals. Transferring wealth is managed by creating markets, i.e. I have some books, you want to buy two of them. We “make a market” when we agree on the price, you give me the money and I give you the books. You increase the value of your personal library by two books and I deposit the money in my bank account. If I can supply want you demand (two books) and we can agree on the price, we’ve “made a market,” and conducted a private transaction in the classic sense of capitalism. So, why revert to this elementary school illustration of what capitalism means?
Because there are those who have confused capitalism with unfettered individualism and unrestrained financialism, and therein lies the problem. Capitalism without some basic governance structure can quickly devolve into very “unfree” territory. Let’s look at two simple examples:
There is no free market when I monopolize the production, distribution, or exchange of an item. If I own the only publishing house manufacturing mathematics text books for high school students then every school, public and private, must agree, however grudgingly, to my price. This isn’t a free market, this probably closer to highway robbery. I am acting in my individual best interest — toward the maximizing of my profits, but I am definitely not creating a market in the classic capitalism sense of the term. Therefore, we allow a government to constrain tendencies toward monopolies in the interest of creating fair markets.
There is no free market when I can take someone else’s idea or product and pass it off as my own. If we were to take the free market idea to a ludicrous extrapolation then I would be “free” to manufacture, distribute, and sell anything — whether it’s mine to sell or not. However, the authors of the U.S. Constitution understood that this is not the way to run a fair market, so we have Article I, Section 8 allowing Congress to “Promote the Progress of Science and useful Arts, by securing for times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.” AKA copyrights and patents.
The U.S. Constitution also discusses other elements in creating fair markets. Congress can “regulate Commerce,” “coin money,” and “fix standards of weights and measures.” James Madison was quite clear about what he perceived as a major flaw in the Articles of Confederation:
“The practice of many States in restricting the commercial intercourse with other States, and putting their productions and manufactures on the same footing with those of foreign nations, though not contrary to the federal articles, is certainly adverse to the spirit of the Union, and tends to beget retaliating regulations, not less expensive and vexatious in themselves than they are destructive of the general harmony. ” [LOC]
Madison’s point is fairly simple: A totally free economic system without restraint and supervision moves very quickly from a free market to a free-for-all.
My point is essentially the same. When it’s “every man for himself” there is the least actual economic freedom. Adam Smith, battling the conservative forces of Mercantilism, believed that enlightened self interest predicated on long term vision would be enough to curb excesses, and should that prove insufficient, a bit of government oversight would be practical. [Investopedia] Unfortunately, Smith has been pressed into service to support unrestrained, and ill advised adventures, into free-for-all economics.
What does Capitalism need in order to create a viable economy for this nation?
If we agree with the authors of the Constitution that we’re better off when the federal government ( not each individual state) regulates interstate and foreign commerce, then our capitalist system needs some structure. If we agree with Madison that “general harmony” is a better foundation for our economy than unrestrained individualism, then our capitalist system needs regulation to encourage the creation of fair markets.
Now we come to the sticky part about ‘fair markets’ and The Invisible Hand.
There are those who argue, quite sincerely, that the consequences of economic decisions must be sought in the impersonal, invisible hand of the market. How does this relate to the little market example about the two books? It doesn’t.
Remember, in the example given above We Agreed On The Price. There is nothing invisible here, and the explanation is relatively simple:
“I have often argued (and as often to no avail) that there is nothing invisible in markets – in fact it is their necessary visibility that provides the essential dynamic for their operation. Prices are very visible; they have to be because prices are what influences purchases and competitive responses. Potential buyers do not have to ‘guess’ the price. Participants, you write, “look at, and compare, relative prices” and “decide what to produce, how much to produce, what to buy and sell,how to invest their capital (if they have any)”. [ASLostLegacy]
An unfair market is one in which values cannot be computed with any reasonable expectation of accuracy. If this sounds vaguely familiar, it should. The inability to calculate the actual value of securitized assets on the books of several major investment houses in the U.S. during the housing bubble collapse of 2007-08 was “invisibility” at its worst, and the consequences were obvious — think Lehman Brothers, or think “Las Vegas Housing Market.”
Thus far it seems reasonable to propose that a Fair Market is not monopolized, is regulated to mitigate against fraud, theft, and abuse, and is one in which the items being exchanged have a very Visible value.
Since I believe that capitalism works best when it facilitates free and fair markets, and that free and fair markets are necessary to sustain our economy, why am I not supporting Republican candidates? Fair question.
Here’s Willard Mitt Romney’s proposal on government regulation: “Repeal Dodd-Frank and replace with streamlined, modern regulatory framework.” And, “Amend Sarbanes-Oxley to relieve mid-size companies from onerous requirements.“
First, I have absolutely no idea what the candidate means by a “streamlined, modern regulatory framework.” So, I’m left guessing. Does he mean allowing the bankers to regulate themselves as per the GOP version of oversight of “systemic risk?” I think we tried this with the Gramm-Leach-Bliley Act of 1999, and the result appears to have been the demise of all the investment banks on Wall Street. Does the former CEO of Bain Capital Management want to revert to the days of “invisible” trading in complex derivatives? We’ve seen where that leads.
Secondly, Sarbanes-Oxley, enacted in the wake of the Enron Debacle, may not be so “onerous” as Mr. Romney suggests. What, for example, is a mid-sized company? If we are speaking here of “mid-sized” financial firms, do those get to make up their own rules about financial reporting? At some point World Com, HealthSouth, and a host of other firms with dubious reputations (or down right illegal practices) were “mid sized.” Do we wait until they become behemoth blights on the economic landscape before we check up on the markets they are creating?
Perpetual candidate Newt Gingrich offers only more of the same in his description of his ideal economic structure:
Steps include: Repealing the Sarbanes-Oxley Act, which did nothing to prevent the financial crisis and is holding companies back from making new investments in the U.S; Repealing the Community Reinvestment Act, the abuse of which helped cause the financial crisis; Repealing the Dodd-Frank Law which is killing small independent banks, crippling loans to small businesses and crippling home sales; Breaking up Fannie Mae and Freddie Mac, moving their smaller successors off government guarantees and into the free market; …”
There is nothing new here. Repeal Sarbanes-Oxley, repeal Dodd-Frank, and replace them with what? At least candidate Romney gave me something about which to guess — there’s nothing in the Gingrich proposal except to remove all the obstacles to reverting to the Good Old Days when Enron accounting wasn’t an oxymoron, and Lehman Brothers was amassing a pile of commercial real estate paper of in-determinant worth.
Candidate Gingrich would like to disband the Mortgage Twins…and replace them with what? A system in which there is no secondary mortgage market and banks have to hold all the home loans on their own books? This would guarantee there would be no more housing bubbles — in no small part because there would be no more housing market. The interesting part of the Mortgage Twin attack is Gingrich’s assumption that they were government entities, which they weren’t; and, that there was a “guarantee,” which there wasn’t — it was only implied because Fannie and Freddie were corporations, complete with CEO’s and stockholders. Fannie and Freddie WERE playing in the free market, or rather a free-for-all-market in which they were losing market share. Hence their miserably mishandled portfolios.
Repeal the Community Reinvestment Act? Why? The only thing the law requires is that banks make their products available to all their depositors. It doesn’t now, nor has it ever, required that people who don’t qualify for mortgages obtain them. And, it certainly doesn’t require banks to create markets for Alt-A, no documentation, and other questionable mortgages. Nothing in the CRA required banks to reduce their underwriting standards — they did that all by themselves.
There isn’t much daylight between the remaining Republican candidates, so my objections haven’t been answered.
(1) In a free and fair market, prices aren’t invisible. They should be clear to everyone who participates. Enron accounting IS an oxymoron (ask former employees of Arthur Anderson Inc?) Repealing Sarbanes-Oxley, or significantly reducing the statute’s effectiveness at rendering corporate financial reports intelligible, is not the way to create free and fair markets in which buyers and sellers can agree upon valuations.
Allowing unsupervised over-the-counter trades in credit default swaps served only to obscure the ownership and value of these financial products, and contributed nothing toward making the value of underlying assets more visible. Repealing the Dodd-Frank Act would only allow a continuation of practices that were more conducive to obscurity than transparency and accountability.
(2) In a free and fair market, opportunities for fraud and abuse are minimized. Let’s face it, Enron’s bookkeeping was a classic fraud. Repealing Sarbanes-Oxley only invites more of that behavior. Selling subprime mortgages to people who would have otherwise qualified for conforming mortgages was definitely an abuse. Creating an electronic end run on the requirements for recording real estate transactions was an abuse. Robo-signing real estate documentation was an abuse. Repealing the provisions of the Dodd-Frank Act only invites more such abuse.
I am left with the conclusion that all the Republican candidates are offering in support of a capitalist system is protection for the Financialists who would very much like to play in a familiar sand box, free of oversight, regulation, or any other form of restraint on the very practices which imperiled our economic system in the wake of the Enron Debacle and the Housing Bubble Meltdown.
Contrary to the image presented on the television screen, there are more markets than just the one for stocks and bonds. We make markets for homes, for wholesale products, and for retail goods and services. Those markets should be comfortable for participants, not predators. Our markets should be based on the long-term vision expected by Adam Smith, not the short term quarterly earnings report view emphasized by the Financialists.
What I am looking for are candidates who want to protect our markets from predators, protect our financial system from short-termism, and protect American jobs from the not-so-tender mercies of merger and acquisition desks. I am more interested in candidates who have not bought into the Great Supply Side Hoax, and know that a market requires not only a seller but a buyer with the earnings necessary to support our capitalist economy.
If I can’t find them in the Republican Party, then the Democrats who supported Sarbanes-Oxley and Dodd-Frank will be getting my vote.