Friday, August 05, 2005

User Friendly Capitalism

Laissez faire, unfettered capitalism, to the extent that it has ever existed, was, in effect unrestricted, total economic warfare. Products, services and political influence were the weapon systems and managers the officers and generals. Markets were the territories in dispute and market segments theaters of war. The goals of big business were the same as the goals of imperialistic wars: conquer the desired territory and exploit its inhabitants.

The ultimate prize was a market monopoly that would allow big businesses to charge all that the traffic could bear for the necessities of life. If competing armies were too numerous and strong to defeat, peace treaties could be negotiated. Prices then could be fixed not through competition but collusion. Geographical markets could be divided up in such a way as to create local monopolies. Foreign economic armies could be kept at bay through high tariffs if you lined the pockets of enough politicians. Why improve quality or lower prices when there was no need to do so? The consumer be damned.

And what of the men, women and children who performed industrial labor? There was a bottomless supply of immigrant humanity that when given the choice between brutal, inhuman working conditions and starvation would choose the former. If they were injured, crippled or killed because of unsafe working conditions they could be easily discarded and replaced. They, along with the consumer, could be squeezed dry in order to maximize profits.

This is an accurate depiction of what Frederick Bastiat called “the natural political economy”. Perpetual competition between large enterprises is as unnatural as perpetual warfare that admits no possibility of victory or negotiated settlement. The idealized depiction of unfettered capitalism retailed by orthodox Libertarian economists envisions a world in which creative entrepreneurs and managers endlessly and voluntarily compete with one another to provide the consumer with more and better for less. This fantasy can only be sustained by ignoring history.

In 1912 a large group of Republicans bolted from their party and created a new one, the National Progressive Party. They ultimately chose Theodore Roosevelt as their Presidential candidate. Regrettably, they lost the election. However, their party platform tells us much about the largely unfettered capitalism of the time.

In the section of the platform entitled “Social and Industrial Justice” it calls for the following:
“The supreme duty of the Nation is the conservation of human resources through an enlightened measure of social and industrial justice. We pledge ourselves to work unceasingly in State and Nation for:

Effective legislation looking to the prevention of industrial accidents, occupational diseases, overwork, involuntary unemployment, and other injurious effects incident to modern industry;

The fixing of minimum safety and health standards for the various occupations, and the exercise of the public authority of State and Nation, including the Federal Control over interstate commerce, and the taxing power, to maintain such standards;

The prohibition of child labor;

Minimum wage standards for working women, to provide a "living wage" in all industrial occupations;

The general prohibition of night work for women and the establishment of an eight hour day for women and young persons;

One day’s rest in seven for all wage workers;

The eight hour day in continuous twenty-four hour industries;

The abolition of the convict contract labor system; substituting a system of prison production for governmental consumption only; and the application of prisoners’ earnings to the support of their dependent families;

Publicity as to wages, hours and conditions of labor; full reports upon industrial accidents and diseases, and the opening to public inspection of all tallies, weights, measures and check systems on labor products;

Standards of compensation for death by industrial accident and injury and trade disease which will transfer the burden of lost earnings from the families of working people to the industry, and thus to the community;

The protection of home life against the hazards of sickness, irregular employment and old age through the adoption of a system of social insurance adapted to American use;

The development of the creative labor power of America by lifting the last load of illiteracy from American youth and establishing continuation schools for industrial education under public control and encouraging agricultural education and demonstration in rural schools;

The establishment of industrial research laboratories to put the methods and discoveries of science at the service of American producers;

We favor the organization of the workers, men and women, as a means of protecting their interests and of promoting their progress.”
The section of the platform concerning business is equally instructive about the economic conditions of the time:
“We believe that true popular government, justice and prosperity go hand in hand, and, so believing, it is our purpose to secure that large measure of general prosperity which is the fruit of legitimate and honest business, fostered by equal justice and by sound progressive laws.

We demand that the test of true prosperity shall be the benefits conferred thereby on all the citizens, not confined to individuals or classes, and that the test of corporate efficiency shall be the ability better to serve the public; that those who profit by control of business affairs shall justify that profit and that control by sharing with the public the fruits thereof.

We therefore demand a strong National regulation of inter-State corporations. The corporation is an essential part of modern business. The concentration of modem business, in some degree, is both inevitable and necessary for national and international business efficiency. But the existing concentration of vast wealth under a corporate system, unguarded and uncontrolled by the Nation, has placed in the hands of a few men enormous, secret, irresponsible power over the daily life of the citizen—a power insufferable in a free Government and certain of abuse.

This power has been abused, in monopoly of National resources, in stock watering, in unfair competition and unfair privileges, and finally in sinister influences on the public agencies of State and Nation. We do not fear commercial power, but we insist that it shall be exercised openly, under publicity, supervision and regulation of the most efficient sort, which will preserve its good while eradicating and preventing its ill.

To that end we urge the establishment of a strong Federal administrative commission of high standing, which shall maintain permanent active supervision over industrial corporations engaged in inter-State commerce, or such of them as are of public importance, doing for them what the Government now does for the National banks, and what is now done for the railroads by the Inter-State Commerce Commission.

Such a commission must enforce the complete publicity of those corporation transactions which are of public interest; must attack unfair competition, false capitalization and special privilege, and by continuous trained watchfulness guard and keep open equally all the highways of American commerce.

Thus the business man will have certain knowledge of the law, and will be able to conduct his business easily in conformity therewith; the investor will find security for his capital; dividends will be rendered more certain, and the savings of the people will be drawn naturally and safely into the channels of trade.

Under such a system of constructive regulation, legitimate business, freed from confusion, uncertainty and fruitless litigation, will develop normally in response to the energy and enterprise of the American business man.

We favor strengthening the Sherman Law by prohibiting agreement to divide territory or limit output; refusing to sell to customers who buy from business rivals; to sell below cost in certain areas while maintaining higher prices in other places; using the power of transportation to aid or injure special business concerns; and other unfair trade practices.”

The dissident Republicans who formed the National Progressive Party in 1912 weren’t Socialists or anticapitalists. Their objective was to declaw and housebreak capitalism; not abolish it.

While Milton Friedman and like-minded economists might argue that free-market competition would over time have ended child labor, 7 day work weeks and 12 hour work days while at the same time increasing workplace safety that will remain forever an untested and unproven theory. Corporations are by nature amoral and self-serving. Corporate management is nevertheless rational and pragmatic. It will comply with the laws and regulations designed to prevent exploitation of workers and consumers if the likelihood of getting caught doing otherwise is high enough and the resulting penalties severe enough.

The objectives of the 1912 National Progressive Party have more than been achieved. Today, American corporations and countless sole proprietorships are amazingly well behaved. Rogue corporations (Enron, Tyco, Adelphi, etc.) are rare and their abuses quickly led to greater regulatory oversight. The enormous creative energy of free enterprise has been effectively harnessed and put to work in the public interest. The continuing decline of the labor union movement is evidence enough of a larger proportion of the workforce believing that it is paid and treated fairly and decently by its employers.

It is therefore difficult for a rational person to fathom the fierce animosity towards large corporations expressed by the base of the Democrat Party. As it cannot be the result of knowledge, it must be the product of ignorance. Orthodox Libertarians on the other hand don't seem to appreciate the fact that contemporary American capitalism is an artificial creation of government. It is virtuous not because it is naturally so but because it is forced to be so.

The question then is not whether capitalists should be kept on a leash but how long or short that leash should be. If the leash is too long, consumers and workers suffer. If the leash is too short they suffer as well. The key to finding optimum leash length is sound public policy aimed at optimizing economic growth without compromising the general welfare. In this regard, neither Progressive paranoia nor Libertarian panglossian fantasies are likely to prove helpful.

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