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Confusion about Capitalism

Bernie Sanders wants us to know the difference between himself and fellow Democratic presidential candidate Elizabeth Warren.

Elizabeth considers herself -- if I got the quote correctly -- to be a capitalist to her bones. I don't. And the reason I am not is because I will not tolerate for one second the kind of greed and corruption and income and wealth inequality and so much suffering that is going on in this country today, which is unnecessary.

It would seem that Sanders got his economic education from the fictional character Gordon Gekko, who in the 1987 movie Wall Street famously said, "Greed, for lack of a better word, is good." Gekko represents the laissez-faire theory of capitalism, in which business owners are free to seek profits however they see fit, without being constrained by government regulations. In order to increase their profits, they provide what consumers want. Competition keeps prices reasonable. Everyone wins, in theory. In practice, it never quite works.

But laissez-faire is not the only model of capitalism, and one needn't be an anti-capitalist to oppose inequality. Warren herself has railed against inequality and promoted a plan she thinks will reduce it. Ralph Gomory, commenting on Warren's plan in an op-ed for The Hill, emphasizes how much our economy has been skewed in recent decades.

In 1981, the Business Roundtable wrote in its Statement on Corporate Responsibility that companies should always consider the effects their actions have on a number of groups including their shareholders, their communities, their employees, and society at large. But by 1997, their discussed only how they could best serve their shareholders.

Our growing level of inequality is largely the result of this narrowing of the scope of corporate responsibility. Gomory connects the dots.

It is a fact, although one that is often obscured, that most corporate stock belongs to those who are already wealthy. So, intended or not, our corporations have as their goal today, making the wealthy wealthier. And that is what is actually happening in our country.

But things don't have to be this way. Gomory continues.

Certainly one significant possibility, as suggested in Warren’s bill, is to have employees serve on the boards of our largest corporations along with those who represent the shareholders, and that the board clearly acknowledge its obligation to consider the interests of all the stakeholders.

But there are other possibilities as well. We live in a complex world and different approaches may work better in different industries. Some of these many possibilities are discussed in an article I wrote with economic historian Richard Sylla, The American Corporation. Many more are discussed in Christopher Mackin’s Wealth at Work: Employee Ownership and Responsible Accumulation.

Some approaches such as Employee Stock Option Plans (ESOPs) and cooperatives are already widely used either here or abroad. In our insurance industry, familiar names such as State Farm or Mutual of Omaha are mutual insurance companies. In these companies it is the insured, rather than outside shareholders, who are paid the profits from company operations.

We have lots of options that don't require burning down the capitalist system that has exponentially increased our standard of living and doubled our life expectancy.

We don't want to follow the Soviet model of socialism, which did reduce inequality, but accomplished this feat primarily by making everyone poorer. British economist Mark Warwick elaborates.

First, in the Soviet era the poor might have gained relatively, but the chief factor in this was impoverishment of the rich. What the rich lost was not transferred to the poor, or was given only temporarily before the state grabbed it back, as clearly implied by Allen and Khaustova (2017). NPZ measure inequality by shares of income distributed to adults. In the Soviet era, the share of income not distributed to adults, but retained by the state, became unusually large. As a first approximation, household consumption fell from around 80 per cent of GDP in 1913 to around 50 per cent in 1940 and through the postwar period.

And some were more equal than others.

Finally, as NPZ acknowledge, under Soviet arrangements, persistent shortages and privileged distribution decoupled consumption inequality from income inequality. In the Soviet Union everyone had an income, but not everyone could spend it on the same terms. A privileged class of insiders – the party elite and the employees of key production and service establishments – who had access to relatively high-quality goods and services at prices fixed below the market-clearing level without waiting. Others had limited access to staple goods and services, for which they either waited in line or paid a higher, sometimes illegal price.

And that's not the only flaw in Sanders' critique. By the same token, greed and corruption don't need capitalism to thrive.

Under a communist regime, the plumber defrauds you on repairs because he knows that the baker cheats him on the weight of bread. There is little competition to push cheaters out of the market, and thus no incentive to offer good prices and quality. If your windshield wipers are stolen from your car, which was apparently so common in communist Russia that people removed them at night, you will try to replace them by stealing some yourself. Self-interest, but not economic freedom.

More recent experiments with socialism have fared no better. Israel, India, and the United Kingdom adopted socalism to varying degrees following World War II, but turned away as they found it unworkable. In the 1990s, Venezuela's Hugo Chavez took over a struggling economy and turned it into a disaster, though he personally profited handsomely.

Socialism's track record is even worse than that of laissez-faire capitalism. As Winston Churchill once quipped, "The inherent vice of capitalism is the unequal sharing of blessings. The inherent virtue of Socialism is the equal sharing of miseries."

Now Bernie Sanders may object that the model for his style of socialism is not Venezuela but Norway. However, Norway is not a socialist state. Like its other Scandinavian neighbors, it is more accurately classified as a social democracy. While this is a semantic distinction, it is an important one. Although they enjoy an extensive social net and generous welfare benefits, most Norwegians are employed by privately owned for-profit corporations. Only ten percent are employed by state-owned corporations. This is what defines a country as capitalist rather than socialist.

And that brings us back to the difference between Bernie Sanders and Elizabeth Warren. Warren wants to reduce inequality and corruption without turning the economy over to the state. Sanders seems to want the same thing, but wants to call it something else.

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