The Good & Bad of Socialism & Capitalism. IV

As promised, today I will write about what's bad about Capitalism. I'll also include at the end a "PS" on a bad element of Socialism that I inadvertently omitted (OK, I forgot).

What's Bad about Capitalism ?

Unfettered Capitalism over time tends to lead to the creation of aristocracies. The many dimensions of freedom in Capitalism conflated with the many dimensions of human differences, and both then perturbed by simple luck (good & bad) and the world environment, tend to create powerful aristocracies (merited and unmerited) with great economic power. These people can then use that power to obtain more economic power and political power to get ... MORE.

The economists miss this in their theories which mostly use static, equilibrium methods. For an astronomical analogy, Kepler solved the problem of the shape of the orbits of planets around the sun in static equilibrium (they are ellipses). BUT Newton's theory of gravitation provided the insight to understand what happens when a stray asteroid (or more distant planet) perturbs those orbits at some time. Time is the key added dimension to the analysis. The dynamics in Newton's time-dependent equations of motion let Herschel discover Neptune from its perturbation on the orbit of Uranus.

Dynamics of Capitalism matter hugely. When firm goes bankrupt, it often disappears. Zero is zero and hitting zero causes the firm to be zeroed out. Huge (and successful) firms in dynamic Capitalism gain more market power and profits. A big firm can usually borrow money at less cost, negotiate larger price discounts and buy more political protection and thus gain a larger advantage over smaller rivals. The owners (if concentrated as in the 19th Century gilded age) and / or the rulers (CEOs and top management in today's large public firms) gain more and more wealth and money and then begin to act like Dukes & Earls & Barons. The popular press call them Barons of industry with good cause.

Like mafia dons, the Barons buy more and more political power and protection through legions of lobbyists and contributions, and purchase subsidies and rights from the politicians. All this feeds on itself more and more. It's a dynamically unstable process. Yes, purely unfettered Capitalism is a dynamically unstable process leading to more and more concentration of wealth and power into an aristocracy of wealth and power.

We know from numerous historical examples that powerful and growing aristocratic class leads to the fall of a nation over a few hundred years. Simply put, the aristocracy takes more land and power and wealth from the common people AND from the central government. The common people who truly give the nation its military and economic power get weaker and weaker as a class, losing any stake in the success and life of the nation. Eventually the process bursts into an ugly revolution or the nation is so weakened that external enemies can overwhelm it.

Examples of nations destroyed by aristocracies are ancient Rome, the later Eastern Roman empire, the Mameluke empire, the Commonwealth of Poland-Lithuania, and the kingdom of France.

In a democracy, a populist force of stabilization can arise. The US saw this in the "Square Deal" of Theodore Roosevelt which led to changes that curtailed the power of the Robber Barons. Later his distant cousin's "New Deal" brought forth other legal forces of stabilization that reduced the power of the money barons and the large corporations of that era, such as fair union organizing rules, the Investment Company Act and the SEC. The common man needs a fair deal in his relations with the economically stronger units of Capitalism that must arise. Some limits are need to protect the crucial common man from being ground into serfdom.

That great economist Friedrich Hayak missed this other Road to Serfdom. At the time (1940), it was not on the world's "radar screen" - not a big problem - so he had a good reason to not dwell on it. Today, however, we see this grotesque creature again. In the late 1990s, the technology barons grabbed huge amounts of wealth and power in the technology stock bubble. In the first decade of the 2000s, the financial barons (hedge fund managers, Street leaders and traders) grabbed huge amounts of wealth and power. In both periods the CEO club members have grabbed more wealth and power. Yet in this 15 year period, the common man in the US has gotten NOTHING extra after taxes and inflation. Nothing. Why ?

The budding aristocracies in the US are taking all the growth and profits for themselves. The common man sees his pension cut, his wages stagnate, gets laid off and or more work piled onto him. He works longer hours for the same or less. He has to take a second job. Etc., etc., etc. The ruling class in DC does nothing as they enjoy their own perquisites of office They even conspire to give more power to the large corporations was the expense of small business and the common man.

Demagogues like Obama use this discontent to grab more power for the State. That's no good for the common man either. We need new leadership to get the common man a 21st century "Square Deal".

Tomorrow I will write about what I see as the solution - the optimal political economic system.

PS: More on "What's Bad about Socialism ?"

If Socialism evolves to create a larger and larger state sector of the economy (and not simply regulate or transfer wealth), those well-connect groups will gain more political power and use that to grab more and more wealth for themselves to the detriment of those outside the State tent. The sector then acts like the powerful under Capitalism to grab more and more for themselves. We see this process in Socialist Greece now. And we see it stick its head up in Britain, France and other nations with more Socialist dimension to their economies. We also see it in the US public sector now. The same dynamics that lead to Robber Barons in unfettered Capitalism leads to a preferred class in Socialism.

Word of the Day

"Vitiate" - verb, transitive [$10] an oldie from the card file
Vitiate means to make faulty or defective often by the addition of something that impairs. Alternate definitions: 1. to impair the value or quality of; 2. to corrupt morally, debase; 3. to make ineffective, invalidate.
Sentence: The powerful forces that make Capitalism a good, hugely beneficial system also vitiate it by leading to aristocracies over time.