Monday, October 25, 2010

IEA Blog � A tale of three capitalisms

Kevin Dowd at IEA authors a well-written article outlining three 'versions' of capitalism.  Some free marketers would argue that crony capitalism is actually a form of socialism or fascism.  But there we are.  Defining the regulation preventing these insidious forms of market destroying organizations is remarkably easy.  But let us first review the article.

IEA Blog � Blog Archive � A tale of three capitalisms.

Dowd describes three different types of ownership.  The first is the classic form:

Ownership and control go together, leading to strong corporate governance and a long-term outlook, and there is little state intervention. This is capitalism at its best and most effective. 

My favorite neighbor, the plumber, is a good example.  So are millions of small businesses across the nation which provide the lion's share of jobs, innovation and exploration of new markets.  Their personal wealth is at stake every day.  If the book keeper absconds with the business cash, their personal wealth stands in for it.

In general, Main Street USA (both owners and employees) live their lives in the purest form of free markets.  Their word is their bond.  The honesty and quality of their work predicts their success or failure; shoddy work creates its own negative reputation which spreads more effectively than any advertising campaign.  To describe this form of market as the pursuit of 'greed' is disingenuous.

The second involves the concept of limited liability.  It results in a divorce between ownership and management or control, resulting in increased risk, managerial pay, and other than a loss of shareholder investment, little or no responsibility for failure even by management.

The third is crony capitalism, wherein management colludes with government to manipulate markets together.  Dowd uses the financial sector as its best example.  In many of these cases, profits are privatized while losses are socialized.  Downside risk is almost totally obliterated, taxpayer subsidy is rampant, and regulation tends to act as a barrier to entry.

Frighteningly, most of the educated class ends up working for these businesses, which have not labored under Main Street rules for generations.  They live and work and manage in a world of limited liability and view the law in its many forms as an integral tool in their success, including product regulation, lobbying subsidy, defined liability, tariffs, political contributions, employee relations, financial reporting, ethics, competition, eminent domain, etc.  Relying heavily on the benefit and inertia of their market share, these businesses will suffer or prosper from their actions only in the very long run.  Ethics and quality are a legal issue to be bartered at government forums.

Contrary to popular opinion, most managers of businesses in crony capitalism are not Republicans; they are Progressives.  They deplore free markets.  They look forward to a further cementing of government and large business.  The Green movement ultimately represents freedom from competition once and for all, wherein subsidy, regulation and market share finally precludes the market altogether.

Interestingly, these large firms are still failing.  The pricing of generally free markets in the end topple many large firms as structural inefficiency and innovation eventually spells its ultimate verdict.

Remedying this mess is fairly easy.  Governments intent on defending choice and free markets would concern themselves not on legalese, but very simple market based precepts:
  1. Make all Directors and above of corporations fully liable and vested, as in Capitalism #1. They are owners by proxy. In bankruptcy cases, make the judge’s personal wealth to hang in the balance if she shows preference regarding management owners’ attempts to hide or transfer their assets.
  2. All laws must protect the right of every corporation to fail.  Subsidy in any regard must be viewed with extreme prejudice, since the negative externalities to the market are larger than anyone can envision.
  3. The 17th Amendment must be abandoned.  It is an integral check on federal collusion to special interest at the expense of the nation.
  4. Bank leverage as by now regulated by governments has now reached debilitating proportion, and expliciting supported by taxpayer bail-outs.  It destroys markets and the creative destruction that progress and innovation demands.  Before government intrusion, bank reserves typically hovered at or above 25%.  Regardless of opinion on whether fractional reserve banking is a good  idea, the fact remains that current regulated reserves are typically less than 5%, with off-Balance Sheet transactions of trillions of dollars (dwarfing global GDP) that if unwound are impossible to predict.
We explicitly mention bank leverage because banking is a special industry integrally involved in every aspect of society.  Current banking regulation, especially the most recent regulation, ultimately increases risk to the economy rather than allowing the complex system of markets to operate.

It is time for free marketers to make public pleas for fiduciary duty of professionals.  It is long past time to collapse laws mitigating risk to professionals.

It is also time for business leaders to stand up and fight for free markets.  They have cowered too long from reprisals by Progressives. That no business leaders stand up for Target is a testament to the current cowardice of business while Rome burns.  Where have they gone?  If this time is not the time to stand up, when will it be?

No comments:

Post a Comment