Chapter
3
CAPITALISM
WITH BROAD DISTRIBUTION: A “SHARED MARKET ECONOMY”
While the shift from work to capital implies the need for a broad distribution of income,
that distribution is not incompatible with a vigorous market economy. It certainly does not imply government
ownership or control of business (which is the definition often given to
socialism). Along with a broad
system of economic distribution that will include a great many people who will
no longer be sustained by “work,” it will be desirable to continue a dynamic
market economy both as a spur to innovation and as a freedom-enhancing option
for individuals. It may not at first
glance seem so, but there will be no contradiction in having such a continuing
free market. It will be sufficient if we
come to have a “shared market economy” that will feature a vigorous market from
which all people will derive an income as part-owners.
By a shared market economy I mean an economic
system in which
(a) The
competitive market will continue to play a central role, with firms competing
vigorously for profit in a global marketplace that will drive firms toward
continuing innovation and the lowest-cost production.
Public
policies will need to be followed that will assure a competitive internal
market and that will prevent foreign competition from forcing a
deindustrialization of the nation’s economy. Even though it will run counter to
the current ethos, this will require whatever amount of protectionism is
necessary for the purpose. A
re-industrialization should be attainable with increasing ease as the
enterprises adopt a more-and-more perfected labor-saving technology, since the
main competition at that point will be other technology, not the enormous
overhang of cheap foreign labor.
The
“global marketplace,” while still vigorous and innovative, will need to be one
in which the activity is kept on a scale that is manageable for central banks
and governments.
(b) The
engine that keeps the market going with its innovation and productivity will
continue by including the right of those owning private shares and conducting
the enterprises to reap rewards (or losses) considerably greater than any
individual portion that will go to others. The outcome will not be one of total
leveling of wealth and income, although the society will be wise to prevent a
polarity that is so extensive that it threatens to introduce aristocracy.
This
private conduct of the enterprises should not preclude legal and ethical
measures to eliminate the “cronyism” that has warped so much recent corporate
life, where boards of directors and executive officers have colluded to produce
remuneration to themselves far in excess of what a competitive situation would
call for.
This sort
of internal cronyism has gone hand in hand with yet another form of cronyism, a
“crony state capitalism” that involves an incestuous interplay of government
and business enterprise. It is this that
has come to be identified as “the free market” or “capitalism” in recent years
– but such a thing is qualitatively different from the free market we have
known in the past. The political system
has become corrupted by the marriage of government with money and lobbying. The result is repugnant to, rather than
consistent with, a free political and economic system as envisioned by
Americans throughout their history.
(c) Much
but not all of the capital ownership will be held by "index mutual
funds" (i.e., funds that hold a broad array of shares representative of
the market, perhaps of the global market, as a whole). These funds should take an active owner’s
interest in the sound conduct of the firms they invest in, but are not intended
to dictate any sort of central planning.
Since as index funds they will invest in firms in an amount proportional
to the firms’ weight in the market, their role will be essentially neutral as
among firms.
(d) A
good deal of the stock in these index funds will have in turn been purchased by
an independent public agency, which will
in effect distribute to each person in the society a portion of ownership in
those mutual fund shares (or of income from them), thereby providing each
individual the source of an income even if he is not employed in the
economy. Each person’s share will not be
transferable, since the intent is to provide a vehicle for income on a
long-term basis.
David
Smick, the author of The World is Curved
(2008), expresses the need that is addressed by this distribution: “The
challenge comes down to how to dramatically expand society’s base of
winners. The best way to do that is to
expand the base of the investor class.
In fact, bringing more people into the economy as capital owners may in
the long run be the only means politically of saving globalization” [to which
we should add “capitalism”].
(e) The
public agency, elected or appointed in a manner that will assure both its
representative quality and its independence from the government per se, will need money with which to
purchase the mutual fund shares. It will
receive those funds from taxation and other sources and that classical liberal
principles will themselves find sound in principle for reasons I will explain
in the final chapter of this book.
It seems
unwise at this time to set out seemingly definitive details about exactly how
some of this should work. Will the
national government supply the money to the independent agency for the purchase
of the mutual fund shares, or will it be the central bank that does so, or will
the agency perhaps be given powers, such as of taxation, to generate that money
itself? Will the independent agency
actually distribute mutual fund shares to each citizen, or shares of stock in
the agency itself, or simply send income to each citizen without seeing a need to
interject a specified unit of ownership?
How are the members of the independent agency to be chosen? What oversight, if any, is to be given to the
agency’s decisions? These issues, and
perhaps many others, will be subject to debate among experts and to the
complicated processes of political decision.
In his
excellent book The Battle for the Soul of
Capitalism, John Bogle, founder of the Vanguard Mutual Fund group, has made
an observation that is pertinent here.
Discussing the George W. Bush administration’s proposal partially to
“privatize” Social Security by creating a pool of savings in which each citizen
would have an account, he points out that the proposal would involve an
intermediary between each citizen and the businesses that make up the
economy. We should notice that the idea
of a public agency under a shared market economy to purchase and hold index
mutual fund shares involves the same use of an intermediary agency (two of
them, in fact). Bogle gives this
admonition: “It is essential that we appoint a group of our wisest, most experienced,
and most independent citizens to serve as trustees [of the fund].” This is excellent advice, but it is worth
noting that the intermediaries in the proposal for a shared market economy will
each have a largely non-directive role.
The index funds will buy stocks representative of the stock market as a
whole, and the independent public agency will buy stock in the index
funds. (We will soon see why this double
intermediation is desirable.)
In the
The result will be a broad distribution of
the ownership of
competitive capitalism, providing incomes and continued purchasing power, while
at the same time furnishing the business firms that attract the capital of the mutual
funds and other investors with abundant capital.
A word to
explain elements (c), (d) and (e): From a classical liberal point of view, the
new conditions will make it as important as ever to “chain the state down” to
prevent the abuse of concentrated power.
Those elements are meant to incorporate the time-honored principle of
the “separation of power,” and this can be satisfied by a
Constitutionally-mandated separation of the distributional mechanism from the part
of the state that exercises regulatory, military and police functions. That is why I have called for an “independent
public agency” in (c).
There is
a similar reason I have provided for an independent public agency and its
investment in mutual funds, rather than just having the agency itself invest in
the business enterprises. My purpose is
to build in a safeguard against any central direction of the enterprises
themselves, which are intended to be left free to decide the direction of their
efforts and investment of resources.
“Central planning” is not a feature of the plan. If the independent agency were to buy
corporate stocks, itself acting as an index fund (rather than going through
such funds), the law creating the agency could command that the agency leave
the corporations alone to make business decisions. But we can well imagine that this constraint
would erode over time, at least de facto,
and perhaps even be repealed eventually.
If that were to happen, we would wind up with what would best be
described as “state capitalism.”
This
is not to say that the index mutual funds that serve, in effect, as the
intermediary between the business enterprises and the independent distributing
agency should not themselves serve as “active owners,” which I mentioned above.
Bogle has argued that a major reason capitalism has gone astray is that the
stockholders of business firms have stopped being active, allowing the
executives to become loose cannons serving their own interests rather than the
stockholders’. He urges especially that
institutional investors, such as mutual funds, feel themselves responsible, as
fiduciaries for their own owners, to play a major oversight role. That will certainly be desirable, and will
not itself amount to directive control.
It helps
to see how the “shared market economy” will differ from government’s simply
providing a “guaranteed annual wage.”
The difference is that our proposal here calls for the use of tax
dollars to capitalize business enterprises (which the government won’t run).
Instead of taking money from the productive economy by taxes and distributing
it, a “shared market economy” will involve taking the tax money from the
economy and then putting it into the enterprises via the mutual fund purchases
of shares. This will help capitalize the
very economy the taxes (and other income) were derived from; and it will be the
return received by the mutual funds that will provide the income that is to be
distributed. It is those enterprises
(engaging in the competitive world market just as firms do now, and using
extensive labor-saving technology) that will themselves provide the
productivity for the distribution of income.
The firms will be in no way dissimilar to enterprises today that enjoy
large amounts of preferred stock and bond investment. Today’s firms see such investment as simply
part of their capitalization and certainly don’t find it an objectionable
feature.
Another
disadvantage of having the government simply pay each person a guaranteed
annual wage is that the people who are taxed to provide it will most likely
believe that they are being victimized to support “an army of slackers.” This is because the ideological rationale
that has been appropriate for a society based on work will remain in
place. Nothing will have been institutionalized
that asserts the rightful claim of the society as a whole to a substantial part
of the economic product. A continued
earn-and-tax system will lend itself to class conflict. This doesn’t rule out some taxation, as will
be discussed in Chapter 18, to provide the money for the sharing of ownership;
but the shared market economy will lead overall to a system that invests in
business and then to the receipt of dividends by the distributing agency. There will not be a direct connection between
taxation and distribution.
By no
means do I suggest that the new circumstances will demand, or even be well
served by, a total leveling of wealth and income as in George Bernard Shaw’s
brand of socialism. A broad distribution
of income and a market system will be able to exist together and will need each
other. The market system will be able to
exist only if, indeed, profit-seeking continues as a powerful motivation for
enterprise and innovation.