Capitalism: Is It Working...? Of Course, but...
By George M. Taber
In an age of economic anxiety, real and rising concerns about whether free enterprise can surmount the problems of inflation, energy and productivity
The relentless daily pounding of dismal news drives deeper the public's conviction that the economy is in a profound and morose crisis. Feverish inflation, previously a rare malady limited primarily to wartime, has become chronic. Price spurts once associated with profligate banana republics are now common to North America and Western Europe and threaten the foundations of democratic societies. With every sign showing that prices in the U.S. will continue soaring even as the nation begins slumping into recession, President Carter, his re-election jeopardized by the economy more than by anything else, is stuck in an economic morass.
The litany of U.S. economic woes at times seems endless. Week after week, interest rates crack new records; home owners face 17% mortgages, and companies confront 20% business loans. Energy, the oxygen of industrial life, has become so costly and politically controlled that the U.S. can no longer be certain of enough fuel to keep its factories running and homes heated. The output of goods per hour worked has stagnated. From 1948 to 1973, the productivity of American employees increased 2.9% annually, thus permitting steadily higher real wages and higher standards of living. Last year productivity dropped .9%. The real median income of American families jumped 64% from 1950 to 1970, but has crawled up by less than 1% a year in the past decade. Weekly real take-home pay has been declining for two years. That gauge of American economic health, the stock market, has been sharply depressed.
Amid all this, the Carter Administration has appeared paralyzed and unable to cope with problems that it does not fully understand. Quips Alfred Kahn, the hapless presidential anti-inflation adviser: "Anybody who isn't schizophrenic these days just isn't thinking clearly."
While these travails are felt most acutely in the U.S., the situation is common to nearly all Western nations. Since the mid-1970s, industrial economies have grown about as well as wheat in a drought, while inflation has expanded dangerously. Even countries that have adapted best to recent economic problems, notably West Germany and Japan, suffer inflation or slow growth. The world money system that functioned like a Swiss watch for a quarter-century has been sending off alarms. Gold, the barbarous relic that Shakespeare called the "common whore of mankind," has become the refuge for a world fearful of returning to an economic jungle.
As industrialized and developing nations meet the challenges of the new economic era, they must choose between two essentially different economic systems: the market economy and the command economy. Neither exists in pure form. They overlap, and there are myriad variations within each model. But the difference between them is basic. In market economies the principal business decisions are taken by individuals, who freely exchange their goods or services. In the command economy, the state makes the fundamental business decisions.
Capitalism, the system that relies on the maximum use of free markets and the minimum of government controls, is today being challenged as at no time since the Great Depression. On all sides the haunting questions arise: Is capitalism working well enough? Can the system suffer and survive these problems? Can it be repaired or is it fatally flawed?
One might be tempted to say: What else is new? The free enterprise system has been constantly questioned and condemned ever since that absent-minded Scots professor Adam Smith, another revolutionary of 1776, enunciated its basic philosophy. But today's doubts are deeper and the assaults more virulent. They come not only from capitalism's old critics but from its longtime champions. Leftist Economist Robert Lekachman of the City University of New York declares: "The central economic fact of our day is the declining vitality and elan of capitalism and capitalists." And Chrysler Chairman Lee Iacocca also says: "Free enterprise has gone to hell."
Critics and champions alike once recognized capitalism's remarkable vitality and adaptability, but those qualities seem to be declining. Says Stanford Economist Tibor Scitovsky: "The joints of that once wonderfully flexible structure are becoming more and more calcified and rigid."
Also in doubt is one of the basic tenets of American capitalism: faith in the future. Though capitalism has always been regarded as raw and risky, people accepted the system because it held out the promise that hard work and talent would lead to high rewards. Not everybody was created economically equal but, with the indefensible exception of some minorities, everybody had a full, free opportunity to prosper. Ever distant frontiers and ever brighter tomorrows created a nation of optimists, who believed that a rising tide lifts all boats. This was the U.S. social contract.
But a long spell of little economic progress, or actual retrogression, may cause people to conclude that the system's potential rewards are not worth its real risks. Rancorous confrontations among government, business, labor and a thousand contentious factions could erupt. Warns Arizona Congressman Morris Udall: "When you get a constant pie, and when any group like the steelworkers or the longshoremen gets more, then somebody has got to get less. We have got to adjust to slower growth, and the story of the 1980s will be how we adjust."
If market economies are doing so poorly, are the centrally directed command economies doing any better? No. Capitalism's primary rival, Communism, is afflicted by most of the same ailments, and more. Communist countries are encountering far more difficulty than the West in adapting to the age of economic anxiety. After substantial gains from low bases during the 1950s and early 1960s, progress in Communist economies has sharply slowed in recent years. Technology, innovation and productivity have fallen further behind most Western countries. Economic growth in the Soviet Union last year was about 2%, the lowest since the 1930s.
Inflation, Communist style, is real, though artificially repressed. In the U.S.S.R. and elsewhere, state subsidies hold down the prices of some necessities, and the government pays the bill by keeping wages lean. Bureaucratic ministries are slow to make minor price adjustments. Thus, when prices do increase, they explode. Last year Czechoslovak children's clothing jumped 200% and Hungarian bread went up 50%. At the same time, consumers regularly face shortages. In Communist countries, the block-long queue at meat markets or clothing stores remains a common sight.
East European economies are also squeezed by the energy crunch. The Soviet Union is the world's largest oil producer, its 11.8 million bbl. per day surpassing even Saudi Arabia's 9.5 million bbl. But output is expected to peak this year, and the Soviet bloc may become a net oil importer by 1982. Gasoline prices in Eastern European countries vary widely, but in most cases gas costs more than $3 per gal.
Yet Communism's troubles are small comfort for the U.S. and other free economies, which desperately need to find their own solutions to inflation. This is the most pressing economic problem of the age.
The Decline of Risk Taking
Inflation is already beginning to paralyze Western financial markets. Says Herbert Wolf, chief economist of West Germany's Commerzbank: "The survival of a market economy depends above all on price stability." Without that stability, people lose the incentive to save and accumulate the capital that feeds the system. Their savings debauched, citizens desperately seek alternatives, some of them extreme. Soaring prices have almost always been the prelude to social chaos and eventually political upheaval. There is no such thing as a "stable" rate of consumer price increase. The 5% inflation of four years ago became last year's 13.3% and this year's 18.2%. That rate will be even higher in the future unless effective action is taken to slow or stop the spiral.
Much of the public is turning for relief toward government--which is itself in large measure the problem, not the solution. During the past half-century, governments, in response to public demand, have steadily gained more control over the production, jobs and wealth of society. This enlarged state role was undertaken in an attempt to create a recession-proof economy. Deeply scarred by the 1930s Depression, politicians, labor leaders and intellectuals adopted the slogan of 19th century French Utopian Socialist Etienne Cabet: "Nothing is impossible for a government that wants the good of its citizens."
In the U.S., federal, state and local agencies in 1929 spent an amount equal to only 10% of the nation's total output; last year they spent 32%. Fifty years ago, government income-support payments to individuals were 3% of the total amount of wages and salaries; last year they had swollen to about 20%.
But today there are more and more questions about the government's ability to accomplish its benevolent goals and growing weariness of meddling by government regulators. Proclaims a Texas bumper sticker: "If you like the post office, you'll love a nationalized oil company." A historic revolt against government is under way. One symptom: in the U.S., voters in almost a quarter of the 50 states have put limits on taxes. The revolt is largely justified.
Successive U.S. Administrations since the mid-1960s have mismanaged the economy by wildly spending more than they collected in taxes and then recklessly printing money to pay for the prodigal policies. In 18 of the past 19 years the federal budget has been in deficit, creating a sea of red ink totaling $372 billion. Until recently, the Federal Reserve Board has cooperated with the spend-and-spend policy by pushing up the growth of money. This rapid increase in expenditures and credit beyond any real growth in the production of goods and services remains the basic cause of inflation.
The Government's attempts to create a risk-free economy, in which there will never be a danger of serious business slumps or steep unemployment, has built an inflationary bias into society. Managers and workers have become confident that the state will intervene to stop any sharp business decline. Thus, instead of restraining wage or price demands when the economy slows, companies and unions continually push for more. Adam Smith maintained that each individual seeking his own profit would promote society's good, as if guided by an "invisible hand." But the late economist Arthur Okun argued that the comfortable relationship between Big Business and Big Labor has led to an "invisible handshake" that lifts both wages and prices.
Typical was last year's pay settlement between Chrysler and its employees. At the same time that the company was asking for a fat federal loan guarantee, it agreed to raise the wages of some of the nation's best-paid workers from $60.24 a day to $76.96 over three years.
Because both sides at the bargaining table assumed financial help would be coming from Washington, there was less pressure to make a significant sacrifice. It was left to Congress, as a condition for a federal loan guarantee, to force the union to accept a $463 million reduction in the wage package.
The search for a fail-safe society is also pursued by businessmen. Though they still extol free enterprise's virtues in after-dinner speeches, American capitalists can often be the system's most dangerous opponents. Rather than embracing the marketplace and competition, many businessmen look longingly to those societies, notably Japan, in which the government intervenes to sponsor, subsidize or otherwise ease the way for business.
These U.S. "free enterprisers" demand that their Government protect sales from foreign or domestic rivals, oppose steps to remove regulation whenever it shelters their own business, and lobby hard for federal or local grants.
As economic pressures have been building in recent months, more and more producers of goods as varied as cars and cheese, steel and shoes have turned to Government to demand relief from imports. Protectionism, of course, pushes up prices. Despite last year's major agreement on reducing world tariffs and other trade barriers, backsliding toward protectionism is growing. Nearly half of all world commerce is now restricted by tariffs or quotas, as compared with 40% in 1974. Recalling his days as Treasury Secretary, William Simon says: "I watched with incredulity as businessmen ran to the Government in every crisis, whining for handouts or protection from the very competition that has made this system so productive." At the same time, workers want assured salary increases and consumers products that never break and never can be dangerously misused. Says General Motors Chairman Thomas A. Murphy: "There is that peril in our society, the unwillingness to take a reasonable risk."
Inflation and Government
The state's new role as a regulator in the capitalist economy has been growing steadily for decades, but it exploded during the past dozen years. When public budgets became tighter in the early 1970s, officials saw Government regulations as the means of achieving their social goals. Rather than spending billions of tax dollars to clean up the air and water, authorities passed laws obliging companies to spend large sums to do the job. Such federal regulations, which came to 20,000 pages in 1970, swelled to 77,498 pages last year.
These regulations, originally well-intentioned, often turn into generalized hostility toward businessmen. Often, too, they are grossly inflationary. Stanford Economist Michael Boskin notes that when the Government orders, say, General Motors to put $400 in pollution equipment on a car, that amounts to a $400 tax on the consumer, who eventually pays the sum in the purchase price for the automobile.
While quite willing to benefit from Government support, businessmen nevertheless complain with much justice that the leaden hand of Government undermines the freedom and incentives that make capitalism so productive. Managers see themselves as Prometheus bound, unable to launch a new product or finance research into a tempting field without completing a fat book of federal forms and paying exorbitant, sometimes needless expenses. Complains Pennzoil Chairman J. Hugh Liedtke: "We sit here in management meetings deciding on projects that may cost hundreds of millions of dollars. But we do not know what the Government regulations will be for pricing, importing, entitlements, allocations."
Private companies can best--and at least cost--accomplish the goals of public regulation if the state does not tell them precisely how to control bad side effects but sets standards and allows the companies freedom to devise means of compliance on their own. The Environmental Protection Agency's "bubble plan" for air pollution control is an example of this flexible approach. Rather than strictly controlling the pollutants from each and every smokestack in a factory, the agency sets overall standards for the effluents from the entire plant or groups of plants. The air-quality goal is the same, but the means of reaching it are more liberal and less costly. Managers determine how to achieve the goal.
Some would-be reformers push a sort of bubble plan for the whole economy. Despite the state's poor record of ensuring prosperity and stable prices, many left-leaning economists and even some businessmen regard further Government economic planning as the next inevitable step. The Government would fix the broad goals for economic growth and targets for investment and production in specific industries, although the details would be left to private firms. Only in this way, they argue, could inflation be brought under control and a path of steady growth set.
But in Western Europe, where planning within capitalism originated, such government direction has fallen into disfavor. France's Le Plan has operated since 1946, but the program is now virtually ignored; the Eighth Plan, covering 1981-85, will not even contain specific growth targets. In the past, programs directed by the French government produced too many white elephants, like the supersonic Concorde and the steelmaking complex near Marseille, that look brilliant to a bureaucrat but flop in the marketplace. Admits Franc,ois de Combret, the top French presidential economic adviser: "A bureaucrat like myself, with his butt in a chair all day long, does not know enough to make all economic decisions. Those who know what to do are the ones who have skills, the ones willing to take the risks."
In a form of Gresham's Law, bad planning by government drives out good planning by private people. No detailed plan emanating from a computer bank in some bureaucracy could ever store the information necessary to tell the would-be entrepreneur to open a new corner carry-out or Revlon to launch a new Charlie. No plan could foresee the economic effects of the overnight success of some new Xerox or IBM. Modern industrialized economics are far too complex to permit a rigid master plan. The state can provide its fallible view of future economic developments, but the best planning is still provided by private businessmen and -women making decisions on the basis of the information they receive from consumers in the marketplace.
At the same time, the right overall Government policies and strategies are necessary. Nobody is demanding that the state revert to the minor role that Adam Smith envisaged for it, which would not even include operating a nation's canals. All capitalist countries have mixed economies that combine some free-market features and some government controls, depending on practical needs, tradition and political trends. But there are sharp new questions about the mix. Says Jan Tumlir, chief economist of the world trade organization GATT (General Agreement on Tariffs and Trade): "The 1980s must be a period of rethinking the functions of government. We should figure out what governments should do and can do well and what governments should not even try to do."
Ralf Dahrendorf, director of the London School of Economics, argues that the welfare state produces what German Sociologist Max Weber called "the iron cage of bureaucratic bondage." He admits that centralization and government activity in the modern economy are inevitable but stresses that in the future the burden of proof for turning over functions to the government must rest "on the centralizers and not the other way around."
The economics profession, which for four decades was dominated by John Maynard Keynes' disciples, who stressed a strong stimulative role for the government in the economy, is now swinging away from state solutions. The new Rational Expectations school, led by the University of Chicago's Robert Lucas and the University of Minnesota's Thomas Sargent, emphasizes that government policy initiatives often do more harm than good, creating more inflation than economic growth. The hottest topic among Washington economists is the "supply side" theory. It maintains that Keynesian policies placed too much emphasis on stimulating consumer and business demand and paid too little attention to stimulating the production, or supply, of goods and services. Supply siders, such as Senator Lloyd Bentsen and Michael Evans, the president of a Washington-based economic advisory service, propose tax cuts for business to spur investment rather than just tax relief for consumers to heighten spending.
The brightest younger economists on campuses, including Harvard's Martin Feldstein, Southern California's Arthur Laffer and Stanford's Michael Boskin, generally emphasize the strengths of the free market and the failure of government intervention. The theme that unites them is skepticism about the effectiveness of state action in the economy.
President Carter's chief economic adviser, Charles Schultze, also argues that the government should make greater use of the free-market mechanism rather than government Diktat in formulating state programs. Wrote he: "The historically demonstrated power of market-like incentives to influence the pace and direction of technological change warrants every effort to install such incentives in our social programs."
Like a sailboat tossing about in a wild sea, the government's activities in the economy under capitalism have bounced from one extreme position to another. For more than a century the state had very little or no role in the overall running of the nation's business affairs. When the government did intervene, it was usually on the side of corporations, with such aid as the 19th century land grants to help the railroads build their steel path across the country. During the past generation, however, the state has become the often overpowering major-domo of the economy. And now its actions frequently carry an undertone of antibusiness hostility. While not returning to the earlier hands-off posture, government leaders must recognize the limitations of economic central direction and restore some lost freedom to the free enterprise system.
Problem of Expectations
Inflation, of course, is the result not only of government actions but also of the changing cultural atmosphere in Western nations. Societies that once held up temperance, frugality and industry as ideals now increasingly cherish consumption, leisure and even hedonism. The culture that formerly stressed tomorrow now emphasizes today. This instantly gratifying good life is easily available through installment buying or "plastic money," which the Carter Administration last month attempted to restrict.
When capitalism took root in the 18th century, religion exercised a strong influence within a rigid social structure. The principles of the new economic system coincided in large measure with those of religious faith. Free enterprise demanded sacrifice and delayed satisfaction in order to build savings as a source of investment funds. Limited consumption and hard work were required to create more capital and more consumption for the future. Self-denial and individual diligence in this life were signs of someone's virtue and even of salvation in the next life. Max Weber labeled this "the Protestant ethic."
The decline of religion's dominant influence starting early in this century opened a conflict between contemporary social values and economic virtues. Capitalism still needs savings, hard work and postponed rewards, but consumers want immediate satisfaction. This conflict is visible within the business corporation itself. Writes Sociologist Daniel Bell in The Cultural Contradictions of Capitalism: "In the world of capitalist enterprise, the nominal ethos is still one of work, delayed gratification, career orientation, devotion to the enterprise. Yet, on the marketing side, the sale of goods, packaged in the glossy images of glamour and sex, promotes a hedonistic way of life whose promise is the voluptuous gratification of the lineaments of desire. The consequence of this contradiction is that a corporation finds its people being straight by day and swingers by night."
Consumer expectations exploded during the quarter-century of seemingly endless prosperity following World War II. Capitalism created the affluent society, but the more prosperity the public enjoyed, the more it wanted. If hard work, talent and savings no longer provided the affluence, the public demanded it from the government. The family that once was "satisfied" with only two cars looked around the open-window culture provided by instant communications and saw many other people with two cars and a boat. Then the family not only expected but began demanding its "right" to everything --and felt somehow cheated when galloping prices frustrated its desires.
The poor, handicapped and racial minorities can feel particularly isolated within affluent capitalist societies. Poverty and urban decay like New York's South Bronx are an outrage to any nation or economic system. The U.S., of course, has tried to solve such problems. Social spending is now by far the largest item in the national budget, amounting to $423.8 billion this year as compared with $145.1 billion for defense. But some well-intentioned Government spending, such as the $8.6 billion annual outlays for the heavily criticized Comprehensive Employment and Training Act (CETA), has created new bureaucracies rather than solving urban problems. Social expenditures have grown so rapidly that they have become a heavy load on a national economy that is growing only slowly.
In short, people today ask things from capitalism that no system can deliver. They confuse hope with promise. When everyone begins demanding more, the Inevitable result is a madder scramble for a nation's limited output and a bidding up of prices. Says Albert T. Sommers, chief economist of the Conference Board, a leading business research group: "The failure of our political system to contain the growth of social demands within limits tolerable to the free market is the essential first cause of inflation."
The problems of socially stimulated inflation have been compounded by the now deeply ingrained inflation psychology. The attitude of "Buy it now because it will cost more tomorrow" has long been common in such Latin American countries as Argentina and Chile, where annual price rises of 100% or more have been known. But the American reaction as recently as 1973, when inflation hit 12%, was to save in the face of higher costs. Price rises created insecurity, and people fearful of losing their jobs began putting more in the banks. During the past year, however, Americans have caught the Latin virus. They no longer believe a Government that has been telling them for years that Inflation is about to drop. So the American consumer is radically decreasing his savings and Increasing his personal consumption. Americans are saving only 3.4% of their income, vs. 7.7% in 1975. By contrast, the West Germans last year put aside 13.5% of their earnings, and the Japanese 22%.
Finding solutions for these social and psychological causes of inflation will be excruciatingly difficult. Attitudes toward work and thrift have evolved over decades and can be changed only slowly. The most Important change would be to recognize that immediate consumption must be limited, and that the public needs to save and invest for tomorrow. Says Political Philosopher Dahrendorf: "Some stabilization of expectations is inevitable and even desirable. The society of more and more of the same things cannot and probably should not continue forever."
Beyond reining in consumer expectations, several basic, if familiar, steps are necessary. The first is to reduce the previously excessive growth of money and credit in order to restrain demand and restore stability. Federal Reserve Chairman Paul Volcker has started a series of necessary credit-tightening measures to restrict demand. The second step is to limit severely government spending at the federal, state and local levels. The third step is to increase the supply of goods by giving tax incentives for saving and investment and to relax the regulations that force business to channel scarce capital into projects that may or may not be good for society but that create no new wealth.
Wage and price controls are an attractive temptation, supported, according to the latest public opinion polls, by a strong majority of the American public. But they remain fool's gold. Studies show that once mandatory price restraints are removed prices soar as high as or perhaps even higher than they would without any legal restrictions. Virtually all free-market economists, whether liberals or conservatives, reject mandatory controls as ultimately detrimental in fighting the causes of inflation.
The Energy Dilemma
In its bid to find a political scapegoat for roaring inflation, the Carter Administration has tried to place the blame almost entirely on OPEC for raising energy prices. While the foreign oil cartel is a major force behind inflation, it is far from the only one. Energy costs amount to about one-third of this year's projected 15.5% inflation rate. But indisputably, the new energy era poses a serious challenge to free-market economies. Modern industrial nations have been built on relatively cheap, easily available fuel. There is a real question of how, and whether, capitalism can continue to grow in an era of expensive, easily interrupted energy supplies.
The adjustment to energy scarcity has been made harsher because markets have not been allowed to operate properly. Only for a brief time during the 1930s were petroleum prices set entirely by supply and demand. The cost of oil: an astonishingly low 100 per bbl. Prodded by the major oil producers, the Texas Railroad Commission began controlling output, thus pumping up the price.
Later the multinational oil companies were powerful enough to manipulate prices up or down to guarantee the optimum production and maximum profit. The real price of oil declined by 50% between 1950 and 1970 because of abundant U.S. supplies and rich Middle East discoveries. Under the circumstances, it was perfectly reasonable for the U.S. to consume energy as lavishly as it did. But when oil demand scraped up against the limits of easy supply in the early 1970s and the OPEC producers began raising prices to levels previously unimagined, the importing nations were as helpless as an addict hooked on cheap heroin.
The best hope for ultimately restraining energy prices, increasing supplies and loosening the control of the cartel is to allow the market to function at last. Initially, there would be a severe penalty. If the U.S. removes all controls on oil, gasoline and natural gas, their prices will rise to world levels. This will reduce consumption and save oil for the most important uses, such as vital transportation or petrochemical production. This is the unavoidable step needed to establish correct energy prices and the basis for sound economic growth.
No country, of course, can afford to renounce new energy technology. Unless and until the scientific breakthroughs make solar power or other sources feasible, nuclear energy will remain necessary both to provide enough power and to control fuel costs. France has shown the way to safe and extensive use of nuclear energy. By the mid-1980s the country will be getting 55% of its electricity from the atom, as compared to 19% with the U.S.
Challenges for Business
As free-market economies grapple with inflation, unemployment, slow productivity and low innovation, no private institution will come under more careful scrutiny or acute pressure than the corporation. The public's concerns about the role and rationale of the corporation are real, and businessmen who ignore them risk the demise of free enterprise.
Early capitalism did not foresee the rise and growth of the huge, bureaucratic corporation. Adam Smith opposed what he called the joint-stock company, arguing that hired managers would not work zealously for firms they did not own. More than a quarter-century ago, Harvard Economist Joseph Schumpeter glumly concluded that the very success of capitalism would undermine it, as impersonal corporations grew up and swallowed the entrepreneurial spirit.
While brilliant innovators such as William Norris (Control Data) and Frederick Smith (Federal Express) can still build large new businesses from scratch, corporate control has passed increasingly from entrepreneurial proprietors to hired managers. Leading companies are no longer owned by the founders' families. The Rockefellers control less than 5% of Exxon, the parent of the empire John D. Rockefeller built; ownership has spread to 687,000 individuals, mutual funds and pension plans. Such broad ownership gives still more control to managers.
Unlike gutsy founding fathers, corporate managers--responsible to boards of directors and subject to intense public and political scrutiny--are often less willing to risk, to dare, to take the calculated gamble on an innovative product or imaginative idea. Yet it was precisely far-out ideas that gave capitalism the creativity that it sometimes seems to lack today. For corporations, a prime challenge of the 1980s will be to find means of restoring the verve of the entrepreneurs, while preserving the best of modern management techniques.
One way would be to appoint younger chief executives. They would be more likely to look at long horizons and take the creative chances that would pay big dividends on some distant tomorrow. The median age of corporate chiefs is now 59, and so they are often driven to achieve short-term results. There is too much pressure for risk-free, sure and often modest success. Unless managers know--and the public understands--that they must be free to fail in some ventures or wait for the longer-term payoff, they will never take the daring step.
Government can stimulate the growth of entrepreneurial companies by reducing taxes on high-risk investments. When Congress in 1978 cut the maximum long-term capital gains tax from 49% to 28%, there was a burst of new investment in small, venturesome companies. Initial stock issues by such firms almost tripled, raising $592 million for them in 1979. If more new companies develop, they will give the big, old corporations a competitive run for their profits and act as a renewing force in capitalism.
Certainly the company's main objectives must remain production and profit, but the capitalist firm also has important social functions. The corporation will increasingly have to face the sometimes conflicting demands of the balance sheet and society. The new corporate constituency extends beyond the shareholders to embrace the company's employees, customers and the community at large. Demands for "social accountability" are increasing among legislators and consumerists and, very important, among younger corporate managers. Their questions are tough, and the answers are not clear-cut.
Should companies add more "public" directors, as demanded by powerful leaders, from Ralph Nader to Chairman Harold Williams of the Securities and Exchange Commission? Yes, if these outside directors add a new dimension of thinking, expertness and dedication to the corporation; but no, if they are merely tokens or single-issue obstructionists who would block rather than promote corporate initiatives and company welfare.
Should corporations firmly pursue affirmative action? Yes, if they make special efforts to consider qualified members of minority groups as well as women for almost every job and promotion; but no, if they set rigid quotas that compromise efficiency, dilute the meritocracy and grossly discriminate against whites and men.
Should firms accept reduced profits in order to spend much more to control pollution and improve safety? Yes, if the investment produces demonstrable results at a reasonable cost; but no, if the costs far exceed any possible benefits or place an oppressive burden on the company.
Some of these dilemmas require something close to squaring the circle. Compromises will be necessary and progress will be imperfect. The lesson of the past, activist decade is that, if capitalist managers do not take social actions voluntarily, unforgiving legislators and regulators will force them to do so, and the consequences will be harsh.
One of the modern corporation's most important new challenges will be in dealing with its own employees. Karl Marx's case for Communism was based in large part on the "alienation" of industrial workers, who felt estranged from society because of the dehumanizing nature of 19th century industrial life. The overwhelming size of many modern factories and offices now makes that alienation more acute. But attempts are being made to create a stronger sense of participation by workers in both their jobs and their firms.
These attempts range from experiments to reduce assembly-line monotony to employee stock-purchase or profit-sharing plans that give workers a larger stake in company earnings. The furthest reaching program is West German co-determination, which allots workers and management equal numbers of seats on the supervisory boards of large firms. But both sides have become somewhat disenchanted with the system. Management charges that union representatives have leaked board secrets, like plans to lay off employees. Workers claim that they are usually outvoted on the board by the employers, who have a tie-breaking extra vote in case of deadlock.
U.S. union chiefs have generally opposed board seats for employees, fearing that they might begin to think like managers and soften their wage demands. United Auto Workers President Douglas Fraser is expected to be elected a Chrysler director next month as part of an exchange for a somewhat lower raise for Chrysler workers than that given by GM and Ford. This is an exceptional and highly controversial case. Not many American unions are willing to trade off wages for a place on the board of a relatively prosperous company.
A well-functioning capitalist system nonetheless demands some social compact in which employers, unions and government recognize their common obligation to achieve price stability. A wages-chasing-prices-chasing-wages inflation does nothing for either a company or its workers. Some capitalist countries in northern Europe have commendable programs in which major unions, management and government leaders periodically and informally try to set wage-price goals. This kind of tripartite cooperation has been given credit for West Germany's relative success in fighting inflation.
It is doubtful that such concerted action in its present form could be adapted to the U.S. The method has worked in countries where a few large, national unions dominate labor. This makes a discussion among business, union and government easier to conduct and firmly commits all sides to any agreements. In the U.S., unionized laborers make up only about a quarter of all workers and are divided into many independent unions.
Nonetheless, American management and labor could imitate the cooperative, rather than adversary, approach that is common in northern Europe. Neither side would lose its independence or compromise its interests through joint discussions of ways to reduce inflation, raise productivity or stimulate investment and job creation. The hangover of ill will on both sides, which dates to the robber baron era of the turn of the century and the bitterly divisive 1930s, is blatantly archaic. What is needed more than anything else is a new mindset. Both workers and bosses are penalized by capitalism's serious difficulties, and both will have to contribute to the search for solutions.
Faces of Free Enterprise
Capitalist countries have reacted in various ways to the interlocking challenges of inflation and energy, sluggish growth and scarce resources. In a surprising number of cases, there has been a movement back toward market-oriented economic policies and growing disillusionment with welfare states that cost too much and deliver too little. Says Emile van Lennep, head of the Organization for Economic Cooperation and Development: "It is quite clear now that in the industrialized democracies we let the success of the 1960s go to our heads. In responding to the rising economic and social aspirations of our people, we allowed our economies to become overloaded, overregulated and insufficiently profitable."
The most ambitious experiment in freedom is British Prime Minister Margaret Thatcher's attempt to unwind a socialist mess by cutting income taxes and reducing subsidies to inefficient, government-controlled industries. Thatcher's bold program is being severely tested by labor unrest and continued high inflation. French President Valery Giscard d'Estaing two years ago also started to turn the rudder of economic policy. His government decontrolled many basic prices, including those of bread, which had been regulated since the let-them-eat-cake days of 1791.
Even in Scandinavia, where government control has been pervasive and popular, citizens in recent elections have called for less of it. After 44 years in office, Sweden's Socialists were voted out in 1976, and last year they were again defeated. Denmark, Norway, Finland and Iceland have all moved to the center in their latest elections.
Perhaps the world's most successful capitalist society is West Germany. Though the government is nominally center-left and holds minority interests in the steel, oil and auto industries, it interferes little in the thriving private sector. Chancellor Helmut Schmidt will run for re-election this fall with a record that would be any other politician's dream: last year the economy grew 4.4%, inflation was 4.4%, and productivity increased 3.5%.
Bonn's enviable record results from policies that foster--in addition to cooperative labor-management relations--tight money, a strong currency and a high savings rate.
Capitalism is flowering expansively in Asia. In addition to Japan's fabled success, South Korea, Taiwan, Singapore and Hong Kong have prospered by using the classical capitalist tools: private initiative and the profit incentive. Over the past four years the Hong Kong economy has grown by an amazing 12.75% annually, while unemployment has been a modest 2% despite huge influxes of refugees from neighboring China. During that period, per capita real income increased 25%.
Capitalism is even showing its first blush in post-Mao China. As part of the Four Modernizations programs, Communist leaders are rehabilitating former capitalist "running dogs." Nearly 5,000 older entrepreneurs have been asked back to become factory managers or advisers. Their confiscated capital has been returned, with interest, and China now has some 100 millionaires in U.S. dollar terms. Hu Qiaomu, the director of the Academy of Social Sciences, admitted in a policy statement in the People's Daily that China has had to adopt such capitalist principles as "the pricing system, the rule of value, and the advantage of material incentives."
It is in the developing nations of the Third World that capitalism today is weakest. Most new countries lack an entrepreneurial class, and they usually adopt some form of statism. Often, existing elites in tribes or clans prefer a centralized system that reinforces their own authority.
Yet those developing countries that have pursued the strongest centralized economic planning have fared the worst; those that have adopted some degree of private initiative have achieved the most impressive economic gains. Take the cases of neighboring African countries that have similar peoples, natural resources and other conditions: free-enterprising Kenya has surged, whereas Tanzania's command economy has slumped; the Ivory Coast is capitalist and prosperous, while neighboring Guinea is socialist and impoverished.
Capitalism will face serious challenges in the Third World during the 1980s. The colonial era is only just over; distrust of the old rulers and their economic systems runs high in developing countries. OPEC's price increases are just the first grab by these countries for a larger share of the wealth of the industrial nations. Third World demagogues will doubtless push a soak-the-rich program on an international scale. The staggering $350 billion that the developing countries will owe international banks and institutions by the end of this year will create another source of potentially dangerous global tension. Warns Father Theodore Hesburgh, president of the University of Notre Dame: "The real threat to capitalism is the maldistribution of wealth across the globe. We cannot hope for world peace when 20% of the people in the world have 80% of the goods."
But the situation cannot be solved simply by aid or "reparations" to the poor. True, free enterprise governments must be ready to help through development aid and also by opening their markets to more Third World exports of both traditional raw materials and new manufactured goods. As former West German Chancellor Willy Brandt concluded in a study done for the World Bank this year, rich and poor nations will mutually benefit from a progressing world economy; stagnations and protectionism will ultimately harm both. Yet underdeveloped countries must also help themselves by hard work, realistic economic policies and guarantees for outside investment.
The multinational corporation, which Father Hesburgh calls "the colossus of capitalism," should be a leading force in the stimulation and redistribution of the world's wealth. Says Hesburgh: "The multinationals are among the greatest resources for transferring technology and education. Most do it well; some are exploitive. But rather than pillorying them, we ought to be using them."
At their best, multinationals are the ultimate exporters of capitalism. By creating jobs, training technicians, grooming managers, awarding contracts to myriad local suppliers, and selling shares to local investors, they create a capitalist middle class. That is not their primary intent, of course, but they usually do good while doing well. In the 1980s, GM Chairman Murphy sees even larger profit potential in the yearning new markets of the Third World than in the advanced nations, where growth will be slower.
The multinationals, of course, will also be obliged to prove that they are not just carpetbaggers who despoil the environment, exploit labor and then close up shop once they have reaped their profits. Host governments are increasingly fearful that multinationals can quickly shift plants, jobs and capital from one country to another to extract the maximum profit and the most favorable taxes. To ease these anxieties, many multinational officers are willing to accept a convincing international code of conduct, pledging them to reinvest much profit and generally to be good corporate citizens in developing nations.
A Fateful Rivalry
In both developing and industrialized countries, Communism and capitalism for decades have fought intense battles that have often resembled the 17th century wars of religion. Free-market advocates correctly point out that the command economy has performed dismally. In a system where the millennium is always at the end of the next five-year plan, the concrete results in Communist societies have regularly been insufficient agricultural output, inadequate and substandard consumer products and few personal freedoms. Rather than creating the promised classless society, Communism has always established its own "new class," which enjoys special privileges and benefits.
Capitalism's critics likewise have railed against the inequities, uncertainties and the social flux it creates. As Karl Marx saw it, "All that is solid melts into air, all that is holy is profaned." Foes charge that the capitalist system perpetuates grave inequalities of wealth and extravagantly rewards success. Communists proclaim that capitalism demands periodic depressions as the way to keep workers poor and subservient. Psychoanalyst Erich Fromm wrote that 19th century capitalism's drive for profit made people overly competitive, warped and aggressive. Finally, Economist John Kenneth Galbraith argues that free enterprise values wasteful private consumption more than needed public services.
Such charges are extreme and often unfounded. For the most part, the inequality of wealth under the free enterprise system is the unavoidable price that must be paid for genius, hard work or plain luck. The equality of results demanded by many leftist reformers would stultify society; complete equality can only be enforced by dictatorship. Income-leveling experiments in Britain and Scandinavia have proved that an economy without reward for success produces social entropy. There is little incentive for anyone to do more than the minimum necessary to maintain his own standard of living. Argued Winston Churchill: "The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries."
Certainly, the large divergence of income within capitalist societies can be a cause of serious social tensions. In the society described by Plato in The Laws, no person would be permitted to be more than four times richer than the poorest. In the U.S. the upper 20% of the population earn 46% of the income, a figure that has changed very little in the past generation. In France that same group earns 44% and in Britain 40%. But those who complain that the chairman of General Motors earns nearly $ 1 million a year never criticize the Who for pocketing that much or Marlon Brando for collecting that sum for just one motion picture. Any attempt by government to set limits and establish "just incomes" or "equitable incentives" would quickly break down or be arbitrarily and rigidly enforced. The progressive income tax and social welfare programs have become capitalism's methods of providing some income leveling.
Rather than pushing workers deeper into poverty, as Marx predicted, capitalism has lifted the vast majority of laborers into the middle class. In addition, modern unions have given employees a counterforce to management's power. An economic downturn now hits harder at corporate profits than at wages, which are usually fixed by contract.
Contemporary economic policies have attenuated, though not eliminated, the peaks and troughs of the business cycle. Recessions are not only unavoidable but often beneficial--despite the pain they cause some individuals--to society as a whole. They can purge the system of excesses, failed products and mismanaged companies. Since World War II such slumps have been less severe; social programs like unemployment insurance mean that they are not as painful as in the days of unbridled capitalism.
While Communist theory assumes that people are instinctively good and cooperative, but in practice does not trust them to be free, capitalism has never had any such illusions. Adam Smith maintained that among the most powerful forces in society was "the desire of bettering our condition." Capitalism seeks to use this desire to benefit the whole society.
Collectivist systems have failed to achieve their professed ideals. Pure Communist societies, from 19th century Utopian communities like New Harmony, in Indiana, to the hippie communes of the late 1960s, have struggled with the reality of individual self-interest. Sixty years of Soviet efforts to make workers more productive and innovative through slogans, medals, bonuses and threats have not overcome the basic problems of the U.S.S.R.'s inefficient agriculture and erratic industry. Bertolt Brecht, the Marxist German dramatist, said sardonically after the 1953 workers' riots in East Berlin that in view of the system's problems with its subjects, it might be easier to "dissolve the people and elect another."
The type of material goods produced by capitalism, or by any economic system, returns to what Lenin called the question of "who-whom." Who is to direct and dominate whom? Where is society's Solomon? Who is to decide that this year a nation should produce heart valves rather than vacation houses? The market system provides the most democratic answers. Rather than a government planner's dictating what a society should produce, consumers themselves decide what they buy. They vote in the marketplace. This is not invalidated by the fact that the votes--and the market--can sometimes be manipulated. Capitalist bosses, for all their power, have far less real sway over people than Communist planners.
For all capitalism's proven success in producing material prosperity, the ultimate justification for the system does not rest on its output of cars or cosmetics. Capitalism's fundamental rationale is that it permits and promotes freedom by enhancing the rights of the individual and limiting the power of the state. While some capitalist countries are not democracies, no Communist or totally socialist economy has remained a democracy for long. And every democracy practices some version of capitalism. The reason is clear: political freedom is impossible without economic freedom. As the British poet and essayist Hilaire Belloc noted, "The control of the production of wealth is the control of human life itself."
During the past year a group of American, Canadian and British theologians conducted a long-distance debate on the moral justification of capitalism. The majority concluded it offers greater moral freedom than any other economic system. Said Anglican Edward Norman: "Capitalism is full of minor evils, existing beneath the umbrella of its overall good effect of preserving individual freedom. Capitalism has a good case to argue. It is the case of freedom." The fact remains that throughout the world, millions prefer security to freedom, or think they do, never having known real freedom. Indeed doublethink Communism teaches them to redefine security as freedom.
Inflation and the other problems of the new age of expensive and scarce energy will place tremendous pressure on Western societies and their economies.
The transformations in cities and companies, in living place and work place, will be on a scale not seen since the Industrial Revolution. No amount of rhetoric, false promises, or chases after demons of whatever stripe will help to confront this transformation. Increases in living standards will be moderate, and growth will be slower.
While tackling the herculean tasks, capitalism must demonstrate anew the daring and flexibility that were once its hallmarks. Plainly, capitalism is not working well enough. But there is no evidence to show that the fault is in the system -- or that there is a better alternative. Though neither comfortable nor easy, free enterprise contains the protean potential that will be needed in the coming diffi cult years. For all its obvious blemishes and needed reforms, capitalism alone holds out the most creative and dynamic force that any civilization has ever dis covered: the power of the free, ambitious individual.
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