Why Free Marketeers Are Wrong

Paul Ryan and his supporters are trying to sell their spending cut and lower tax program and they’re getting booed at town hall meetings.  They’re finally cutting into people’s pockets who can’t defend themselves.  They thought they were doing what their constituency wanted and must be baffled at this negative response.

Okay, this might get a bit complicated, but not really.  It just requires a shift in perspective away from the definition of capitalism we’ve been being sold since Reagan to something that is more descriptive of what actually happens.  Theory is all well and good and can be very useful in specific instances, but a one-size-fits-all approach to something as basic as resources is destined to fail.

Oh, I’m sorry, let me back up a sec there—fail if your stated goal is to float all boats, to raise the general standard of living, to provide jobs and resources sufficient to sustain a viable community at a decent level.  If, on the other hand, your goal is to feed a machine that generates larger and larger bank accounts for fewer and fewer people at the expense of communities, then by all means keep doing what we’ve been doing.

Here’s the basic problem.  People think that the free market and capitalism are one and the same thing.  They are not.  THEY ARE CLOSELY RELATED and both thrive in the presence of the other, but they are not the same thing.

But before all that we have to understand one thing—there is no such thing as a Free Market.  None.  Someone always dominates it, controls it, and usually to the detriment of someone else.

How is it a free market when one of the most salient features of it is the ability of a small group to determine who will be allowed to participate and at what level?  I’m not talking about the government here, I’m talking about big business, which as standard practice does all it can to eliminate competitors through any means it can get away with and that includes market manipulations that can devalue smaller companies and make them ripe for take-over or force them into bankruptcy.

There is, in fact, no such thing as a “free” market—you buy your way in, you spend pelf to stay in, and you play the game to keep anyone out that might threaten your ability to grow your market share.  The larger the market share you own, the more you can dictate the conditions of the market, which includes prices on goods and services as well as income levels of employees, even whether or not specific communities will be served and how.  We have become used to seeing how a company like WalMart can virtually destroy a small community all in the interest of consolidating a given market.  Their actions can cause townships to dissolve by forcing employment into a centralized hub and then shutting down any and all competing local businesses, leaving fewer options for the locals.  An employer of size can dictate tax levels to towns, even cities, get preferential treatment because of the number of employees and the implicit threat of penury should they leave.

A better descriptor of what we mean when we say free market would be Open Access Market.  But for that, someone has to be responsible for keeping all the gates open.

This is not a free market.

Free market is a euphemism these days for No Controls.

The more we roll back regulation and the tax base the more the tax base is eroded, because the companies demanding such rollbacks with the implied promise of reinvestment do not follow through—they use the rollbacks and the politicians they have sponsored to acquire greater freedom of action to shift the latent wealth of communities out of those communities and into their hands.

I’ve mentioned this before and this is the basis on which I recommend a shift in perspective.

Latent wealth.  What am I talking about?

It’s very simple and any businessman in the business of taking over and dismantling other companies knows exactly how this works.  So let’s use the example of such a takeover to illustrate the point.

Company A makes, say, chainsaws.  They have worked for more than half a century improving their product, according to a more traditional view of how a business should run, which is to set up shop to manufacturing a product and improve it and make it desirable through both quality and, as the business grows, reduction in price.  After 50 or 60 years they have reached a level of reputation that is enviable.  They make one of the best chainsaws in the world.  It’s a bit more expensive than other brands, but for good reason—it’s a better chainsaw.

Operating this way, the company has learned over the years that their costs are at a certain level.  They require a certain skill level among employees, materials have to be of a certain quality, they must do regular maintenance on their physical plant, they have to invest a certain amount in research to continually be on top of potential improvements, and their management has to understand the methods by which they make their product.  Along with other expenses, the company has to spend a certain amount to maintain themselves.

For any of a number of reasons, they become vulnerable to a take-over.  Maybe it’s something as simple as the current owners don’t want it anymore.  It could be that they went public and the dividends they pay are not high enough to please a significant block of shareholders, so they sell their shares to buyers looking for what is about to happen.

Company B comes along and makes them an offer.  Company A sells.

Now, it’s possible that what Company B will do is take Company A into its fold, nurture it, and because of Company B’s presumably larger customer base or their better business plan they will preserve and save Company A.  This happens.  There are such Company Bs.  But the other scenario is what I’m interested in.

What the shareholders of Company B want is a quick turnaround of high dollar value.  Company B goes in and immediately reduces overhead in order to increase the profit margin per unit.  They may even lower the price in order to bring it more in line with its cheaper competitors.  Relying on the reputation of the Company A chainsaw, this works—people who would not buy one before because it was too expense will buy it now, so sales increase.

But the profit margin is still higher because Company B has reduced the quality control staff to a bare minimum.  They have started buying materials from a less reliable but cheaper vendor.  They increase the speed of production so more units are going out the door.  If this becomes difficult, a program of firing the higher-paid skilled workers begins and replacing them with less skilled, cheaper, more compliant workers.  Plant maintenance is cut to the bone.  All the money spent on maintenance and probably research is reduced drastically.  With substantially less overhead, the profit margin per unit shoots up.  The dividends are higher.  A small bubble results.  The stocks get more actively traded.  For a short while Company A looks worth much more than it did before.

All this cutting, though, has a longterm deleterious effect.  At some point the ability to produce a reliable product is impaired.  They lose their quality edge.  Eventually, Company A is manufacturing chainsaws that are no better—and possibly worse—than their cheaper competitors.

While all this is going on, if Company A runs a union shop, union busting is going on in order to force the union into concessions whose aim is basically to force them into compliance with what by now is an obvious program.  Workers leave.  The employees are occasionally offered early retirement packages.  The old workforce is whittled away and replaced.  Maybe the union itself is successfully busted.  (If this happens in a right to work state, this part is already dealt with because there is no union.)

Finally the plant suffers from the debilitating lack of maintenance and things break down.  Consumers lose confidence.  Sales begin an inexorable plummet.  At this point, Company B either looks for another buyer and shuts it down themselves and sells off the remaining physical assets either as scrap or piecemeal to competitors.

A few people have subsequently made a great deal of money in just a few short years.

What has happened is, Company B has removed all the latent wealth from Company A, converting it directly into short term profits, at the expense of the entity that was Company A.  When the dust settles, a certain number of people who once had decent livings working for Company A are looking for other jobs and a source of community stability is gone.

Here is where the tax-cutting Tea Baggers fundamentally misunderstand capitalism.

Capitalism—like any other economic system—is simply a way to organize the latent wealth in a community.  The building of a business is an organizing enterprise, a way to bring  otherwise disparate elements of a community together and concentrate what till then is only potential in such a way that order is created and the wealth generated is converted into readily distributable and usable forms.  That’s all.  Capitalism has to date simply been the most efficient and productive way to do this because of the nature of its built-in incentives, namely personal profit.

I don’t wish to undervalue this.  It is very important and very useful.  Potential wealth is just that—potential.  A group of people can wander around as a loose community on a mountain full of diamonds and still be unable to better their lives because the wealth latent in their presence at that mountain is completely untapped.  It is the peculiar genius of capitalism that all this unfocused energy and ability can be identified, organized, and turned into a productive means of utilizing those diamonds.  The carrot, of course, is Improvement of individual circumstance.

Like any organizing system, communities require something like this in order to sustain themselves.  Looked at this way, you can go all the way back to the days of the Pharoahs and see that all communities had some form of organizing activity that allowed the latent wealth to be converted into a means of improvement.  Capitalism basically came along and removed pedigree and privilege from the equation and offered a method whereby anyone could do this and do it in such a way that the greatest efficiency and growth resulted.

What gets lost, however, is the raw materials.  We are talking about the latent wealth of a community.  Everything that gets converted into—for the purposes of this discussion—money comes from that community in the first place.

In other words, the capitalist comes into a community (or comes out of it) and makes use of what is already latent within that community to build a structure that allows for the efficient use of innate resources—labor, the intellectual skills available, the environment, the social interconnectedness, the material resources available—and in return the capitalist expects a profit.  As order emerges out of chaos, there is an ability to improve conditions and generate a certain amount of excess around the growing volume of organization.  We call this excess profit and the thing that has made capitalism such a dynamo is the recognition that this excess is for the individual or group of individuals who are most responsible for the work that has been done in organizing, coordinating, and utilizing latent wealth.  This incentivizes people to do this work.

I need not go into the endless variety of uses for profit.  The more efficient this system is, the greater the apparent amount of this excess.

But it’s not really excess. What it is is the unutilized product of the organized work.  It is not needed for the work at hand, the allocations of expenses have already been met, and there is this left-over “energy” if you will—but it is still a product of the work done and as such comes out of the community along with everything else.

Capitalism operates on the assumption that this excess may become the personal property of the individual.

In a way, all the salaries paid to the laborer (at whatever level, even if we designate them management) are part of this.

At this point, a key element of the nature of capitalism must be kept in mind, which is that capitalism, as a goal, seeks to monetize everything.

Now here’s where it has all gone very wrong.

What has been forgotten is the source of the actual material process—which is the community.  A captain of industry can’t do much more than imagine the factories and the products and the profits unless the community at large both allows the work and then cooperates with it fully.  No matter how you want to dress it up, the Owner is not ever solely responsible for such a creation.

But communities self-identify.  Subsequently, we see a situation where community bonds are split artificially in this instance—labor and management, workers and owners.

What we have been witnessing since Reagan began deregulating everything is the actions of a predatory capitalism leeching the latent wealth out of communities businessmen do not regard themselves part of.  In exactly the way Company B runs Company A into the dirt and sells off the husk after every dollar of converted wealth is taken out of it.   Except this is being done to everyone—towns, cities, states, the country.  Regulation must be in place to keep this relationship in balance, otherwise the wreckage left behind after the pillage will support very little.

The power relationship has been unbalanced and reversed.  Communities do not exist to serve wealth, wealth is organized and distributed to serve communities.

No one need suggest that capitalism be abandoned.  It remains one of the most efficient mechanisms for this process ever developed.  But the idea that those who use it best are the sole beneficiaries by moral right of its product is fundamentally in error.  This fact needs to be recognized and understood and acted upon before those we have sold our Company A to run us all into penury.

The Tea Party keeps insisting that taxes be eliminated or at least drastically reduced.  They assert this out of the belief that taxes restrain business from creating wealth and therefore jobs, at least in its simplest formulation.  This is obviously not true as we’ve been going through repeated cycles of tax reduction since JFK was in office and by the end of the Seventies one thing was clear for anyone to see if they look—as taxes and regulations are reduced, the community at large has lost wealth.  Real wages have stagnated, unemployment has gone up, the government has been called upon again and again to fill in where one presumes private enterprise should be providing support.  Add to this the clear intention of business to eliminate as much overhead as possible through union busting and outsourcing of jobs and the fact that above a certain level profits have grown exponentially and it ought to be obvious that this strategy contains a serious flaw in logic.

Taxes, when judiciously administered, are the best way to make sure the latent wealth of a community, once organized by capitalist improvement, is not packaged up and removed from that community to the detriment of that community.  This is the cost business owes to that community for allowing itself to be used.  When this is done in a reasonable fashion, profit remains a motivating factor and the community itself retains the resources to provide for its own health.

Because we are all part of a community.  This makes sense on a basic level.  What we are allowing to happen now is self-immolation, all for the sake of a broken idea of what we think is ideal.

Now.  I would like to ask everyone to stop voting against the general welfare.   It should be obvious after thirty years of this that Big Business has no interest in being responsible to anyone other than itself and that has clearly not been working to the benefit of the rest of us.

Published by Mark Tiedemann