With all of the hoopla about the ‘death of capitalism’, or ‘failure of capitalism’, you would think everyone who believes in capitalism ought by now to be on verge of ‘Hara Kiri’ — you know, the whole ‘dismember yourself, spill out your guts, and die’ thing that is an honor code among Japanese.
First, let’s take the bull by the horns and admit the fact, which is, ‘American capitalism is failing, failing fast, is on verge of bringing about failure of American society’.
The reason I am not on verge of Hara Kiri?
There does not exist any agreed definition for Capitalism. While the current form of capitalism is failing, it is not my preferred version of Capitalism.
The version of Capitalism that is failing is what I refer to as ‘Hedonistic Capitalism’ — The ‘shareholders and management can treat employers, consumers, and suppliers anyhow they like’ variant of Capitalism’.
‘Hedonistic Capitalism’ is failing, already has failed America.
What then are alternatives to ‘Hedonistic Capitalism’? Well, first on the agenda is ‘Socialist Capitalism’, the sort of capitalism practiced in France, Spain etc. Clearly, this version of capitalism does not seem to have fared much better than hedonistic capitalism.
Second is the ‘All Professional Labor for which there is demand Has Dignity’ variant of Capitalism. This is the sort of capitalism practiced in Nordic countries, such as Denmark, Finland, Norway, Sweden etc. This variant of capitalism has worked better than hedonistic capitalism.
Third is ‘Capitalism with a Human Face’ or equivalently, ‘Innovation Centered Capitalism’, the variant of capitalism of which the United States of America ought to be known, but which it currently is not practicing. There could be more versions of capitalism, but let us explore briefly the three that I have enumerated.
Clearly, Socialist Capitalism is not much different in ideology from the ‘All Professional Labor Has Dignity’ (APLHD) variant of capitalism. In practice, however, the two variants of capitalism are worlds apart. Socialist Capitalism focuses on the State as engine of growth and economic development, with outcome innovation is stifled (there is significant support for this in the academic literature).
The APLHD variant of capitalism provides citizens and residents with so much comfort only those who come up with truly useful ideas are willing to take on the risk of starting their own businesses. Absent countries within which innovation is encouraged, with outcome APLHDs are able to borrow (multinational companies) or transform (technology transfers) new innovations, APLHDs would induce such a low rate of innovation as to perhaps generate societies that are backward.
Within APLHDs, the State is engine of growth and development only because people are comfortable. We have then that whereas Socialist Capitalism can engender significant inequity within a society, by it’s very construct, the APLHD variant of capitalism is designed for mitigation of inequities within society, with outcome whenever there is innovation within the private sector, it typically is practically useful innovation.
While ‘Socialist Capitalism’ can forment and accentuate inequities within society, the APLHD variant of capitalism is specifically formulated for mitigation of inequities within society.
Innovation Centered Capitalism (ICCs) encourages people to be innovative, and provides regulations, such as patent laws, ease of starting businesses etc., that encourage people to be innovative. Within ICCs, so long as there exists feasibility of generation of profits, there is enough incentive for pursuit of innovation. So long as innovations that eminently are practical in their uses have an easier path to success in relation to merely profitable innovations, a wealth rationale is a healthy rationale for facilitation of innovation centered capitalism.
For illustration, while a different flavor of your favorite crackers can be a profitable innovation for the company that makes your favorite crackers, relative to benefits you already derive from your favorite crackers, it is not a very useful innovation (does not provide any new benefits for your body). A new brand of crackers that is healthier, yet having a better taste than your favorite crackers, yet not costing more constitutes, however, a useful innovation (provides new benefits for your body).
Given introduction of new innovations creates jobs, in presence of labor laws that are good, a competitive market for labor, and owners or managers of capital who are not hedonistic, a virile middle and upper middle class is created. With this in mind, within ICCs, CEO pay, and remuneration for top management do not increase at a faster rate in relation to remuneration for other cadres of workers. In this respect, it is easy to see that if a CEO starts off making US$1,000,000.00 per year, and middle managers make US$75,000.00 per year, that while a 10% increase in pay generates an additional US$100,000 for a CEO, it generates an increase of US$7,500 for a middle manager. Over a period of 10 years, the CEO’s pay amounts to US$2,593,742, the middle manager’s to US$194,531. Regardless, the ratios of the salaries (13.33x) remains exactly the same. We have then that an increase in the ratio of CEOs’ salaries to salaries of other workers is evidence that CEO salaries increase faster than salaries of other workers.
Note that while it must be true that aggregate CEO compensation (inclusive of stock options) increases faster than those of other workers — this because he or she (the manager) is not just a manager of activities, but also a manager of capital — it ought not to be the case that CEO salaries increase faster than those of other workers.
Each of shareholders and management operating within ICCs build organizations within which salaries of CEOs and top management do not grow faster than those of other employees.
With the recognition that it is impossible for every single human being to have either of desire or capacity for innovation, ICCs provide safety nets for ensuring no one in society is left behind. If there are people who are not highly motivated, who want to live minimally in context of the minimum amount of work required for minimalist living, such options are available. In ICCs, no one ends up living on the streets because they want minimal work hours that do not require any formal education in exchange for minimalist living. Regulated properly, ICCs are the dominant form of capitalism.
Innovation Centered Capitalism is the Dominant form of Capitalism. Presence of an incentive for ‘innovation curiosity’ guarantees higher rates of innovation than within any other variant of capitalism.
Innovation Centered Capitalism is closest to the variant of capitalism — the firm as nexus of contracts that ensure equilibrium in interactions between all stakeholders, such as employees, suppliers, consumers, shareholders (Jensen and Meckling 1976, Stiglitz (1972), Jensen and Long (1972), Leland (1973), and Baron (1979)) — that is recommended by theoretical models of capital markets within the literature of Finance.
The problem within the United States of America? The profit motive for innovation is superseding the usefulness motive.
Suppose a large publicly quoted company. Whenever such a company muscles in on capital that ought to be directed to financing of truly new innovations for creation of small companies that protect the company’s business model, the company makes it difficult for new innovations to acquire capital that can disrupt it’s industry. In presence of this sort of defensive strategy, new innovations all have a certain character. Consider for instance that presently all innovations seem to consist in building of apps. Apps are good. Apps have helped make lots of things easier. Apps that do not create any new agenda in the real world, however, apps which merely replicate functions of an existing app mostly are profitable apps, not useful apps.
The sort of defensive innovation that I describe mires a country in redundancies of innovation — innovations that merely perturb an existing innovation, such that combined, a larger market share is created for the same innovation. The new innovation makes money, but there are not any meaningful improvements within society because in reality nothing new is created. There are not in reality any new knowledge, skills, physical capital, or knowledge capital created.
Redundant innovations merely repackage innovation that already exists into a form that can generate profits. Redundant innovations create jobs, but inherently lack capacity for creating new stores of knowledge, skills, physical capital, and knowledge capital.
Absent innovations that shift the stock of knowledge, skills, physical capital, and knowledge capital upwards, societies stagnate.
American capitalism is suffering so much from inundation with redundancy of innovations that the economy is on verge of stagnation. The sooner the political class recognizes this problem and decides to take it on, the better for us all.
Neither you nor I can afford a new President for the USA in 2021 who does not believe in power of innovation for transformation of a society. New innovations that are not rooted in research agenda whose outcomes are uncertain merely are profitable innovations, not innovations that possess any potential for challenging wide swaths of the population to strive for new knowledge, new skills, and new ways of living.