Asbury Park Press Interview                                                                  
Failure at the top  
December 14, 2008



With the economy in tatters, critics say corporate executives have failed to demonstrate the leadership skills they were paid for.

By MICHAEL L. DIAMOND
BUSINESS WRITER

Ray Carey's office is in the basement of his Middletown home, which borders Huber Woods Park, but even from this serene location, he could see the train wreck coming.

Carey, the retired chief executive officer of ADT Inc., watched as his colleagues traded long-term planning for short-term windfalls. He watched as Wall Street transformed itself from a supporting role to the the economy's main attraction. And he's watching the system collapse.

"Leadership is nothing more than providing the wherewithal for the individual to help himself. Harmonizing the individual with the collective," Carey said. "That's the hard part, and that's what was lost."

American's faith in corporate leadership is in shambles, the victim of an economic meltdown that observers such as Carey say could have been avoided.

Capitalism's one-time heroes Alan Greenspan and Robert Rubin are now goats. Chief executives called in front of Congress to explain themselves have looked clueless.

And the public's shattered faith threatens to slow the economy further as a cynical work force questions directions from above.

"How do you instill confidence in a group of people? Being ambiguous, unclear, shaky isn't going to cut it," said David Acord, who studied virtually every letter written by Abraham Lincoln for his forthcoming book called, "What Would Lincoln Do?"

Carey, 82, explains his philosophy in a 500-page, self-published book called "Democratic Capitalism," and a Web site, www.democratic-capitalism.com. He leans on the writings of Adam Smith and Karl Marx to explain how corporate leaders veered off course. Four years after it was published, he looks like a soothsayer.

Focus on stock prices

Carey said corporate executives used profits not to invest in manpower, research and development that would assure their companies' futures, but to buy back stock and any other measure that would jolt the companies' stock prices.

With the support of government policy that loosened regulation, they enriched themselves, Wall Street bankers and short-term investors. But they paid scant attention to their workers who made the companies' products or provided the companies' services.

It created a system he calls ultra-capitalism, and he said the game couldn't last. The working class got squeezed. The suddenly massive financial industry ran out of places to make money. And the fallout has been severe.

"How are you going to improve the human condition if you don't address the economic system?" Carey said.

The faith between leaders and followers is cracked. A recent Harvard study found 80 percent of Americans believe the country faces a leadership crisis, up from 77 percent in 2007 and 65 percent in 2005.

Business leaders suffered the steepest drop in public confidence since 2005, performing far worse than government and nonprofit leaders, the survey found.

The results aren't surprising. An increasingly angry public faces rising foreclosures, falling stock prices and job insecurity, and the economic icons who once graced the covers of business magazines have lost their shine.

Greenspan, the former Federal Reserve Board chairman, and Rubin, the former Treasury Department secretary, once won praise for having a golden touch that fueled an economic boom. Now critics say their policies helped create the crash.

Wall Street tycoons left their companies staring at bankruptcy only a couple of years after creating record profits and receiving record bonuses. The CEOs of the country's automakers approached Congress to request $25 billion — and later $34 billion — in loans to stay in business.

"The first time they came before us, I was surprised the three CEOs of the most significant companies in terms of the auto industry could not give me answers as to how, in fact, they derived at the first figure of $25 billion," U.S. Sen. Robert Menendez, D-N.J., said last Tuesday at a New Jersey Business and Industry Association forum.

"I don't know how you can come to Congress, ask for $25 billion, and not be able to answer questions as to how you came to that figure."

Confidence in leaders has plummeted despite a seemingly ever-growing number of resources. Companies devote countless hours on leadership training. Authors churn out books with lessons on leadership. Business coaching is an industry unto itself.

But with an economy in shambles, it is hard to argue that the leadership training has done much to help, at least when it comes to leaders at the top.

Not an easy task

Barbara Kellerman, an author and lecturer in public leadership at Harvard University's John F. Kennedy School of Government, said leadership isn't easy, particularly in an age of 24-hour cable-news coverage and technology that allows any college student with a computer to day-trade stocks.

Still, some would argue that only uneasy leaders react rashly to every rumor. Instead, leaders need integrity to build a lasting organization and competence to execute the plan, she said.

"There are people who succeed," Kellerman said. "To say it's hard is not to say it's impossible."

Partners at Cowan, Gunteski & Co., an accounting firm with offices in Toms River and Shrewsbury, have placed so much faith in their entry-level workers that they rely on them to help develop the company's five-year strategic plan and take charge of hiring.

The strategy appears to work. The growing company plans to open a 13,000-square-foot office building in Tinton Falls next year to replace the Shrewsbury office, and its younger workers are devoted.

Sarah Krom, 25, of Stafford, said she interviewed with several companies before choosing Cowan. The big difference: She could sense which companies viewed entry-level workers as just a cog in a money-making machine.

"It's very difficult to explain, but when (effective leadership) is not there, it sort of screams to you that it's not there," Krom said. "It's a difficult thing to hide if you don't have it."

Experience at the top

Carey, no doubt, would agree. A native of Gardner, Mass., Carey co-captained his high school football team, joined the Navy in World War II at 17, attended Holy Cross College in Worcester, Mass., and Harvard Business School.

He came to New Jersey in 1956 to take over a money-losing General Dynamics plant in Bayonne. He invested in training, lighting, painting and safety. The company's profits rose, and workers became so devoted that they rebuilt the plant after it was destroyed by a fire.

As CEO at ADT, Carey said the company's market value increased from $90 million to more than $800 million when he left, 18 years after joining.

The secret? "It begins with a tremendous faith in people," he said.

Sitting in his office one morning last week, he insisted leaders with integrity and competence can find a way for their companies to become more profitable without resorting to wage and benefit cuts.

After he retired in 1988, he spent 10 years writing his book, laying out his assessment of what was going wrong with America. When he finished, he couldn't get a publisher, so he published it himself. It isn't sold in bookstores. But he hasn't given up.

"You keep trying," Carey said. "Maybe people are mad enough it will sustain their interest. I hope so."

Letter to Austan Goolsbee   November 23, 2008                                                             

Austan,

          Congratulations on your candidate's big win and apparently your continuing opportunity to advise him on the economy.

          From what I read the situation is so confused that few have the simple questions and answers. I think that I have then. I am one of the few who lived with the conditions while CEO of a NYSE corporation for almost 18 years followed by 20 years of full time study. 

          The bad news is the condition of the economy, the good news is that it is so bad that there is an opportunity for real reform that can finally overcome the lobby power of Wall Street.

          Citizens cannot get the fiscal and monetary smarts from education so after years of trying to get attention in academia I made up my own curriculum and put it on my web site www.democratic-capitalism.com. It begins with 18 articles all less than 800 words (the hard part). # 12 is attached as is the transmittal message. 

          The reform agenda should have two big targets: the end of business cycles by preventing asset inflation, and distribution of surplus to the owners, the wage earners. As I point out those who have exploited the workers' labor for centuries have now learned how to exploit the wage earners' capital.

          The business cycle can be stopped in the up direction by a coordinated use of taxes, interest rates, reserve requirements, money direction and supply (not to speculation) and margin requirements. When real estate rises faster than inflation, the brakes are applied; when stocks rise because of a higher P/E ratio the brakes are applied. O'Driscoll a former VP of the Dallas Fed had a WSJ article on this subject 11/19/08. He proposed a commodity standard but I am not sure how that works.

           Other central bankers have taken on the asset inflation problem. See BIS No. 205 "Is Price Stability Enough" (April 2006) For centuries the rich have got richer in the up direction and the poor poorer in the down. This has been supported by the lobby power of the speculators on Wall Street and it's about time it is stopped. Good luck.

          The bank regulation should be simple: apply the same rules to anyone in the credit business and don't let them screw the system by clever ways to get stuff off their balance sheet. Basel 2 has, I believe, a capital to risk adjusted assets of 8. Speculators have probably averaged closer to 50! We should all be embarrassed by a banking system that gives nearly unlimited money at virtually no cost to the speculators until they screw up the system so badly that the banks then give no credit, or limit it severely, for good companies. If we tried to design a system that forced a business cycle we couldn't do better. I also add the nationalization of the credit agencies and a realignment of compensation with the interests of the customer, the wage earner. The credit agencies have disgraced themselves enough times that emphatic action in required.

          Few are brash enough to think they have answers, those who do, like me, should get a good hearing and then either used or if the ideas do not pass scrutiny, ignored. Please give me that opportunity. Thirty years running big companies and twenty years of study should get attention. 

          In # 12 you will see that I take on your former associate at the Univ of Chicago, Stanley Fish. I know what his fundamental error is: he does not address the curriculum that is presented and it lacks any examination of economic alternatives, hence, Wall Street can write the rules with no opposition. I also claim that students cannot learn to think, to "connect the dots," if the economic dot is missing. This is why the integration of knowledge to improve the human condition is a lost art. In my book the great integrators, Condorcet and Mill are given respectful attention.

          If you want my book sent to anyone just give me their address. Under the present circumstances it is getting excited response.

Best,
Ray Carey

To educators:                                                                                             
March 16th, 2007

             Our Founders conditioned the success of this great democratic experiment on the “will and wisdom” of well-educated citizens. America can again lead the world towards the benefits of freedom if educated people regain control of economic and foreign policies. This will not happen unless the universities embrace the mission of elevating and uniting the people. In this effort please consider my book Democratic Capitalism, in which I describe how to harmonize democracy and capitalism on The Way to a World of Peace and Plenty.

            The post-modernists threw the baby out with the bath water when they rejected capitalism along with the other “isms,” communism, socialism, and fascism, as failed 20th- century “single solutions” for improvement of the human condition. They thus lumped the system, imperfect as it is, that has freed hundreds of millions of people to live a better life with the systems that denied freedom and killed hundreds of millions. If they had examined capitalism, instead of rejecting it, they would have found an underlying synthesis of Adam Smith, Karl Marx, and John Stuart Mill, according to which economic freedom, properly defined, can eliminate material scarcity in the world, and economic common purpose can raise the standard of living and steadily reduce the violence. Moreover, they would have found that this democratic capitalism maximizes the broad distribution of wealth because it encourages each person to seek their potential in a moral environment.

            Any revision of the curriculum to educate students to be effective citizens will gain focus by defining the superior economic system as the centerpiece of social progress. The intellectual community has persistently favored political fixes for social problems but ignored economic solutions. This had led to failure and the abandonment of idealism by many. For example, Harvard professor John Rawls’s A Theory Of Justice (1971 ) sold hundreds of thousands of copies and encouraged many to seek a just society. Twenty years later he abandoned idealism and declared that political liberalism “had no such ambitions” to find a comprehensive secular doctrine for the advancement of society. This rejection of the ideal, the means, and process, the legacy from the 18th--century Enlightenment, is the root cause of why our universities are failing to adequately prepare citizens. It is the reason that cynicism and relativism dominate our society, with knowledge fragmented and over-specialized in academia’s inadequate integration. It is the reason that many in academia would ridicule any mission to unify and elevate.
 

           Harvard professor Edward Wilson took the opposite view and challenged the universities in his book, Consilience, to integrate knowledge for human betterment. He defended the Enlightenment as having “got most of it right,” and proposed an end to the culture war between sciences and humanities by treating the boundary as “unexplored terrain needing cooperative entry from both directions.”
 

          President Bok of Harvard commented that in two decades of faculty meetings he never once heard a serious discussion of how to better educate students for their responsibilities as citizens. He further commented that the results of that neglect were all too visible. Dean Stanley Fish of the University of Chicago, however, disagrees with Bok’s mission to educate students to be better citizens. He declared in an article in The New York Times that education for citizenship is not the function of the university.
 

          How then should society view “higher learning” in which administrators and professors have differences this fundamental about the university’s mission? As Francis Bacon advised early in the 17th century: “It is not possible to run the course aright, when the goal itself has not been rightly placed.”
 

          The world was ready after the demise of communism to unite in economic common purpose. Instead of leading in this unique opportunity, the country that had shown the world the benefits of economic freedom corrupted its own economic system to one that is short-term and greedy, and corrupted its foreign policy to one that is militaristic and imperialistic. Capitalism and democracy are in tension whereas they should be in harmony. America is in urgent need for reform in both areas, but the corruptions have happened because the lack of citizen education has allowed a policy vacuum to be filled by an arrogant and ignorant few. What could be more important than to educate students at every level in the reasons why tension between democracy and capitalism dominates and how it can be displaced by harmony?
 

          The universities are now failing to unite and elevate society because their post-modern politicized environment demeans idealism. Since universities left their religious roots in the 19th century, they have not found a secular alternative consistent with the values of religion. Democratic capitalism, however, can break this distracting gridlock because it is based on moral principles common to religion and humanism: the worth and potential of each human harmonized in an environment of trust and cooperation. This teaching is consistent with Marx’s advice that: “the free development of each, is the condition for the free development of all.” Marx’s proposal to change the work culture from alienation to cooperation is also the way to maximize broadly distributed wealth. Whether one draws on religion, Enlightenment philosophy, social sciences, or Information Age business practice, harmonization of individual ambitions with the instinct for social cooperation leads to superior performance in a powerful, universal moral system.
 

          This is not abstract theory. Studies by Harvard Professor Robert Putnam in northern Italy of a community with a concentration of cooperatives led him to the conclusion that trust and cooperation in the work place do flow into the contiguous community. This benign infection was documented by a reduction in crime and cost of protection.
 

          My book should be helpful because I examine democratic capitalism as the superior mode of production for the post-capitalist society. This economic system, by providing opportunities for every human to seek their potential, is rooted in optimism that will displace the pessimism of the post-modernists. Democratic capitalism has been in gestation for over two centuries since the time of Adam Smith, and later, Marx and Mill, but current developments make its emergence and further refinement especially promising: The superiority of democratic capitalism has been demonstrated in thousands of companies in terms of humanization of the work place, and positive effect of long-term profitability; economic freedom has now been verified by China and India where 500 million humans have been released from extreme poverty in a mere decade; Information Age industries around the world demand the democratic work culture as a competitive necessity; and in the United States, wage earners’ pension and 401(k) savings are now a major source of investment capital. The fact that this capital is now being exploited is an intolerable contradiction. During this same time, the European Union has confirmed that economic common purpose can stop the violence: They have ceased centuries of killing millions of their young men in stupid wars.
 

          Please visit the Carey Center for Democratic Capitalism website: www.democratic-capitalism.com for my background, and a description of the Carey Scholars program. Although my career was running companies, I have had the opportunity to examine what students were learning, and not learning, through my communication with more than fifty Carey Scholars over the past thirteen years.
 

          Never has the responsibility of the university to educate, elevate, and unite been greater. Is it not time for the universities to engage in the intellectual process necessary to formulate this mission? In my book, I propose “Enlightenment II” for undertaking this examination.
 

         Resolution of this confusion of mission in the universities will determine the direction of society in the 21st century.
 

Sincerely,

Ray Carey

Letter to Senator Obama   March 13th, 2007                                                                                          

Dear Senator Obama:

          Your agenda, along with all other candidates, lacks specific reforms of the economic system. By studying and assimilating my proposals you can present a comprehensive populist platform for economic reform and get elected. The people have a deep sense that the system is unfair, but they do not know what to do about it. Enormous latent democratic power is there to be activated. 
          The political parties are now gridlocked between the Republicans who proclaim free-market benefits at the same time that they successfully lobby corruptions of capitalism and then use the money to corrupt democracy. The Democrats have a pathetic agenda that criticizes globalization and wealth concentration but only offers wealth redistribution by government. Your book Audacity of Hope presents a democratic philosophy and thematic agenda. You are missing, however, the most critical component for social progress: the economic system that can maximize wealth and distribute it broadly. I can help complete your agenda. I enclose copies of my books Democratic Capitalism, The Way to a World of Peace and Plenty for you and your staff. It sets forth the reforms that can harmonize capitalism and democracy.
          Optimistic Americans are counting on democracy to produce new leaders in urgent times. I have studied your books and other material and have concluded that you are that potential leader. I quote from my book on page 442:

          You have the intellect, experience, openness to new ideas, and a lack of rigid, superficial ideology. You do not try to improve on the ideology of the Founders of this great democratic experiment. You do note, however, that organizations such as the U. N. must be fixed, not trashed. The enclosed check for $1,000 is a financial expression of my hope in your contribution to our future. 
          Please visit my website:www.democratic-capitalism.com where you can read my bio and find out about Carey Scholars. From your community experience in Chicago you might be interested in the announcement I received this week that Robert Rodriguez is the new Chairman of Community Board 11 in East Harlem. Robert was in the first class of Carey Scholars in 1993 from Cardinal Hayes High School in the Bronx, and is a graduate of Yale. Also at my website, you can sample various materials produced during my thirty years of experience running companies, and my twenty-year study of the world’s economic-political systems. My experience included designing and implementing Care and Share, a profit-sharing and stock-ownership plan while CEO of ADT, Inc.-my contribution to ways to build worker ownership as the basis of the American economy. 
          Social progress depends on movement to the superior economic system, but few understand that demand. Although Marx pointed it out in the mid-19th century the intellectual community has persisted in their preoccupation with political solutions and the world has continued in folly and violence. Your stated agenda so far does not indicate an understanding of this economic priority or appreciation of what economic freedom really means. The reforms proposed here are original with me, but I was pleased to find them confirmed through my study of the 18th century Enlightenment, including Adam Smith and the American Founders, with later refinements by Marx and Mill.
          Economic freedom-properly understood and implemented- at home, and economic common purpose abroad means a grasp of Adam Smith’s few conditions for the proper functioning of economic freedom. This includes peace; neutral money, that is, a simple medium of exchange without influence on the commercial process; and control of the speculators, “prodigals and projectors,” as Smith called them. The excessive liquidity and volatility that now dominates world commerce is a flagrant contradiction of Smith’s conditions. Trillions of dollars are traded daily in currency, a casino of speculation, that dwarfs all commercial transactions by many multiples. 
          Many are predicting an economic upset of significant magnitude during the next two years. If you integrate democratic capitalism into your agenda, you will be positioned to respond to this crisis. None of your competitors from either party has the sophistication either to understand the problems or provide solutions. Do not expect help from the Hamilton Project; finance capitalism is a large part of the problem, not the solution. 
          The reforms proposed in my book address the impediments to be removed, but they also outline why this is a special time for democratic capitalism to flourish. Peter Drucker described in The Post-Capitalist Society how every few hundred years there are transformative events that redirect human history: The founding of our great country was the last of those events. As described in Federalist Papers # 1, we were the first country organized by educated, studious people engaged in reflection and choice instead of force and accident. Now, the post-capitalist age should be another transformative event that opens the whole world to the benefits of freedom enjoyed by Americans. Economic freedom has demonstrated that it can feed, clothe, shelter, educate, provide health care and hope to the two billion humans struggling to live on $2 a day. Economic common purpose has demonstrated that it can unite people and gradually stop the violence. Satisfaction of this universal human yearning to be free and live well is now a pragmatic opportunity.
          This opportunity includes the reality that wage earners are now a major source of capital and that Information Age industries demand the democratic work culture to release the cognitive power of their people. The capacity of economic common purpose to displace the violence has been demonstrated by the European Union when they stopped centuries of killing millions of their young men in stupid wars. China and India have demonstrated the power of economic freedom by releasing 500 million people from desperate poverty in a decade. Democratic capitalism is so powerful that it works not only in free societies but also under authoritarian regimes, if the mission is improving the lives of the people. China understands economic common purpose and is going around the world making commercial partnerships with the message “Let’s get rich together!” China has increased both imports and exports with Africa from a few billion dollars to almost $30 billion in only a few years. In contrast, as you well know, America is going around the world with the message: “Do it our way, or else!” while devastating the economic base of millions of innocent people. 
          The democratic part of democratic capitalism is ownership participation that motivates wage earners to innovate and produce more wealth that, then, becomes automatically and broadly distributed. At present, there are 25 million wage earners benefiting from direct types of ownership, and all wage earners are owners through their pension plan and 401(k) savings. The “ownership society” has arrived, but the wage earner has yet to enjoy the rewards because corrupted capitalism, which previously exploited their labor, has now learned how to exploit their capital, an intolerable contradiction that must not be allowed to continue.
          Chapter 5 in my book “Worker Ownership, The Democratization of Capitalism,” confirms that worker ownership has enormous appeal to the whole political spectrum as the long-sought third way. Please read in my book the enthusiastic testimonies to Jeff Gates’ Ownership Solution. My favorite is Coretta Scott King who commented:

          Democratic capitalism continues to grow and demonstrate its superior capacity to build and distribute wealth, but it has been limited by a lack of assimilation by the intellectual community, by lack of support from political parties, by lack of institutional investors’ honoring their long-term fiduciary responsibility, by lack of advocacy in education, and by lack of appropriate visibility in the popular media. It is offered neither to Liberal Arts students as the way to improve the human condition nor to Business School students as the way to manage for superior performance. It is the core of the post-capitalist society, a potentially unifying force of great power. It is available for you to integrate it into your agenda.
          The problem, however, is not just greedy people who make obscene amounts of money on money, but, rather it is bad government policies that are the product of the lobbying by these ultra-capitalists. For example, Congress had the greatest opportunity in the history of capitalism with ERISA in 1974, when they mandated full funding of future pension needs. As much a $100 billion a year was available for investment in the job-growth economy as well as in educational, environmental, and infrastructural needs. But Congress made a colossal mistake in assuming that the stock market would effectively convert these savings into job-growth investment. Instead, the money became the monster that converted the economy into short-term and greedy, and this initiated a quarter-century of sacrificing future growth for present earnings. Institutional investors’ results were measured quarterly and annually, and they passed this short-term measurement onto companies. Enormous rewards or punishments for a few cents per share in quarterly earnings conditioned the CEOs like Pavlov’s dog: They learned quickly how to avoid the electric shock of corporate takeover to snap at the stock-option bone. 
          We are in the middle stages of a financialization of our economy in which people are again treated as disposable cost commodities, and finance capitalism dominates rather than supports the job-growth economy. In this perversion of the post-capitalist society, taxes are shifted from capital to the middle class, the revenues and profits of financial services explode, the manufacturing base shrinks, and wealth becomes even more concentrated. In my book, I discuss the effect of this financialization that has put other great nations into irreversible decline during the past few centuries. Please visit my web site and read the CATO letter in the “letters” section.
          “Private equity” is an example of the financialization of our economy that some have called “21st century capitalism.” It is a buy it, strip it, flip it game played by celebrities of politics and industry. In most cases, they follow mercantile philosophy by suppressing wages and benefits. “Acquire and fire” has been the technique for a quarter century, now enhanced by more aggressive cuts in pensions and health care. One of the rationales for going private is to relieve public companies of the ERISA induced short-term pressure. It would be a lot simpler if the institutional investors would change measurement of companies to one based on long-term performance.
          For example, in 2002, Goldman Sachs and Bain Capital acquired Burger King. The strip it included $22.4 million in “professional fees,” quarterly management fees of $29 million, a $367 million special dividend financed by borrowed money, and finally $30 million in management fees to terminate the agreement. They then flipped it by taking it public again which “earned” them $1.8 billion, more than triple their original investment. 
          The demeaning of dividends is another manifestation of the financialization of the economy. Before the last quarter of the 20th century, 5- 6 % dividends represented one-half of the return from capitalism; the rest was a modest, secure annual appreciation in stock value. Under pressure by finance capitalists, however, dividends shrunk to under 1% and have not recovered to more than 2%. Why? Because Wall Street does not make money on dividends and would prefer that the money be kept in the companies either to attract a deal, finance a deal, or be used to buy back stock. 
          For example, Exxon Mobil, the world’s most profitable company, recently demonstrated the financial capitalist’s preferred distribution of surplus: $20 billion for capital improvements; $30 billion to buy back stock; and $7 billion returned to the economy in dividends. Was there a public debate on this distribution of corporate surplus? Certainly not! But this is where the profit motive and public policy intersect. Presumably, the distribution of surplus by public corporations should maximize public benefit as well as the private benefit of the wage earner capitalist. None of this happened because distribution of surplus is dominated by finance capitalists with most of it going into their favorite toy, stock buy-backs. 
          For another example, Motorola plans to spend $2 billion a year on stock buy-backs, five times the dividends returned to the economy. Corporate raider Carl Icahn however, has bought 1.4% of the stock to force them to increase the stock buy-back. Motorola is sitting on $11 billion in cash, and they produce about $3 billion a year in new cash. The stock went up on Icahn’s move, probably including purchases by the institutional investors supporting, as always, the short-term effect, while ignoring the long-term benefit for their constituency. 
Few are pointing out the broad economic benefits of returning surplus cash to the owners of the capital. Instead, it has become the source of record riches for the handlers of the peoples’ capital. In the last quarter century, over a trillion dollars has been wasted on stock buy-backs and non-strategic acquisitions. In the post-capitalist economy, this money should have been returned to the people as a “capital wage,” a large return on their pension and savings capital to be spent or saved, both of which uses would have benefited economic growth. 
          Defenders of stock buy-backs argue that they enhance the value of the wage earners’ stock, which it may do for the short time it takes for the speculators to make more money. The long-term value of retirement money will be more affected, and negatively so, by a quarter-century of sacrificing future growth for present earnings, and by the baby boomers selling stock to live on in retirement instead of buying stock for their pension funds.
         A cruel example of the domination by finance capitalism is the seduction during the past five years of the least credit-worthy home-buyers, wooing them from fixed-rate mortgages to floating rates. The terms offered were irresistible: for example, no principle repayment for over a year. The packaging of these loans into mortgage-backed securities with the credit risk passed along like a hot potato has become a big industry in finance capitalism and provides an estimated 15% of the industry’s fixed-income revenue. Credit derivative contracts have gone up to $26 trillion, $9 trillion more than early 2006 and seven times as much as in 2003. Respected Wall Street economist Henry Kaufman observed: “The real surge of these instruments is not just about reducing risk; it is fueling speculation.” (WSJ 8/24/06) Like victims out of a Dickens novel, the weakest will lose their homes. But the worst is yet to come: Mortgage delinquencies have doubled in the last two years. The loans are too far removed from the source, and there are too many layers of handlers of money in the process. Our economy has no relative experience of this phenomenon. No one knows its true make-up, and it is unclear who is actually holding the risk. In the meantime, speculators are using derivatives to “short” foreclosures, that is, they expect to make money betting that more people will lose their homes. 
          The above are examples of the damage to the people from corruptions of the economic system at home, all products of the “ideologues of the liberalization of capital markets.” In foreign policy, the “ideologues of the liberalization of capital markets” joined forces with the “ideologues of the American Empire” to stop the momentum towards a beautiful world of economic common purpose and thereby caused terrible economic damage and war. I offer studies of three disasters of lasting consequence in my book: the CIA’s dumping of the democratically elected leader of Iran in 1953; fundamental errors of policy in Vietnam caused by a small group sharing a narrow cultural conditioning; and the devastation of the Indonesian economy-a country that you know well-by the combination of hot money and currency speculation followed by IMF actions that made the problem worse.
          All of these disasters could have been avoided if America’s priority were economic common purpose and if America had purged the corruptions in our own economic system. With your leadership, America’s image can change quickly because democratic capitalism can not only eliminate material scarcity in the world, but also do it in a moral way that will make it easier to unite people. This economic system that we can present to the world is one that we will be proud of and one we know will have universal appeal.
          The priority is to reform the economic system at home first, and then help unite the world in economic common purpose, the only way to stop the violence. It will take hard study and hard work however, because finance capitalism has successfully lobbied government policy since the beginning and their domination has become even greater during the last quarter century. Reformers must write rules for the economic system that truly have the mission of “controlling currency and credit for the general welfare.” The following policies would be essential in such a reform: 

          These policy changes in the domestic economy will finally control currency and credit for the general welfare and organize government support to make democratic capitalism the universal system. The following are changes in the international monetary system, needing American support to spread economic freedom and economic common purpose globally:

          It is a long and complicated list, but the policy vacuum has been filled for a long time by the handlers of money. There is no question but that democratic power is there for reform; the question is whether enough reform-minded people will do their homework? Please let me know if you or your associates wish to examine these proposed reforms further. I believe that they can be pivotal in the 2008 election, and this means that they will be pivotal in the direction of our nation and the world in the 21st century. With American leadership, it can be a world of plenty from economic freedom, and a world of peace from economic common purpose.
          Good luck! 
          Sincerely, 
          Ray Carey

Keynote Speech at Gardner High School, Gardner Mass  Jun 2006                        

Keynote address at Gardner High School Graduation, Gardner Mass, June 3, 2006 
Ray Carey is the author of Democratic Capitalism. www.democratic-capitalism.com

          Principal Baldassarre, Mayor St. Hilaire, Superintendent Dr Daring, 
committee, parents, friends, teachers, and grads to be

          It’s a great pleasure for me to be with you today. The last time I clutched this podium I was president of the class of ’44. Now is my opportunity to share lessons learned since with you. This is your night to celebrate, however, I’ll keep it short
          Gardner is described in my book as: “ a perfect place to grow up… good education…good people… a pervasive work ethic… a sense of being part of a whole...a feeling of responsibility to contribute… egalitarian with the emphasis on equal opportunity.” I have wonderful feelings about GHS and its great teachers like Miss Baron in Latin, Miss Cobliegh in Math, and Miss Fairbanks in English who not only taught me and my sister Ann but also my mother and dad, class of 1916.
          You are entering a stage in your life in which as citizens of the world’s most powerful nation you have new responsibilities. Begin with the question: why is the world full of misery, violence, and folly? The record shows that. 1/3 of the world’s people try to live on $2 a day and 160 million people were killed by governments during the 20th century. 
          My experience as Plant Manager of Electro Dynamic an unprofitable motor company in Bayonne NJ, in the late 1950s began to give me answers to that vital question. Simply by freeing the people to contribute and by building team spirit first learned as a co-captain of the GHS football team, the company became a profitable industry leader. The other co-Captain Reggie Boone scored five touchdowns against Leominster that year which has nothing to do with your graduation but is a wonderful memory.
          I first discovered from the Electro dynamic experiences that in every human association performance improves with trust and cooperation. My appreciation of the power of economic freedom was later confirmed by countries like China and India who used economic freedom to take ½ billion people out of extreme poverty in the last decade.
          Electro Dynamic prospered but in 1963 a fire started in a nearby plastic factory and driven by 50-knot winds across Newark Bay destroyed the jobs and dreams of 800 people and their families. We watched late into a Saturday night when all 14 buildings burned down including the one where President Kennedy’s PT 109 was built. I was then president and the following morning 15 managers met at my home to discuss how to rebuild ED. Others said that it was mission impossible. We rebuilt in a new facility and kept all but ten employees. This experience taught me that people united in economic common purpose can accomplish extraordinary goals. I came to believe that united people could stop the violence in a wonderful inversion in which. the standard of living goes up and the violence goes down. This was later demonstrated by the European Union when the Europeans decided after centuries of killing millions of their young men in senseless wars that they would unite in economic common purpose and stop the killing, and they did. 
          Fast forward to the 1970s when I was CEO and Chairman of ADT, Inc a large, old company. We were located in the World Trade Center at my office was where the first plane hit in the 9/11 tragedy but we had moved out a few years earlier. Like ED many talented people were at ADT eager to participate and they built profitable momentum that provided an opportunity for a plan in which associates become part owners from payroll deductions matched by the company as performance improves. A contest to name the plan was won by a lady in the Detroit office who suggested that the more people cared the more they would have to share, hence Care and Share. Ten years later associates owned 13% of the company and some of the lowest paid took home six figure checks to their surprised spouses.
          I had learned the stark differences from short-term and greedy capitalism that pays the CEO 300 times the average worker while maximizing profits by suppressing wages and benefits in an environment of fear and intimidation, in contrast to democratic capitalism, that maximizes profits by motivating and rewarding people for their innovation and productivity in an environment of trust and cooperation.
          From experience and study I had two of the answers to that hard question: there is no reason for misery as economic freedom can feed, clothe, shelter, educate and provide good health for all, and there is no reason for violence because economic common purpose can stop the violence. Terrorists will lose their funding and, in time, young people in all cultures will demand the good life.
          Folly continues, however, because big mistakes are made by a few people. We have abandoned the ideal of our Founders who believed that government must reflect the “will and wisdom:” of the people filtered by an “aristocracy of talent and virtue.” Thus the egregious mistakes by the few, like George III and Louis XVI at that time, would be avoided by the wisdom of educated citizens.
          For example, I believe that you as a group could design an economic system based on trust and cooperation that did not concentrate wealth in record amounts, and a foreign policy based on trust and cooperation in which America was a strong team player. You could start at the economic, not the political end; believe in the inevitability of peace, not war; and find new leadership, whether Republican or Democrat is not important as both need a reform agenda. Perhaps new leadership, the “aristocracy of talent and virtue” is here in this room, getting ready to graduate. Why not? You have been given a wonderful start by your good fortune of growing up in Gardner
          My book, Democratic Capitalism, The Way to a World of Peace and Plenty, is in your libraries but can be read and downloaded from my website www.democratic-capitalism.com. I would welcome your email communication. 
          At the end of my book I present my vision of a world in which countries compete on improving the lives of their people based on the U N Human Development Index which “ will shine a bright light on any nation that is not improving lives, and an even brighter light of stardom on every nation that is leading the way. Future generations will benefit from this self-perpetuating momentum towards the realization of full human potential but will wonder why it took so long because it will seem so essentially human, so reasonable!” 
          Such a beautiful world is a pragmatic opportunity during your lifetime. Please use your powers of reason to understand the way, and then use your political power to make it happen. Congratulations on your accomplishments, and good luck with your new responsibilities.

2004 Dialogue with Adam Smith                                                                 

A Free Market Dialogue
The following is a dialogue between Adam Smith the author of the 1776 Wealth of Nations, and Ray Carey the author of Democratic Capitalism comparing Smith’s version of free markets to the one being practiced in the United States in 2004.

Carey: From many years of experience managing companies I learned that performance improves when the leader successfully harmonizes human instincts for individual ambition and social cooperation. In my subsequent study, I became familiar with the comprehensive examination of the best organization of human affairs by the 18th century Enlightenment One of the stars of that Enlightenment, Adam Smith defined the economic system that could eliminate material scarcity, a watershed event in human history. Mr Smith told us the circumstances that this system needed for success and the impediments that must be avoided. Mr. Smith has been called a major Western philosopher, the greatest political economist, the father of the Industrial Revolution, the founder of social science, and the author of a coherent system called classical economics. I am very pleased to have him with us today to, in effect, audit how well we are utilizing the free market system. (Adam Smith and his Legacy for Modern Capitalism; Patricia H. Werhane, p 3 New York: Oxford Univ Press 1991) 

Adam Smith: It is a special opportunity for me also. But first, the accolades are nice but truth searching is a team effort and I was only one of the extraordinary group of men known as the Enlightenment. The flow of knowledge and the quality of the truth searching going on in my time between the Continent, Great Britain, and North America was extraordinary and must be replicated. But let me give you a quick summary of the time since I wrote Wealth of Nations and earlier The Theory of Moral Sentiments, both, incidentally, translated within a few years into both French and German. I find your comments on the necessity to harmonize the individual and the social interesting because my first book was all about the social and the sympathy that binds us together. My second book built on this moral base with the release of the latent energy of the individual in the free market system. Please, Let me be blunt in my audit as you call it, the urgent circumstances demand it. First, the proposal that the free market system could eliminate material scarcity worldwide has been validated during the 19th and 20th centuries by the improvement in the lives of hundreds of millions of people around the world; secondly, the free market system has functioned at a fraction of potential because my conditions of peace, neutral money, and control of the speculators has not been met; and finally, early in the 21st century, instead of a world uniting in economic purpose, you have trapped yourselves in a world of reciprocal atrocities.. On a personal note, I can’t tell you how offended I have been that many have distorted my work by translating me as an apologist for greed. I hope that this interview will help because your society is now headed, not for readily available peace and plenty through economic freedom and economic common purpose, but toward extinction through continued folly and violence. But before we get too far into this tragic failure of society tell me about the Carey Center for Democratic Capitalism.

Carey:  The Carey Center for Democratic Capitalism was opened in 1995 and my book Democratic Capitalism, The Way to a World of Peace and Plenty was published in 2004. It describes the democratic capitalism culture in detail, examines the rise of ultra-capitalism that corrupted both democracy and capitalism, and proposes how to get from the bad to the good capitalism. It believes, as I think you do, that democracy and capitalism represent the commercial opportunity to harmonize these dual instincts of the individual and the collective. Too much of the former and we get the greedy and short-term capitalism, too much of the latter, and we get a mistake prone, suffocating government that limits both the creation and distribution of wealth. I am dedicated to breaking the political and intellectual gridlock that allows these perversions of your beautiful vision to prevail.

Smith: Is democratic capitalism as a term understood by most?

Carey: Not really and therein lies the problem. Many academicians give me a bit of a smile, if not a smirk, and ask if the expression is not an oxymoron. Such remarks just exhibit how institutionalized is the ignorance of the economic system that you initiated. The Carey Center explains why democracy and capitalism are inherently synergistic not in tension as they have been since your time. But many intellectuals have a contempt for commerce that traces back to Plato, and they accept the view of generic capitalism as exploitive. But let’s get back to how you challenged the vested interests, holding on tenaciously, at the end of the break-up of feudal Europe, and the beginning of the modern world. Could I suggest that your ideas have been validated in practice, but the vested interests are still limiting free markets to a fraction of potential? 

Smith: Good luck in your efforts. There are many good people now with democratic power only needing knowledge. I would ask you why the universities are not getting that job done but I think that I already know the answer to that. A bit of background, as you requested, I was born in Kirkcaldy, Scotland in 1723 and went to the University of Glasgow at age 14 for three years and then to Oxford for six more. I joined the faculty of the University of Glasgow in 1752 and published The Theory of Moral Sentiments in 1759. I traveled in France for three years as the tutor and companion of the Duke of Buccleugh and then spent ten years writing An Inquiry Into the Nature and Causes of the Wealth of Nations. I was later the commissioner of customs.

Carey: Would you suggest a proper approach for our examination of free markets as you defined them and as we are not employing them? 

Smith: I think that it is important to begin with the irrepressible human urge for freedom. It is this urge that powers progress and belief in an ideal, after that we can review the means to the ideal and the process to specify the means and validate the ideal. Remember that the mind was in the process of being freed. In 1726, Voltaire chose banishment to England instead of another trip to the Bastille because he kept writing what he thought. He was a genius who inspired the Enlightenment on both sides of the Channel and when he returned to France he brought back Newton’s discovery of order in the universe; Locke’s government by the consent of the governed, Bacon’s advice on the truth seeking process necessary to meet the challenge of the Enlightenment, and admiration for the British Constitutional freedoms. Voltaire, to me, epitomizes the freeing of the mind to use reason to arrive at the ideal of peace and plenty. Kant in Germany presented the structure and the philosophy and structure for nations to settle their differences by law and not by violence, 

Carey: Voltaire had a high opinion of you also. I have read that the described you as an excellent man and that the French have nothing to compare with you.

Smith: I had the opportunity to visit him at his home in near Geneva. Besides his well- known advocacy of tolerance he knew that civilization could advance only as all members of society gained both necessities and increasing comforts.

Carey: How did you interpret the challenge for the Enlightenment?

Smith: Simply to use the truth seeking methods developed in science to find the best organization for human affairs. It was this freeing of the mind during the 18th century on the Continent, and a century earlier in England, that had produced the technology of the Industrial Revolution. It was this technology combined with involved workers and free trade that gave society the first opportunity to eliminate material scarcity and the violence associated with the struggle over scarce resources that began with the cave men and got bigger and more violent with the warrior state. 

Carey: It seems to me that the Enlightenment left an extraordinary legacy for following generations: the ideal of a world of peace and plenty, the specific means to attain the ideal and the process to specify the means and validate the ideal. 

Smith: Yes it all seemed clear to the Enlightenment whether on the Continent, Great Britain, or in America. Thomas Paine called it a “new chapter in the history of man” in his book published the same year in 1776. Paine was good at what you now call the sound bites. Through my friendship with David Hume, secretary to the British ambassador and increasing attention to my first book that was translated into both French and Greman I met and benefited from many of the French Enlightenment: Helvetius. d’Alembert, d’Holbach translated with the Marquis wife Moral Sentiments for example was one of the editors of their massive effort of capture knowledge in their Enclopidie and Turgot wrote on the physiocratic school for the Encyclopedie and coined the expression laissez-faire. The title of his book Reflections of the Formation and Distribution of Riches sounds familiar doesn’t it? It was published in 1766 just after I returned to England. If Louis XVI had followed through with Turgot’s reforms when he was prime minister he would have kept his throne and his head. Besides the French Salons benefited from the contributions of Franklin, Jefferson, and Paine. Professor Kant who made such an important contribution in his work on the structure needed for what he called “perpetual peace” as far as I know never left Konisberg. That is not to say that he was provincial because he honored the work of my best friend David Hume who integrated experience, tradition, and even intuition into the reasoning process. Kant called his discovery of Hume’s work his “Coperican Revolution” in his analysis of how we sought truth. 

Carey: It must have been an exciting time as philosophers joined together in their new freedom from theological domination. It was a recent experience, however. Wasn’t Kant precluded from publishing by King Fredrick at that time?

Smith: Yes he was, as was Voltaire and Montesquieu earlier in the 18th century by the churh-state structure in France. But tell me more about democratic capitalism, don’t you get a lot of questions about what it means? 
I could see that the combination of the new technology of the industrial revolution, involved and well-paid workers, with companies free to produce, price, sell and compete anywhere could eliminate material scarcity and spread wealth around the world.
Note the complete title An Inquiry Into the Nature and Causes of the Wealth of Nations. My work was an inquiry, an examination, a part of an ongoing process that with the circumstances properly defined, understood, and most importantly applied in practice and with the impediments removed, then, I believed strongly that everyone in the world could be well fed, sheltered, clothed, educated, in good health and full of hope for the future. 

Carey: But as I understand free markets the system runs itself on what others have called spontaneous order? 

Smith: Listen more carefully, I said that little else was required to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice, all the rest being brought about by the natural course of things but note that I qualified the success on peace. The function of government was simply to provide civic order and certain services like assistance to education and health but in all cases combine private and public payment. It is fundamental that any service that does not involve consumer choice and some cost to the user, no matter how small, will become terribly inefficient and not even meet its mission. It was also my assumption that the government would, as you a few years latter said in your Constitution, “control currency and credit for the general welfare.” As I am sure that we will examined it is the violation of that axiom that is causing most of the damage to your system. 

Carey: You qualify the success of economic freedom on peace but many would call that a cop-out because there have always been wars many believe it to be part of human nature.

Smith: The idea that killing and maiming in battle while destroying economic and social momentum at home is part of “human nature” is the biggest, sustained lie in history promoted by those with a power adoring ego or a vested interest in war. My contribution was to point out that wars that were caused by a struggle over scarce resources were no longer logical because there was enough for everybody. 

Carey: A circular proposition perhaps, peace is a prerequisite for economic freedom to eliminate material scarcity around the world but world leaders must accept this and stop making war as an inevitable part of human existence. Am I on the right track?

Smith: You’re getting to the hard part. But the pressure must come from growing democracy, the people, because, as obvious as it may be, leaders conditioned to war are not likely to have a mid-life epiphany and recognize economic freedom as the alternative. The answer can be found in a world of economic common purpose in which everybody is improving their lives. First, everybody must have the necessities of adequate food, clothing, and shelter, to free the body. They can then take advantage of education to free the mind. The resulting acceleration in the improvement in everyone’s standard of living frees the spirit with the belief that they can pass on a better life to their children.

Carey: Is this what you meant by the invisible hand? That it was not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest as you expressed it. (p. 14)

Smith: Yes, but this observation has been translated as a defense of greed by those who have little understanding of commerce but an instinctive love of state. Is it possible that my proposal that the natural course of commerce can make a better world without help from the government has offended the champions of government so much that they have tortured my worlds to fit their agenda? 

Carey: That is a conditioning of the intellectual community that goes all the way back to Plato. Why don’t you explain in your words exactly what you meant?

Smith: I used the expression invisible hand only once in my large book. I was writing about the small businessman whose pursuit of excellence in the quality of his meat, beer or bread gave him the opportunity to sell and the quality of his relationship with his customers gave him the opportunity to grow. Some of these may have been motivated by greed only but the most successful were motivated by the pursuit of excellence and the satisfactions of friendly relations with their customers. These entrepreneurs generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. He intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this led by an invisible hand to promote an end which was no part of his intention. (p. 423) 

Carey: I use your free markets economic freedom and refer to your invisible hand as economic common purpose in my book. It is the economic freedom that improves lives and it is this improvement that lowers the violence. Is that not the way to a world of peace and plenty? 

Smith: By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never know much good done by those who affected to trade for the public good. (p. 423)

Carey: This is what you mean by the natural course of things with only peace, easy taxes. a tolarable administration of justice, money that is merely a medium of exchange and control of the prodigals and projectors. You aren’t very optimistic about the efforts of the state to manage the details of society, are you? 

Smith: Absolutely, the statesman, who should attempt to direct private people in what manner they ought to employ their capitals, would assume an authority which could be safely trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had the folly and presumption enough to fancy himself fit to exercise it. ( p. 423) 

Carey: You may have noticed that Hobbes is now a philosophical reference to those in power. He makes no appearance in your work,

Smith: The world of ideas is divided between those moving towards freedom and those moving away from it. Mr. Hobbes is such a devotee of the totalitarian state that he even makes religion serve the interests of state. I find it incredible that the country whose founders studied the state based on the Locke’s consent of the governed would at this late date give any space to considering Hobbes. Your bloody victory over the totalitarian forces in WW II should have put Hobbes into history as a curiosity not worthy of examination. Do you not think it threatening that people in your democratic republic even refer to Hobbes as a serious contributor to contemporary discourse?

Carey: With due respect to the democratic will of the people there must be the right structure in place to make it work. Jefferson and Madison in America helped put in place a balanced political structure that filters the will and wisdom of the people at the same time it improves it through universal fee education. You emphasized the involvement of people but you also emphasized the division of labor and labor value within the free market.

Smith: Mr. Jefferson was concerned with the wage-slave of the industrial revolution. There is no question that the man whose whole life is spent in performing a few simple operations, has no occasion to exert his understanding, or exercise his invention. He naturally loses, therefore the habit of such exertion and generally becomes as stupid and ignorant as it is possible for a human creature to become. (p.734) Jefferson’s profile of the perfect citizen consequently was the independent farmer not the manufacturing employee. No society can surely be flourishing and happy however if the far greater part of the members are poor and miserable. ( p. 79) In America your steady growth was, however, a direct cause of rising wages despite the attitude of the vested class. It is not the actual greatness of national wealth but its continual increase, which occasions a rise in the wages of labour. England in my time was certainly a much richer country than any part of North America but the wages are much higher in North America than in any part of England. It is the scarcity of hands that occasions a competition among masters that breaks through the natural combination of masters not to raise wages. (p.68)

Whenever the law has attempted to regulate the wages of workers, it has always been rather to lower them than to raise the, for whenever the legislature attempts to regulate the difference between masters and their workmen , its counselors are always the masters. At that time English law allowed employers to organize to protect their economic interests but forbade employees. Durant 771)

Carey: The technology of the Industrial Revolution was combined with the division of labor to provide the productivity level that could eliminate material scarcity but with a price. You were quite clear in what monotonous jobs could do the individual.

Smith: Yes, I knew that a man whose whole life is spent in performing a few simple tasks generally becomes as stupid and ignorant as it si possible for a human creature to become. This seemed to be a negative part of progress. This man made a poor citizen in a free society also because his education and habits did not give him the knowledge and made him unfit to participate in the affairs of state. Worse, on some occasions his clamor is animated and supported by his employers, not for his, but for their own particular purposes. (249) 

Carey: These are the people who have been hurt the most by the business cycle and had little understanding of what happened to them. The wealthy gain the most in the up cycle but the poor are hurt the most in the down.

Smith: When the economy is stagnant this group has barely enough for subsistence when the wealth of the nation goes down there is no order that suffers so cruelly from its decline
By dividing the circulation of money into a greater number of parts, the failure of any one company becomes of less consequesnce to the public. This free competition too obliges all bankers to be more liberal in their dealings with their customers, lest their rivals should carry them away. The more general the competition the more advantageous it will always be to the public. (313)
The experience of all ages demonstrates that the work done by slaves is in the end the dearest of any. A person who can acquire no property, can have no other interest but to eat as much, and labor as little as possible. Whatever work he does can be squeezed out of him by violence only, and not by any interest of his own.

Carey: One of the benefits of the Information Age now is that the independent thinking, educated, involved person is similar to Jefferson’s profile of the farmer as the ideal citizen. The Information Age besides must harmonize democracy and capitalism in their work culture as they depend on releasing the cognitive power of their people. Democratic capitalism is a competitive necessity and I find that very exciting and promising for the future after we peel off the bad capitalism. But tell me more about labor value. This was the concept that Marx adopted and spent so much time analyzing. 

Smith: Labour is the only universal, as well as the only accurate measure of value, or the only standard by which we can compare the values of different commodities at all times and in all places. (p. 36) 

Carey: But it is not labor value that determines the price in a free market, and what about brain power as well as the time used?

Smith: There are different degrees of hardship of the work, and of the ingenuity exercised but you are correct that the price of the product is set not by any accurate measure but by the higgling and bargaining of the market. (p. 31)

Carey: The price may be set by the market but perhaps it is the difference between cost and price that depends on labor value. In democratic capitalism this is made up of time to produce, skills required, equipment provided but most importantly on the attitude of the people. This is hard to value but people who are motivated both to individual excellence and to the greatest cooperation will produce the largest surplus and necessarily to sustain motivation will have ways to share in that improvement. 

Smith This is the maximum creation and distribution of wealth that makes the company and the workers prosper and it is the system that can make countries grow strongly and steadily. I use the word steadily and carefully as it implies that we have ended the business cycle.

Carey: That makes sense but still leaves most of the world at the mercy of crazy people who still think that violence is a faster way to get what they want. But we are understandably getting into how to get rid of the violence before we have a full understanding of how to give all the people of the world enough food, clothing, shelter, education, good health, and hope. Could you go through what you feel are the basics needed for free markets to spread wealth?

Smith: Yes, of course. We begin with the technology of the Industrial Revolution that was part of the recent freeing of the mind. It was this advance that gave the economic system for the first time the capacity to supply what everybody needed to be comfortable. This technology to be effective however needed involved workers. It is the workers who can find out easier and readier methods of performing their own particular work A great part of the machines made use of in manufacturers were originally the invention of common workmen in order to facilitate and quicken their own particular part of the works. (p.9)

Carey: That sounds like democratic capitalism but the mercantilists during your life and since had the attitude that wage and benefits suppression was the way to more profits. How does that worker you described share in the improvement and keep the motivation to improve the operation?

Smith: I assumed, incorrectly as it turned out, that the mercantilists would recognize that there was enough for everybody in the free market system and would involve the workers and get rid of the traditional management by fear and intimidation. Your modern consultants call it top-down, command-and-control. I was quite clear that the workers were a vital part of the process and should be rewarded accordingly. I knew that the liberal reward of labor increases the industry of the common people. The wages of labor are the encouragement of industry, which like every other human quality, improves in proportion to the encouragement it receives A plentiful subsistence increases the bodily strength of the laborer, the comfortable hope of bettering his condition, and of ending his days perhaps in ease and plenty, animates him to exert that strength to the utmost. Where wages are high, accordingly, we shall always find the workman more active, diligent, and expeditious, than when they are low. (p.81)

Carey: So now we have the technology of the Industrial Revolution, and involved well paid workers. But remind us how this system spreads wealth? I have referred to it as an economic perpetual motion machine, do you agree?

Smith: With the benefits of the technology and involved, well paid workers the cost to produce goes down. In a free market competition forces the price to go down with the cost. Now there are more people who can afford to buy the product. Their purchases add to the volume and because of the added volume the cost and prices go down. At the same time those who could afford to buy at the higher price now have money to buy other things. Of course as the volume goes up there is a need for more workers whose wages then provide more opportunities for more volume, more jobs, and even lower prices and so forth. As long as trade is not artificially restricted by subsidies and tariffs the system will in fact spread wealth around the world.

Carey: Sounds logical to me but what do you think of all of the noise and bad feelings about what is now called “globalization”? 

Smith: By now I know that you know the answer to that question but need my answer for the record. The answer is that your world economy is still in the hands of the mercantilists who are still trying to maximize their profits by suppressing wages and benefits. Your “globalization” has become a dirty word because the workers in emerging economies are being exploited by the global companies who still refuse to recognize that the best way to maximize profits is to involve the workers and pay them more. 

Carey: That is the way to increase the total wealth and improve the distribution of wealth. If the workers in these emerging economies do not have any money over and above the necessities of life, however, then they cannot buy anything from other countries and free trade comes to a stop. 

Smith: Now you are joining into the examination, good! Yes the key is what your economists now call the multiplier effect. There has to be demand not in theory but backed up with the spendable income to buy. The theory of classical economics that the system would seek equilibrium is true but only if there is money to support real demand to balance supply. The problem has always been that the system can supply everything that people need but they have not had the money to take demand out of the theoretical into the practical. Effectual demand is different from absolute demand. A poor man my like to have a coach and six but this demand is not effectual as he cannot afford it. Your Henry Ford understood that when he raised the pay of his workers to $5 a day so that they would have an effectual demand.

Carey: In order for your economic perpetual motion machine to work you have, however, distinguished among different types of purchases. You categorize fine wines and large yachts as not helping the multiplier effect as much as stoves and clothes bought by people with low incomes.

Smith: Yes, I even include those services that disappear in the act of performance. To keep my economic dynamic functioning we need purchases that add more volume to the items of popular use. This is one of the most vital subjects as concentrated wealth and war are the two interrelated impediments that has kept my system from doing its good work all around the world. This was, however, not just my opinion. Voltaire was excited to discover Confucius and the advanced Chinese culture in materials then available after he returned from England. Confucius understood wealth distribution when he commented that the centralization of wealth is the way to scatter the people, and letting it be scattered among them is the way to collect them. ( cited in Durant, vol 1 p 673)Your Benjamin Franklin was even more emphatic describing the enormous proportion of property vested in a few individuals as dangerous to the rights, and destructive of the common happiness of mankind. ( Edmunc S. Morgan, Benjamin Franklin New Haven conn Yale univ press 2003 pp 307-8)He recommended that laws should be directed to preventing this situation. While I have expressed myself in favor of minimum government this is the area that government must provide the rules for free markets to work.

Carey: Might I express it differently, it is not the need for new laws as much as it is the need to eliminate special government privileges for the speculators. We’re back to control of currency and credit for the general welfare, How well did you know Voltaire? 

Smith: Voltaire was the father of the Enlightenment who was well regarder for his promotion of tolerance but inspired many and authored the concept that people would want a steadily improving standard of living. Freedom from want, fear and oppression. .

Carey: Could you elaborate on neutral money?

Smith: For economic freedom to do the job money must not influence the commercial process. It must be patient, non-volatile, enough but not too much. Or putting it another way the prodigals and projectors, the speculators, will make it impatient, volatile, and take it away from the job growth economy, so the most important part of making money neutral is control of these prodigals and projectors. 

Carey: Sounds like an important piece of the puzzle, why did you not mention it with your qualifications like peace?

Smith: Because we had free banking in Scotland at the time and banks with too many bad loans were punished quickly, visibly, locally, and if there were enough stupid loans the punishment was terminal. Now the government has taken over that responsibility and as far as I can see has privatized the profits and nationalized the losses for the benefit of the prodigals and projectors. They are the people who will pay high interest for their risky adventures. Sober people who will give for the use of money no more than a part of what they are likely to make by the use of it, will not venture into the competition. A great part of the capital of the country is thus kept out of the hands which are most likely to make a profitable and advantageous use of it, and thrown into those which were most likely to waste and destroy it. (p. 339)

Carey: But your free market philosophy has been confirmed by years of improving the lives of people. Now with the failure of communism you don’t have any competition anymore, is that not true?

Smith: There never has been a real competition for those willing to engage in a thorough examination. The problem is that your citizens and leaders have never learned what is needed for economic freedom to do its job for the world.

Carey: I guess like anything else it gets more complicated when one gets into it. By the way why were you agreeable to this interview after so many years?

Smith: I usually do things for a purpose. I see things going on in your world today that force me to speak out. We were just talking about one of them. Now you have got me started, your governments killed 160 million people during the 20th century, over 2 billion people, 1/3 of the world, try to live on less that $2 a day, and we’re going backwards, over 100 million more people are living in poverty than a decade ago. Besides that the prodigals and 

projectors that I warned about are not only not controlled they now dominate your economy and very bad things are going to happen unless your people do their homework and use their democratic power to fix the system. 

Carey: Your vision sounded good but could not really run itself as you promised, is that the sad conclusion?

Smith: My vision has been confirmed many times over by the improvement in the lives of hundreds of millions of people all over the world. The problem is that the expected universal education has not properly educated leaders and citizens in how to properly couple democracy and capitalism and as a result the prodigals and projectors have filled the vacuum and written the rules for their personal benefit. 

Carey: Although you have been incorrectly translated as an apologist for greed you were in fact a supporter of the worker and had some pretty tough comments on those who made their money on money describing how their mission was not consistent with that of society in general. 

Smith: These people that I see you call the ultra-capitalists have a mission of maximizing profits but they think erroneously that they do this by suppressing the wages of the workers and seeking laws from government that allow them greater profits. They are always trying to narrow competition to raise their profits above what they naturally would be, to levy, for their own benefit, an absurd tax upon the rest of their fellow-citizens. The proposal of any new law or regulation of commerce which comes from this order, ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it. (p.250)

Carey: You remind me of the arrogance of Citigroup the monster financial services company that was assembled in anticipation of the repeal of Glass Steagall a law put in place during the Great Depression that nearly destroyed this wonderful country. One of the conflicts was commercial bankers providing the easy credit to companies so that their investment bankers could get the lucrative deals. Within a year of the repeal Citigroup gave the east credit for bad loans in order to participate in the bad deals in a company called Enron. Despite this glaring example of conflict and damage to people repeal of the repeal was not seriously suggested.

Smith: Why?

Carey: I guess that the dominance of ultra-capitalism with the politicians of both parties in their pocket is so total that these perversions of your free market are not challenged

Smith: In my time we expected free trade to help unify the world. Imperialism was the international system worked off the same philosophical basis as mercantilism and should have been superceded by superior system. We thought that the world would arrive at some sort of respect for the rights of one another through communication of knowledge and all sorts of improvements which an extensive commerce from all countries to all countries naturally, or necessarily, carries along with it (891) 

Carey: The dominance by finance capitalism can now be measured. The percentage of total market capitalization of financial services companies of the S&P was 8% in 1980 up to 23% in 2004. You actually excluded financial services from the wealth of nations, did you not Mr. Smith?

Smith: Yes, neutral money was merely the medium of exchange that had a cost first to collect it and afterwards to support it. Expenses that may be part of the gross revenue of society but are deductions from the neat revenue of the society,

Carey: You certainly emphasized the importance of universal education in your work but had a bit of a problem reconciling that with your minimum government.

Smith: Not really. The public can educate the young in every district for a cost so moderate that even a common laborer may afford it, the master being partly paid by the public, because if he were wholly paid he would soon learn to neglect his business. ( 737)

Carey: You were consistent in your insistence that education should have an accountability similar to market forces as you felt that the dons of Oxford should be paid by the students based on performance. It is an intriguing theory but not one that has any current utility. You also emphasized that the student needed training in how to reason properly.

Smith: Of course, the correct reasoning process must precede the examination of subjects of great importance. (725) The subject of greatest importance was in my time not being addressed, namely, the happiness and perfection of man, considered not only as an individual, but as the member of a family, of a state, and of the great society of mankind. This was the subject that ancient moral philosophy proposed to investigate. In the ancient philosophy the perfection of virtue was represented as necessarily productive to the person who possessed it, of the most perfect happiness in life. In my day philosophy was frequently represented as inconsistent with any degree of happiness in this life, and heaven was to be attained only by penance and mortification, not by the liberal, generous, and spirited conduct of a man. By far the most important of the different branches of philosophy became in this manner the most corrupted.(p. 726)

Carey: This is a view that I believe that you shared with your friends David Hume and Edward Gibbon, is that no true.

Smith: Exactly, we all knew that the tutors in the best-endowed universities contented themselves with teaching a few shreds and parcels of this corrupted course; and even these they commonly teach very negligently and superficially. 

Carey: You noted that in my hypotheses in chapter 10 of my book the first agent of change is the university on the simple principle that it is only better trained leaders and better educated citizens that can avoid the mistakes that have kept us from the world of peace and plenty. 

Smith: That should be true but the universities to day from what I can observe are if anything worse in this area of moral philosophy than they were in my time, as bad as they were. It is still true that the improvements that have been made in universities, these learned societies. have chosen to remain the sanctuaries in which exploded systems and obsolete prejudices found shelter and protection. The richer the university the worse the problem. In some of the poorer schools the teachers were more dependant on their teaching reputation for their subsistence were more obliged to pay more attention to the opinions of the world. (727) At Oxford, for example, most of the professors have for many years given up altogether even the pretence of teaching. (718)

Carey: You and your friend Hume were consistent in your promotion of free trade but not altogether successful because the Corn Law was not taken off the books until 1840, and only after repetitive food riots.

Smith: One of many areas of our good advice that was ignored. It seemed obvious to us that what is prudent in the conduct of every family can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it from them with some part of the produce from our country in which we have some advantage. (p.424)

Carey: That seems straightforward to me but one of the scandals of our time is the agricultural subsidies in the rich nations that take away the best opportunity for emerging economies to join in the world economy. 

Smith: That is very disappointing. Certainly not the United States the leader in free trade?

Carey: Unfortunately the United States subsidizes cotton, Europe sugar, and Japan rice totaling several hundred billions of dollars. It is an obvious contradiction of free trade principles and also contributes to a reputation as a hypocrite.

Smith A bit more on motivation, perhaps. A small proprietor who views it all with affection and takes pleasure in it is generally the most industrious, the most intelligent and the most successful. ( 392)The statesman who should attempt to direct private people in what manner they ought to employ their capitals would assume an authority which cannot be safely entrusted to council or senate whatever, and which would be nowhere so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it, ( 423)
Thee ultimate objective of the mercantilistic system, however it pretends, is always the same, to enrich the country by an advantageous balance of trade. ( 607)
The good temper and moderation of contending factions seems to be the most essential circumstance in the public morals of a free people. ( 729) By thus parting good friends, the natural affection of the American colonists to the mother country would quickly revive. It might dispose them to favor us in war as well as in trade , and, instead of turbulent and factious subjects, to become our most faithful land generous allies. (Durant # 10 779)

Carey: One of the casualties of the Great Depression was the wide spread belief that it destroyed classical economics and the free market theory that it would seek and find equilibrium on its own energy. Even the introduction to the 1937 edition of your Wealth of Nations in which Max Lerner said that you gave a new dignity to greed and a new sanctification to the predatory impulses. (p. ix) He admitted that your work had been twisted to the point that your economic individualism was being used to oppress where once it was used to liberate, and that it now entrenches the old when once it blasted a path for the new. He regretted to see your doctrine result in the glorification of economic irresponsibility. (p.x) What is a memorable quote from the reaction to your book?

Smith: I suppose it was Pitt II who said “We will stand until you are seated, for we are all your scholars” Unfortunately the universities did not have the same interest. D 772).

The World, Flat or Round                                                                         

In The New York Review of Books, volume 52, Number 13, August 11, 2005, John Grey’s “The World is Round” reviews Thomas Friedman’s “The World is Flat.” This argument, about social progress, or the lack of it, in the 21st century, is also examined in Ray Carey’s “Democratic Capitalism, The Way to a World of Peace and Plenty.” A summary of Carey’s conclusions in contrast to these round or flat views follows:

          John Gray’s review of Thomas Friedman’s The World is Flat in your August 11, 2005 Review presents opposite views of the human condition during the 21st century. Friedman sees the world driven by technology moving towards a common economic system that can raise the standard of living and stop the violence. Gray calls this a “baseless utopian hope” and sees the world in the 21st century a continuation of the past dominated by nationalistic and religious passions and criticizes Friedman for treating them as “grit in the workings of an unstoppable machine.”
          Both Friedman and Gray refer to Marx’s proposition that social progress depends on movement to the superior economic system and that as the world united in economic common purpose the warrior state would lose power and violence would recede. Neither examine the superior system, or compare it to the one that now dominates. Friedman thinks that capitalism, in a generic sense, will spread affluence and peace through the benign effects of new technology, Gray believes that flawed capitalism will continue to concentrate wealth and cause social tensions.
          The motive force in the world is not technology but rather the human instinct toward freedom. Since the 17th century it has followed a logical sequence as the
freeing of the mind in Western civilization produced the technology that Friedman celebrates. It was the productivity of the Industrial Revolution from new technology combined with economic freedom that stimulated Smith’s vision of a world free of material wants. This freeing of the body of primitive needs followed the freeing of the mind. Galileo, Descartes, Montequieu, Voltaire, and Kant were all constrained from expressing their thoughts by the authorities. Notably Englishmen Locke, Newton, and Bacon are not on the list and that is why the English led the Industrial Revolution.
          The freeing of the spirit through the worldwide use of economic freedom for food, clothing, shelter, education and good health, and through economic common purpose that displaces violence among people and cultures can happen during the 21st century. The technology has advanced to the point in which the productivity and the unifying force of world communication makes a world of peace and plenty attainable, and this is Friedman’s vision.
          Friedman and Gray arrive at opposite views of the opportunities during the 21st century, but share the intellectual default that has gone on since the time of Adam Smith, that is, an ignorance of what free markets need to succeed. Paradoxically, they both acknowledge Marx’s challenge to the intellectual community to assimilate the superior system and modify the political structure in its support in the abstract but do not examine the specific means to the ideal.
          Marx also showed the direction in which the superior system could create more wealth and distribute it broadly, a change in the work culture from alienation to cooperation to release the enormous latent power of people to produce and innovate. It is at this point that my book Democratic Capitalism, The Way to a World of Peace and Plenty leaves Marx with thanks for his important contributions and goes on to synthesize his contributions with Smith’s conditions for free markets to work, viz. neutral money and control of the speculators; and John Stuart Mills’ integration of private property and competition into the superior system. Mill went further and connected the dots among the elimination of material scarcity, the improvement in the quality of life, and the radical idea that profits were maximized in a moral system. 
          Smith’s vision of a world free of material scarcity should have been accomplished a long time ago but the intellectual community has never examined the conditions for its success as outlined by Smith. Money has never been neutral and the speculators with borrowed money have never been controlled. In America this corruption of capitalism has resulted in concentrated wealth that in turn has concentrated political power. Marx’s priority for the economic system with the political structure modified in its support has never happened because brilliant people like Grey have never examined the conflict in capitalism and learned enough about the good capitalism to purge the bad.
          In contemporary terms democratic capitalism is the system that builds up from the individual, encourages the wage earner to participate in an environment of trust and cooperation, and rewards them with a share of the improvement. It is this latter feature that is the key mechanism to spread wealth around the world with enough spendable income for the reciprocal purchases that are the sine qua non of free trade. Democratic capitalism is also the work culture necessary for Information Age industries to release the cognitive power of their people. It is also the system that recognizes that the worker is now a prime source of capital in their pension and 401(k) savings and must share in the rewards of capitalism.
          Ultra-capitalism, by contrast, is the combination of modern mercantilism that treats the wage earner as a disposable cost commodity and in which finance capitalism dominates instead of supports the job growth economy. It is individualistic, greedy, and short term. Globalization for a ultra-capitalist is the opportunity for wage arbitrage in order to hype short-term earnings. Downsizing in not a careful response to changing market conditions to be managed by attrition and retraining over a period of time, but rather an opportunity to demonstrate the CEOs manhood to Wall Street and obtain accounting opportunities to make the following years look cosmetically attractive by capricious downsizing. Beginning with the take over craze 30 years ago ultra-capitalism has been engaging in a form of cannibalism in which long-term profitable programs are consumed for the benefit of short term profits, the price of the stock, and the value of options. The traditional criticism of generic capitalism, the exploitation of labor, has a new dimension in Ultra-capitalism, it feasts on the savings of the wage earner, it exploits their capital.
          Economic freedom and economic common purpose are attractive in the abstract and have demonstrated that they can feed the over 2 billion people in the world who do not have enough to eat. China and India demonstrated this with different forms of economic freedom when they took 3 million people in China and 2 million in India out of extreme poverty in a decade. Similarly. the wonderful inversion has been demonstrated in which the standard of living goes up and the violence goes down when people unite in economic common purpose as they did in the Marshall Plan and more recently in the European Union.
          These are some of the particulars of the choice that needs challenge, debate, resolution, and action. Gray’s nationalistic passions will be very different if the standard of living is going up and wealth is broadly distributed. Gray’s religious passions will be very different if people are living better based on a system of trust and cooperation. This is where the Information Age technology will be crucial. The religious fanatics will lose support gradually as people in all cultures can view the good life from a moral system. Friedman’s technological momentum will be unnecessarily limited unless ultra-capitalism is purged from the American system.
          It is this conflict in capitalism that is examined in detail in Democratic Capitalism and it for these reasons that I propose that it be included in the debate outlined by Gray in his “The World is Round.”
          Grey believes that Friedman has presented a “baseless utopian hope,” that “globalization “ may make the world smaller and parts of it richer but it wont “make it more peaceful or more liberal.” Friedman acknowledges that he is a “technological determinist,” and believes that the momentum of the world powered by technology is toward a common economic system that will bring more freedom and peace. Grey believes that nationalistic and religious passions are a more important part of the process, and criticizes Friedman for treating them as “grit in the workings of an unstoppable machine.”
          Friedman’s optimistic vision is attainable but he overemphasizes the effect of technology. Grey has no vision and believes that the future will mirror the past. Friedman is right for the wrong reasons; Grey is wrong as he does not understand the power of economic freedom to feed the world, and the power of economic common purpose to unite people of all cultures and stop the violence. 
          Friedman’s vision has credibility because in the past decade millions of people have been freed from extreme poverty through economic freedom, for example 3 million in China and 2 million in India. . There is no question that it works. After WW II the Marshall Plan and then the European Union demonstrated how economic common purpose could displace violence. With the demise of communism the world was moving toward the common system of economic freedom, or free markets, in both democratic and authoritarian countries. This was celebrated ten years ago by Fukuyama’s The End of History, challenged by Huntington’s Clash of Civilizations, a dichotomy of views not too different from Friedman and Grey.
          In the middle of the 20th century, long before the Internet, Jesuit priest and scientist Teilhard de Chardin, saw the convergence of technology freeing and uniting humans. More recently Robert Wright in Non-Zero Sum combined technology and an environment of trust and cooperation and concluded, like Marx, that a conversion from alienation to cooperation dramatically improved performance. Jeffery Sachs recently contributed The End of Poverty to the literature of hope. In various ways they all support Friedman’s optimism. 
          Grey is correct that in a world of folly and violence, nationalism and religious passions can dominate the 21st century and with the benefit of nuclear weapons we may be able to break the 20th century record of governments killing 160 million people most of them non-combatants. On the other hand, if Friedman’s technological momentum is coupled with economic freedom and economic common purpose then nations’ passions will change to competition in how well they are improving the lives of their people and religious passions will stimulate democratic support for economic freedom and economic common purpose. The U. N. can assume a new role as the monitor of how well countries are doing measured by their Human Development Index. Those nations and religions that do not support this march to full freedoms will be subject to increased pressure by their people using Information Age technology to learn about the good life in most of the world and become more determined to share it.

Which Capitalism? Both Grey and Friedman make their arguments based on the assumption of a generic capitalism. This disinterest in the conflict in capitalistic alternatives has been the impediment to economic freedom from the time of Smith and later Marx. Friedman’s attention is technological momentum, Grey’s attention is the political structure and religion, neither evidence much interest in the nature of the economic system. The human condition in the 21st century, however, will be determined by which economic system wins the battle:ultra-capitalism or democratic capitalism? 
          Ultra-capitalism is defined as mercantilism that treats the wage earner as a disposable cost commodity combined with finance capitalism that dominates instead of supports the job growth economy. The philosophy is short term, individualistic, “greed is good,” and the results are record concentration of wealth and social upset. In this system capitalism and democracy are in constant tension and Globalization suffers the traditional impediment of mercantilism: not enough spendable income for reciprocal purchases upon which free trade depends. Because of policy mistakes by the American government, lobbied by Wall Street, the world’s monetary system is excessively volatile and liquid. The speculators with borrowed money have demonstrated more power than the central bankers. Hot money and currency speculation have reversed economic momentum in several countries including the world’s largest Muslim nation, Indonesia. Domestically, the wage earners’ savings is exploited by money managers, brokers, and specialists all of whom feast on the wage earners’ pension and 401 (k) savings 
          Democratic capitalism is defined as the system of economic freedom in which the latent power of the wage earner is released through participation and a sharing in the rewards from improved performance. Like Marx, it believes “that the free development of each is the condition of the free development of all.” Like Marx, it believes that changing the environment from alienation to cooperation creates more wealth and then forms of worker ownership automatically distribute it broadly. Like John Stuart Mill, and contrary to Marx, it integrates these vital improvements with private property and competition both crucial to the success of economic freedom. It has also been demonstrated that when people participate and contribute in an environment of trust and cooperation, morality flows from democratic capitalistic companies to the contiguous communities. In the future, companies’ surplus now wasted on stock buy-backs and non-strategic acquisitions will be returned to the benefit of economic growth in tax-free dividends to the wage earner, his or her “capital wage.”

Nationalism: Friedman, like Marx, believes that the power of the warrior state will decline as the standard of living goes up and economic common purpose displaces the violence. Grey believes that this is grossly overstated and the nationalism will continue to be an integral part of the process of society. I strongly favor the argument that economic common purpose can unite the world and stop the violence but that depends on which economic system, the one that is moral and distributes wealth broadly or the one that is individualistic and greedy and concentrates wealth in record amounts?

How Costco became the anti-Wal-Mart                                                     

Steven Greenhouse
New York Times
Jul. 21, 2005 08:23 AM 

ISSAQUAH, Wash. - Jim Sinegal, the chief executive of Costco Wholesale, the nation's fifth-largest retailer, had all the enthusiasm of an 8-year-old in a candy store as he tore open the container of one of his favorite new products: granola snack mix. "You got to try this; it's delicious," he said. "And just $9.99 for 38 ounces."

Some 60 feet away, inside Costco's cavernous warehouse store here in the company's hometown, Sinegal became positively exuberant about the 87-inch-long Natuzzi brown leather sofas. "This is just $799.99," he said. "It's terrific quality. Most other places you'd have to pay $1,500, even $2,000."

But the piece de resistance, the item he most wanted to crow about, was Costco's private-label pinpoint cotton dress shirts. "Look, these are just $12.99," he said, while lifting a crisp blue button-down. "At Nordstrom or Macy's, this is a $45, $50 shirt." 

Combining high quality with stunningly low prices, the shirts appeal to upscale customers - andepitomize why some retail analysts say Sinegal just might be America's shrewdest merchant since Sam Walton.

But not everyone is happy with Costco's business strategy. Some Wall Street analysts assert that Sinegal is overly generous not only to Costco's customers but to its workers as well.

Costco's average pay, for example, is $17 an hour, 42 percent higher than its fiercest rival, Sam's Club. And Costco's health plan makes those at many other retailers look Scroogish. One analyst, Bill Dreher of Deutsche Bank, complained last year that at Costco "it's better to be an employee or a customer than a shareholder."

Sinegal begs to differ. He rejects Wall Street's assumption that to succeed in discount retailing, companies must pay poorly and skimp on benefits, or must ratchet up prices to meet Wall Street's profit demands.

Good wages and benefits are why Costco has extremely low rates of turnover and theft by employees, he said. And Costco's customers, who are more affluent than other warehouse store shoppers, stay loyal because they like the fact that that low prices do not come at the workers' expense. "This is not altruistic," he said. "This is good business."

He also dismisses calls to increase Costco's product markups. Sinegal, who has been in the retailing business for more than a half-century, said that heeding Wall Street's advice to raise some prices would bring Costco's downfall.

"When I started, Sears, Roebuck was the Costco of the country, but they allowed someone else to come in under them," he said. "We don't want to be one of the casualties. We don't want to turn around and say, 'We got so fancy we've raised our prices,' and all of a sudden a new competitor comes in and beats our prices."

At Costco, one of Sinegal's cardinal rules is that no branded item can be marked up by more than 14 percent, and no private-label item by more than 15 percent. In contrast, supermarkets generally mark up merchandise by 25 percent, and department stores by 50 percent or more.

"They could probably get more money for a lot of items they sell," said Ed Weller, a retailing analyst at ThinkEquity.

But Sinegal warned that if Costco increased markups to 16 percent or 18 percent, the company might slip down a dangerous slope and lose discipline in minimizing costs and prices.

Sinegal, whose father was a coal miner and steelworker, gave a simple explanation. "On Wall Street, they're in the business of making money between now and next Thursday," he said. "I don't say that with any bitterness, but we can't take that view. We want to build a company that will still be here 50 and 60 years from now." 

A 'cult stock' 

If shareholders mind Sinegal's philosophy, it is not obvious: Costco's stock price has risen more than 10 percent in the last 12 months, while Wal-Mart's has slipped 5 percent. Costco shares sell for almost 23 times expected earnings; at Wal-Mart the multiple is about 19.Dreher said Costco's share price was so high because so many people love the company. "It's a cult stock," he said.

Emme Kozloff, an analyst at Sanford C. Bernstein & Co., faulted Sinegal as being too generous to employees, noting that when analysts complained that Costco's workers were paying just 4 percent toward their health costs, he raised that percentage only to 8 percent, when the retail average is 25 percent.

"He has been too benevolent," she said. "He's right that a happy employee is a productive long-term employee, but he could force employees to pick up a little more of the burden."

Sinegal says he pays attention to analysts' advice because it enforces a healthy discipline, but he has largely shunned Wall Street pressure to be less generous to his workers.

"When Jim talks to us about setting wages and benefits, he doesn't want us to be better than everyone else, he wants us to be demonstrably better," said John Matthews, Costco's senior vice president for human resources.

With his ferocious attention to detail and price, Sinegal has made Costco the nation's leading warehouse retailer, with about half of the market, compared with 40 percent for the No.2, Sam's Club. But Sam's is not a typical runner-up: It is part of the Wal-Mart empire, which, with $288 billion in sales last year, dwarfs Costco.

But it is the customer, more than the competition, that keeps Sinegal's attention. "We're very good merchants, and we offer value," he said. "The traditional retailer will say: 'I'm selling this for $10. I wonder whether I can get $10.50 or $11.' We say: 'We're selling it for $9. How do we get it down to $8?' We understand that our members don't come and shop with us because of the fancy window displays or the Santa Claus or the piano player. They come and shop with us because we offer great values."

Costco was founded with a single store in Seattle in 1983; it now has 457 stores, mostly in the United States, but also in Canada, Britain, South Korea, Taiwan and Japan. Wal-Mart, by contrast, had 642 Sam's Clubs in the United States and abroad as of Jan. 31.Costco's profit rose 22 percent last year, to $882 million, on sales of $47.1 billion. In the United States, its stores average $121 million in sales annually, far more than the $70 million for Sam's Clubs. And the average household income of Costco customers is $74,000, with 31 percent earning more than $100,000.

One reason the company has risen to the top and stayed there is that Sinegal relentlessly refines his model of the warehouse store, the bare-bones, cement-floor retailing space where shoppers pay a membership fee to choose from a limited number of products in large quantities at deep discounts. Costco has 44.6 million members, with households paying $45 a year and small businesses paying $100. 

Fewer options, more sales
 
A typical Costco store stocks 4,000 types of items, including perhaps just four toothpaste brands, while a Wal-Mart typically stocks more than 100,000 types of items and may carry 60 sizes and brands of toothpastes. Narrowing the number of options increases the sales volume of each, allowing Costco to squeeze deeper and deeper bulk discounts from suppliers.

"He's a zealot on low prices," Kozloff said. "He's very reticent about finagling with his model."

Despite Costco's impressive record, Sinegal's salary is just $350,000, although he also received a $200,000 bonus last year. That puts him at less than 10 percent of many other chief executives, though Costco ranks 29th in revenue among American companies.

"I've been very well rewarded," said Sinegal, who is worth more than $150 million thanks to his Costco stock holdings. "I just think that if you're going to try to run an organization that's very cost-conscious, then you can't have those disparities. Having an individual who is making 100 or 200 or 300 times more than the average person working on the floor is wrong."

There is little love lost between Wal-Mart and Costco. Wal-Mart, for example, boasts that its Sam's Club division has the lowest prices of any retailer. Sinegal emphatically dismissed that assertion with a one-word barnyard epithet. Sam's might make the case that its ketchup is cheaper than Costco's, he said, "but you can't compare Hunt's ketchup with Heinz ketchup."

Still, Costco is feeling the heat from Sam's Club. When Sam's began to pare prices aggressively several years ago, Costco had to shave its prices - and its already thin profit margins - ever further.

"Sam's Club has dramatically improved its operation and improved the quality of their merchandise," said Dreher, the Deutsche Bank analyst. "Using their buying power together with Wal-Mart's, it forces Costco to be very sharp on their prices."

Sinegal's elbows can be sharp as well. As most suppliers well know, his gruff charm is not what lets him sell goods at rock-bottom prices - it's his fearsome toughness, which he rarely shows in public. He often warns suppliers not to offer other retailers lower prices than Costco gets.

When a frozen-food supplier mistakenly sent Costco an invoice meant for Wal-Mart, he discovered that Wal-Mart was getting a better price. "We have not brought that supplier back," Sinegal said.

He has to be flinty, he said, because the competition is so fierce. "This is not the Little Sisters of the Poor," he said. "We have to be competitive in the toughest marketplace in the world against the biggest competitor in the world. We cannot afford to be timid."

Nor can he afford to let personal relationships get in his way. Tim Rose, Costco's senior vice president for food merchandising, recalled a time when Starbucks did not pass along savings from a drop in coffee bean prices. Though he is a friend of the Starbucks chairman, Howard Schultz, Sinegal warned he would remove Starbucks coffee from his stores unless it cut its prices.

Starbucks relented.

"Howard said, 'Who do you think you are? The price police?' " Rose recalled, adding that Sinegal replied emphatically that he was.

If Sinegal feels proprietary about warehouse stores, it is for good reason. He was present at the birth of the concept, in 1954. He was 18, a student at San Diego Community College, when a friend asked him to help unload mattresses for a month-old discount store called Fed-Mart.

What he thought would be a one-day job became a career. He rose to executive vice president for merchandising and became a protege of Fed-Mart's chairman, Sol Price, who is credited with inventing the idea of high-volume warehouse stores that sell a limited number of products.
Price sold Fed-Mart to a German retailer in 1975 and was fired soon after. Sinegal then left and helped Price start a new warehouse company, Price Club. Its huge success led others to enter the business: Wal-Mart started Sam's Club, Zayre's started BJ's Wholesale Club, and a Seattle entrepreneur tapped Sinegal to help him found Costco. 

Proven formula

 
Costco has used Price's formula: sell a limited number of items, keep costs down, rely on high volume, pay workers well, have customers buy memberships and aim for upscale shoppers, especially small-business owners. In addition, don't advertise - that saves 2 percent a year in costs. Costco and Price Club merged in 1993.

"Jim has done a very good job in balancing the interests of the shareholders, the employees, the customers and the managers," said Price, now 89 and retired. "Most companies tilt too much one way or the other."

Sinegal, who is 69 but looks a decade younger, also delights in not tilting Costco too far into cheap merchandise, even at his warehouse stores. He loves the idea of the "treasure hunt" - occasional, temporary specials on exotic cheeses, Coach bags, plasma screen televisions, Waterford crystal, French wine and $5,000 necklaces - scattered among staples like toilet paper by the case and institutional-size jars of mayonnaise.

The treasure hunts, Sinegal says, create a sense of excitement and customer loyalty.

This knack for seeing things in a new way also explains Costco's approach to retaining employees as well as shoppers. Besides paying considerably more than competitors, for example, Costco contributes generously to its workers' 401(k) plans, starting with 3 percent of salary the second year and rising to 9 percent after 25 years.

Its insurance plans absorb most dental expenses, and part-time workers are eligible for health insurance after just six months on the job, compared with two years at Wal-Mart. Eighty-five percent of Costco's workers have health insurance, compared with less than half at Wal-Mart and Target.

Costco also has not shut out unions, as some of its rivals have. The Teamsters union, for example, represents 14,000 of Costco's 113,000 employees. "They gave us the best agreement of any retailer in the country," said Rome Aloise, the union's chief negotiator with Costco. The contract guarantees employees at least 25 hours of work a week, he said, and requires that at least half of a store's workers be full time.

Workers seem enthusiastic. Beth Wagner, 36, used to manage a Rite Aid drugstore, where she made $24,000 a year and paid nearly $4,000 a year for health coverage. She quit five years ago to work at Costco, taking a cut in pay. She started at $10.50 an hour - $22,000 a year - but now makes $18 an hour as a receiving clerk. With annual bonuses, her income is about $40,000.
"I want to retire here," she said. "I love it here." 

[Ed. Note: The review of Democratic Capitalism by Ray Carey in ER of August 2005 gave very little space to his extensive treatment of monetary and banking issues that are central concerns of COMER. Mr. Carey subsequently provided us with this summary of his argument against the unregulated power of the financial industry.]

Capitalism, the Good and the Bad   2006                                                                   

          Democratic Capitalism defines ultra-capitalism as the combination of traditional mercantilism and finance capitalism. The former treats the wage earner as a disposable cost commodity while the latter dominates and preys upon the real economy instead of supporting it. The U.S. economy is in the middle stages of a financialization that presents a huge, complex, and fast moving threat to free markets. Greedy executives are a manifestation of ultra-capitalism, but more important is the Wall Street-Washington nexus that provides government privileges for the easy credit that allows ENRONs and WorldComs to happen. 

          Financialization has corrupted capitalism by concentrating wealth, and corrupted democracy by using concentrated wealth to concentrate political power. This result is a persistent failure by American lawmakers to honor the Constitutional responsibility to “ control currency and credit for the general welfare”. From the time of (Alexander) Hamilton the wealthy and powerful have enjoyed privileges to speculate with borrowed money, resulting in economic panics from 1818 to 1929. Only in the past quarter century, however, has this impediment to free markets escalated into a dominance that threatens permanent damage to our economy. Imperial overstretch, budget deficits, and current account deficits put America into uncharted and dangerous territory. Financial services have grown from 4% to 40% of total corporate profits; their share in total S&P market capitalization is up to 25%. GM and Ford make 125% and 157% of their profits from financial services. That is, they are losing money on cars. Imagine what the overall numbers would look like if we followed Adam Smith’s advice and treated financial services as administrative expenses to be subtracted from the wealth of nations! 

          Kevin Phillips in Boiling Point called attention to what financialization can do to great nations: first Spain in the 16th century, Netherlands in the 18th, Great Britain in the 20th, and now our turn? The manifestations are a shifting of taxes from capital to the middle class, shrinking of manufacturing, an explosive growth of financial services, and record concentration of wealth. Profits are now so good in financial services that they seem insulated from the big cash settlements required in the recent spate of court cases.

          Concentrated wealth is at record levels and has provoked the usual outrage from the “have-nots” and their representatives, along with the usual nonsense from the “trickle down” representatives of the “haves.” The consequent concentration of political power now threatens the future of economic freedom. For concentrated power, with visible evidence of individual greed, has helped change the international image of America from beacon of freedom to arrogant bully. The most successful free market economy in history has given up economic leadership and chosen the use of military power to run the world. The proper role of America is to spread the benefits of economic freedom around the world. Go-it-alone imperialism is not in America’s national interest (see Joseph Nye, former Secretary of Defense, The Paradox of American Power, Why the World’s Only Superpower Can’t Go It Alone). The “Ideologues of the American Empire” and the “Ideologues of the Liberalization of Capital Markets” are a truly scary combination. Neither represents the “will and wisdom” of the people that must prevail for a democratic republic to succeed.

          Both the political right and the left are mistaken in their diagnoses and prescribed remedies. The Left recognize concentrated wealth as the result of government privilege and therefore think they are justified to tax and spend. The Right see the micromanagement waste and inefficiency of collectivism and wave the flag of “free market” without having read the full text of their intellectual champion. For Adam Smith pointed out that it not only requires “peace, easy taxes, and a tolerable administration of justice”, but also neutral money and control of speculators (prodigals and projectors as Smith called them). Neutral money is part of the Constitutional responsibility to “control currency and credit for the general welfare”. The importance of neutral money has also been emphasized by 20th century free market philosophers such as Friedrich Hayek, who identified the worst sin of government as non-democratic privileges that result in money having a dominating influence in the commercial process. 

          America is in the grip of a Great Contradiction that frees what should be controlled, and controls what should be freed. The government tells companies what shoes to wear and ladders to use while simultaneously deregulating monetary matters and suspending market disciplines. It is polarized between those protecting privilege to concentrate wealth and those trying to redistribute it. This gridlock can be broken only by discovering that democratic capitalism is the superior free market system that satisfies the missions of both the left and the right. 

          Lobby power overwhelms the democratic process

          The problem is that no one, except those enjoying the feast, understands the fiscal and monetary policies that provide the privileges. Financialization is the result of mistakes caused by the lobbying of Wall Street and the inability of Congress to dig deep and get it right. Few have the necessary financial sophistication to examine and challenge these mistakes. The two big ones were Nixon floating the dollar without an alternative stabilizing mechanism in the international monetary system, and the Employees’ Retirement Income Security Act of 1974 (ERISA) that did not fully examine the savings/investment equation. These two mistakes caused the excessive volatility and liquidity that provoked the financialization of the economy.

          ERISA is a well-intended law that required companies to fund future pension benefits fully, meaning that they were no longer permitted to pay these obligations out of future earnings that might not materialize. Managers were required to take the cash out of the company and invest it for the benefit of future pensioners. Instead, ERISA pumped $100 billion a year into Wall Street with no examination of whether the money went into real investment or only into pushing up stock prices. The assumption that the stock market is an efficient way to move savings into productive investment is not true. The stock market is a casino with a mission of making money on money. ERISA in effect took trillions of dividend or growth dollars out of companies and gave it to Wall Street where only a part of it ended in real investment. Consequently, although ERISA’s mission was to protect pensions, many pensions are now under-funded. During the 1990’s bubble economy companies were allowed to hype their earnings by using the fictitious stock prices to lower their pension cash-funding obligation. Now many industries’ pension plans such as automobiles, airlines and steel, with big obligations under defined benefit plans, are broke to the tune of hundreds of billions of dollars. The only question is how long the insurance will hold up and when will the taxpayer take up the load. 

          ERISA’s lawmakers were also apparently oblivious to the costs of getting from savings to investment—or to the power and willingness of the Street to gouge the unsophisticated. Mutual funds, for example, raised their prices when the volume of their business shot up. So much for the free market “law” of supply and demand! It is hard to find a single financial motivation on Wall Street that is consistent with a sense of obligation to their ultimate customer, the wage earner. Specialists became technically obsolete over two decades ago but still manage to take their slice of the pie. There are more stockbrokers than steel workers now, most of them on commission. When Mr. Merrill founded Merrill Lynch he insisted that brokers be on salary to avoid the obvious conflict of interest. Where did Mr. Merrill go?

          Control currency and credit for the general welfare, at home and abroad.

          ERISA pension money is what made it possible for Wall Street to dominate Corporate America. Greedy CEOs are a popular target, as many were seduced with millions in stock options. All CEOs, however, were pressured to choose short-term earnings over long-term growth. The short-term choice gave some the high P/E to acquire other companies. Others were forced to sacrifice long-term plans because they knew that if they did not protect their high P/E they were easy targets for the take-over artists. Mergers & Acquisitions are heating up again, with hedge funds including lots of wage earners’ pension money. They will do new damage with their large war chests, unregulated status, and knowledge of how to play games with derivatives. Despite the bubble bursting, nothing has changed. The short-term pressure continues while the “reform,” Sarbanes Oxley, is the usual “gotcha” rules that cost money and reform nothing. 

          Ironically, when ERISA was passed into law Senator Russell Long’s committee down the hall was passing 15 laws that gave tax benefits for worker ownership through ESOPs. (Employee stock ownership plans) It is a tragedy that the committees working on these laws were not introduced to each other. The greatest savings-investment opportunity in history was lost when they neglected to couple ERISA’s trillions of dollars with some place to go with tax-free-dividends to a secure a “capital wage” for workers. Internally generated capital could have been used for growth and to pay dividends if, for example, workers had been offered a 6% convertible preferred stock. Workers could have then purchased ownership with their pension money, spent, saved or reinvested the annual 6% return, and had a chance to participate in long-term growth. Companies could have used reinvested dividends for either long-term growth investment or to pay more dividends. This would have contributed to the rapid spread of ownership plans, and dividends would have taken their place as an important part of broad wealth distribution. Instead the money was wasted on stock buy-backs and non-strategic acquisitions.

          The concept of the free market finding equilibrium is still viable, but only if currency and credit is controlled for the general welfare. The cause of the Crash of ’29 and the Great Depression was speculation with borrowed money, not any fundamental flaw in Smith’s theory. More recently, unregulated money and capital markets caused the meltdown and turning back of real economic growth among the “Asian Tigers” in 1998—a contribution of American ultra capitalism’s insistence on the elimination of cross border capital controls so that “free capital could roam the world looking for the most efficient investment.” This is a good concept in the abstract, but, lacking the requisite disciplines, a disaster in practice. The “Tigers” had little need for foreign capital because of high-level domestic savings, but speculative capital rushed in looking for a quick chance to make money. The lack of controls on hot money (short-term loans) and currency speculation created a crisis in the region, which the Treasury Department and IMF then treated with standard liquidity cures and further slowed down growth. Joseph Stiglitz examined the confusion between a liquidity crisis and a capital crisis in Globalization and Its Discontents. 

          The disciplines should come from the BIS, (Bank for International Settlements) the central bankers club located in Basel, Switzerland. The BIS in Basel I did not monitor the quality of loans by requiring a matching component of long-term money nor do they have ways in a crisis to automatically convert short-term loans into long term. Such disciplines could have prevented both the Asian Tigers’ crisis and the record asset stripping in Russia a year later. The BIS, in fact, wrote reserve rules that encouraged short-term loans. Hot money rushes in and out at great speed—Forex is currently traded at $2 trillion a day plus $1.2 trillion in derivatives. There is no evidence of popular participation in the rewriting of BIS rules in Basel II, however, is no lack of sophisticated advice. George Soros demonstrated the power of speculators with borrowed money over the central bankers when he made over a billion dollars shorting the British pound in 1992. The British central bankers wasted most of their reserves before they gave up. Soros since then has written extensively about the threat to open markets from the instabilities in the international monetary system.

          The litany of ultra-capitalist abuses can be extended at great length, but it is more important to briefly mention the alternative, the way to a world of peace and plenty. 

           A synthesis of Smith, Marx, and Mill 

          The democratic capitalist proposition is that investing in people in a moral environment maximizes profits. Robert Owen demonstrated this synergy of quality of life, moral values, and profits in practice. J.S. Mill later connected the dots among these crucial components but few paid attention, then and now. Karl Marx was right when he rearranged the sequence of economic system, culture, and political structure to put economics in first place, to be assimilated by the culture with government restructuring following along as a popular (democratic) imperative. Popular ideology of the whole modern era, both left and right has this in reverse: it conceives political reform as prerequisite to economic. Despite the clarity and comprehensive treatment by Smith, Marx and Mill, the experimental verification by Owen, and the validation by thousands of companies dedicated to its culture, Democratic Capitalism has never been presented as a coherent whole for student examination in Business or Law schools or, for that matter, in the liberal arts despite their mission to improve the human condition. There has been a massive intellectual default during the whole industrial revolution by those who could have presented the good capitalism. This is the contribution of intellectuals, whether of left or right, who have ever since Plato manifested a contempt for commerce. The result is that democratic managers must continue to reinvent democratic capitalism. If democratic capitalism is not examined in the university, and is rarely mentioned in the popular media, William Greider has asked the pertinent question in his book Who Will Tell the People? 

Ray Carey

[Acknowledgement: I am indebted to Keith Wilde for generous assistance in condensing this article from a much longer set of notes.]

To Goldman Sachs                                                                  
January 30, 1990

Mr. John Weinberg
Chairman of the Board
Goldman Sachs
85 Broad Street
New York, New York 10004

Dear John,

            For some time, I’ve felt that your industry, including Goldman Sachs, “sold your soul” when you elected to pursue the traditional big bucks fundamentally in conflict with your long term advisory role. If this is true, then all the bad things described in today’s New York Times’ article were inevitable.

            The article mentioned the consultants helping with your introspection but didn’t mention any effort to talk to customers to get their view. Assuming all consultants are enthusiastic about customer inputs, I’m enclosing a letter I wrote you last September but, for a variety of reasons, didn’t send.

           In the February 5th issue of FORBES, there is a J.P. Morgan ad striking a heroic posture about the deals they didn’t do. Good long term advice, etc. They didn’t say anything but uncoupling the deal from compensation structure. Apparently, they are pure enough to walk away from $10,000,000 fees with no conscious or subconscious effect on their professional advice- but I doubt it.

          With my great respect for you, and the traditions of Goldman Sachs, I hope this current review will encourage you to take the lead in putting your customer relationship back into one of long term trust.

With best regards,


Raymond B. Carey, Jr.

Mr. John Weinberg
Chairman of the Board
Goldman Sachs
85 Broad Street
New York, New York 10004

Dear John,

          Its an extraordinary time in which we’re living. The worldwide rush to Capitalism encourages steadily greater economic and political freedom. This shrinking world is becoming more ordered through the natural requirements of world business and political tensions decline with economic improvement and elimination of extreme ideological differences. Is it possible that world peace and prosperity, if not near, are being approached on an accelerated basis?

          Within the U.S. workplace, Capitalism or, more appropriately, Democratic Capitalism is evolving on an accelerated rate to a new form, combining the energy of economic freedom with the idealism of communism. Marx was wrong on much, but he was correct that the system constantly searched for and evolved into its most productive mode. This mode now recognizes the productivity opportunities of tapping the ideas and energy of free people throughout the organization. Broader ownership and participation is happening and these new dimensions of profit seeking demand an environment of integrity and trust with recognition of the worth and dignity of each individual. Is it possible that Adam Smith’s invisible hand is powering an upgrading of the integrity level of industry and the quality of life of its participants?

          This acceleration in both world unity and the moral level of industry comes after centuries of progress made slowly because of the inhibiting effects of those enemies of true Capitalism- the elitist with a zero sum mentality, the warrior state, and mercantilist gaining economic advantage through state involvement. A retrospection of the several hundred years of the Industrial Revolution shows an extraordinary paradox: Dramatic improvement in the quantity and quality of life for most, despite the persistent failure of leadership and the uncomprehending animosity of most of the elements of society. The visible evidence of greed and exploitation with the system conditioned most intellectuals, academia and media to their congenial view that the system was terribly flawed and prevented them from appreciating the positive momentum of the system producing the greatest social gains in history.

          You may not agree with my thesis or my ability to express this optimistic vision of what’s going on in the world, but there’s a commercial. This progress into a more socially desirable form of Capitalism has been despite the external enemies but also despite an increasing polarization within Capitalism between Speculative Capitalism to Democratic Capitalism.

          During the past five years, the effect of this has been an extreme concentration in the U.S. on short term goals and a dangerous distribution of wealth equation. The bottom of the pyramid has had years of rollbacks of fringes and 2% and 3% wage settlements while at the same time, the investment bankers, M&A lawyers, and certain CEOs have been accumulating extraordinary riches. Anyone that doesn’t recognize this type of imbalance as dangerous to the progress of the system is not a student of history. I wont try to summarize the pro and cons of the deal making frenzy. It is not well known that these providers of record capital infusion receive no appreciation or yield on their investment. The argument that its not their money is very limited. The argument that its another monstrous example of the Washington/Wall Street nexus, bad law plus greedy energy, is more appropriate.

          Within this environment, the role of the investment banker has been demeaned by a fundamental conflict of interest. The exploitive technique of charging customers a fee based on a percentage of a total transaction where this pricing technique usually has no relationship to either creativity or risk and has as much economic logic as picking numbers off a freight car.

          This conflict is not vague or theoretical. The investment banker is a key part of the restructured business plan. If a deal goes into an auction, his people regularly do the remodeling. But he also constantly emphasizes a non-participant’s role, “of course, we’re only working with management’s assumptions” you shouldn’t have it both ways. If you’re an advisor, get paid a fee not contingent on the deal. A corollary conflict is the director’s dilemma. In this whole spasm, no one has more responsibility for less return than the outside director (unless you’re on Wall Street where Hutton figured out how to rain money on outside directors). Where the projections are made and remade in an auction, where financing techniques with long deferred interest payments are recommended, there isn’t any question that the director is depending heavily on the investment banker in his/her effort to do the proper thing. Someday the business judgment rule will be tested after a failure. At that time directors will have to explain why they depended on advice from people to make a deal when a deal was worth $20 million to those people and no deal was relatively worthless. This conflict is so fundamental that its hard to understand how the percentage of the deal pricing became institutionalized. Hard- unless you recognize that originally it was slipped in during conditions where management was somewhat fatigued with little energy left to fight their investment bankers. Since then, the rationale has been neat comparisons of other deals usually evidencing modest fees. A practice I once described as an obscenity extrapolated from other obscenities.

          I’m not sure you realize how broad and deep are the resentments against the whole investment banking community by the managers and directors of companies. The feeling is that your industry has abandoned the traditional role of steady advisor and has pursued exploitive profits in deal making. This polarization is a serious impediment to the progress described and continues to support the general impression of Capitalism as exploitive and greedy.

          The usual self-correcting forces within our beautiful system are at work and, in time, assuming the government doesn’t try to get too involved, will correct this spasm probably into the long term detriment of your industry. There is still time for statesmanship within the industry however, and I cant think of anyone more appropriate to assume such statesmanship as you and Goldman Sachs, by the simple expedient of uncoupling investment banking fees from deal making percentages. When you risk your capital, you charge very high percentages; when you provide real creativity in a transaction, you have every right to charge for creativity, but you and your industry are both exploiting and encouraging a deal frenzy that, in most cases, is seriously counterproductive to the wonderful momentum of Capitalism described earlier.

          I think the time is ripe, if not overdue, for someone in your industry to eliminate this fundamental conflict and, in the course of doing it, reaffirm the coalition of Financial Capitalism and Democratic Capitalism, rather than the polarization and animosity that now exists.

With best regards,


Raymond B. Carey, Jr.

Invest the Peoples’ Capital, or                                                                   
How the Government Corrupted Capitalism 

In 1964 Studebaker went broke and did not have the money to pay its pension obligations. Congress responded by passing ERISA [1] in 1974 to protect the peoples’ pensions. The enormous amount of money designated for investment, however, made this a potentially dramatic moment in the history of capitalism. It was a perfect investment profile: large amounts of patient capital looking for return many decades in the future along with a “capital wage” from dividends averaging 6% at that time.

As much as $100 billion a year from private and public plans was available for investment. Where would it go and how would it get there? The possibilities were exciting: stronger economic growth by companies issuing stock for investment in new product development; public investment in education, urban transit, research in new energy sources, and environmental needs. Companies could also address their infrastructure needs, for example utility companies could add capacity to handle peak loads, and oil companies could upgrade transmission lines.

At about the same time Senator Russell Long’s committee was passing 15 laws giving tax benefits to forms of worker ownership that motivated and rewarded the wage earner to build more wealth. The Information Age industries were adding amazing productivity and opportunities to unite people. The power of economic freedom to improve lives was being used in both democratic and authoritarian countries and millions were being taken out of extreme poverty. Late in the 20th century these were solid reasons for optimism that the world had finally found the way to peace and plenty.

Think of ERISA as a hydraulic pressure being applied to the stock market. With about 70% of the total funds there was $70 billion of new money coming into the market in the early years. Where would it go? It could be cycled into the economy paid to companies for new stock they issued for growth, it could increase in the value of stocks then in the market, and it could go to the managers of money for fees, commissions and other compensation.

Directors and executives of public companies were personally threatened by the ERISA and rushed to place investment responsibility outside the company. Company executives and committees then reviewed the performance of the money managers quarterly and fired those whose performance for the year was not competitive with other managers. This was the genesis of the perversion of potentially very patient capital to very short term that changed the nature of capitalism in America. The discipline to invest surplus for long-term benefit is the essence of capitalism and the results of which cannot be measured in less than three years. The shift to short-term measurement eventually provoked cost cutting as the quick way to improve earnings.

Corporate raiders showed the way by taking advantage of the easy credit now amplified by the flow of pension money to attack companies with a premium offer over the stock price and then fire people and strip benefits to pay for the acquisition. Takeovers almost always increased the price of the stock and for that short-term reason gained the support of the money managers motivated to improve their standing in measurements such as the Becker Median. This was an extraordinary perversion of capitalism: the very people responsible for the future value of the peoples’ investment were financially motivated by the system to chose short-term results that cut back on long-term investment!

The way to get there was Wall Street. The investment bankers would handle the bonds and the stock market would move the money coming into the market out of the market in new growth stock. This simple dynamic, however, had a few important conditions to be understood and observed by the designers of ERISA. For the free market to reach full potential money must be neutral, that is, without influence on the commercial process. This, in turn, required that asset inflation in either stocks or real estate must be controlled by tax policies, bank and margin requirements. The obligation of government to control currency and credit for the general welfare meant that the tendency of excessive liquidity, too much money, to move to speculation would have to be anticipated and controlled.

Too bad! None of this was done and most of the money flowed into the stock market and not enough of it flowed out in new stock for growth. The money had no where to go but up and the longest bull market in history began. The pension money flowing into the stock market soon dominated the economy with enormous rewards or punishment for a few cents change in quarterly earnings per share. Instead of the peoples’ money democratizing capitalism, it was perverted into a new mercantilism in which firing people was the way to produce quarterly earnings. Stocks that had been held for six years on average were sold in less than a year. Dividends shrank from 6% to less than1% in the bull market. Despite the greater volume of transactions, fees for handling the money went higher. Mutual fund fees reached ten times that of index funds that produced the same or better results. Profits from financial services exploded from 4% of total corporate profits to over 40%.

In this environment, CEOs’ overriding consideration was building up and protecting the short-term price of the stock. Shortfall of a few cents a share in quarterly earnings per share could wipe hundreds of millions, even billions, of dollars off market value. A high stock price also made acquisitions possible, and a low one made takeover more likely. They “smoothed earnings” by dipping into inventory or bad-debt reserves; slipped into “creative accounting” to prevent a miss against quarterly targets; and finally some plunged criminally into faking earnings. CEOs trapped in this dynamic hoped that the shortfall was temporary and that good times coming would correct the books. When this did not happen, they were hooked on faking earnings.

Once CEOs were trained like Pavlov’s dog the Wall Street agenda was easily implemented. Wall Street did not like dividends because they did not make money on dividends and preferred that companies keep the cash and use it for stock buybacks or as an attraction for a deal. Wall Street hated dilution so those companies thinking about using the stock market for its original purpose of raising cash for investment thought twice before they would sacrifice stock price for possible dilution.

ERISA money turned into easy credit that drove the bull market and funded adventures from LTCM to Enron. Global companies practiced wage arbitrage moving quickly into the lowest wage opportunity with no thought of wages high enough for reciprocal purchases without which free trade does not work. The Southeast Asian countries had their economic momentum reversed by hot money and currency speculation. Muslim leaders called America “economic imperialists.” Russia tried to move to this form of capitalism with “shock therapy” with disastrous results.

At the time of ERISA the stock market valued earnings at about 7 times, that is a dollar of earnings per share meant a stock price of $7. This was low as the long-term average was 15 times. . As most of the hydraulic pressure went, not into new equity for growth but rather into pushing up the value of stocks by the end of the century earnings were valued at about 30 times. That same dollar of earnings was now worth $30 on the market. Extraordinary amounts of personal wealth was produced by this phenomena. With easy credit and favorable tax policies deals proliferated on Wall Street and a crucial change was made in how they priced services. Instead of hourly-based advisory annual fees they now priced on a percentage of the deal. As deals proliferated and became bigger finance capitalists were the first to be comfortable with annual compensation in the $5o million to $100 million range. With the encouragement of the finance capitalists and money managers CEOs were then encouraged to participate in the feast with millions of stock options and increasing compensation from a growing smorgasbord of plans. The practice of Board Compensation Committee to review the internal logic of compensation was abandoned for comparison only to a peer group of overpaid CEOs.

During the 1980s and 1990s everyone seemed to be enjoying enormous wealth. Hidden was the reality that the big increases in productivity were going to the top 1% and not being spread to the wage earner. Inequalities of wealth reached record levels. The business schools and financial press adopted this new “shareholder capitalism” as the sought for new mode of production. Managers who tried to hang on to long-term building plans were derided as “entrenched management,” and support went to the raiders. Well known people warned of the developing dangers; Warren Buffett persistently recommended long-term investment, famous speculator George Soros warned that instabilities in the international monetary system threatened both the economy and social cohesion; famous M&A attorney Marty Lipton warned that we were sacrificing long-term growth for short-term earnings.


[1] Employees’ Retirement Insurance Act

Enlightenment II                                                                                          
The Integration of Knowledge for Social Progress

18th century
          Inspired by Isaac Newton’s identification of order in the universe the Enlightenment sought the best order in human affairs. Men of brilliance and experience in both Europe and America placed the goal of indefinite human progress; with the means more wealth, broadly distributed, and law, instead of violence in the relations among nations,. American Founders tried to design a political structure that would reflect the will and wisdom of educated citizens to displace the egregious mistakes of the powerful few. Francis Bacon’s method combining reason and experimental verification was coupled with Newton’s scientific protocols to specify the means and validate the ideal. Underlying the rational effort was a belief in the worth and potential of each individual.
          The Marquis de Condorcet integrated knowledge for social progress in his Tenth Stage, an extraordinary summary of the economic, social, and political contributions of the Enlightenment. A users manual to reach full human potential for the benefit of subsequent generations (DC reference? These few pages in chapter 3 are critical to the whole thesis, please reread) Condorcet, however, knew with concentrated wealth and violence dominating Europe, that new freedoms would have their best opportunity in America “that happy land where freedom had only recently kindled the torch of genius.” 
          Most of the world, however, was not ready to shift from policies based on nationalism, imperialism, militarism and big mistakes by hereditary monarchs to those based on people uniting in economic common purpose. George III fumbled his way into the American Revolution; Louis XVI precipitated the French Revolution and lost his head; Condorcet died in prison during the Reign of Terror after passing the baton to America to lead the world to peace and plenty.

Mid-19th century
          John Stuart Mill and Karl Marx confirmed Adam Smith’s theory that economic freedom would spread wealth naturally. It had been validated in practice but they pointed out that the system was functioning at a fraction of potential because wealth was still too concentrated. Each proposed that a change in the work culture to trust and cooperation would motivate workers to add more wealth and that a fair share of the improved performance would distribute wealth more broadly.
          In two books, Theory of Moral Sentiments and Wealth Of Nations, Smith had integrated the instinct for social cooperation with individual ambition to drive the free market system, concluding that “little else is required to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice, all the rest being brought about by the natural course of things.” 
          Karl Marx in Das Kapital criticized the prevailing exploitive system and conditioned social progress to movement to the superior economic system, assimilated by the culture to modify the political structure in its support. 
Marx and John Stuart Mill saw that a change in the work culture from alienation to cooperation would add wealth, broadly distributed. Mill in his Political economy integrated participating workers with private property and competition and proposed that material benefit was maximized by an improvement in the quality of life of the workers in a moral environment! Mill’s integration completed the specification of democratic capitalism.
          The intellectual community did not assimilate this integration of knowledge for human betterment initiated by Smith and completed by Mill, consequently, citizens were not educated to use growing democracy to reform economic freedom at home, or unite in economic common purpose abroad. The word “capitalism” came into use as a pejorative expression that implied wealth and privilege. Untrained leaders were nationalistic, imperialistic, militaristic and continued to abuse their power by large mistakes.

21st Century
          During the 20th century economic freedom confirmed its capacity to improve lives in both authoritarian and democratic countries; China and India took one-half billion people out of extreme poverty in a decade; collectivist alternatives were tried and failed. The Marshall Plan after WW II, and later the European Union, confirmed that economic common purpose could stop the violence. The Information Age made the world more productive, smaller, and more interdependent with technology that aided communication and education
          Despite these positive events, early in the 21st century the world was full of violence, misery, and fear. The root causes had become worse because of failure of American leadership. This “happy land” had lost the “torch of genius” of its Founders.

          Reform of the economic system as the starting point can not happen without an epiphany in education in which they realize that they and the university trained popular media are not training leaders, educating citizens, or informing the public. This failure has been documented in recent books by university presidents and deans. Derek Bok, the former, and temporary President of Harvard, has commented on this since 1993: 

          Bok subsequently got hundreds of university presidents to endorse this view. Francis Bacon cautioned that: ” It is not possible to run the course right when the goal itself has not been rightly placed.” Such clarity of mission is sadly missing in academia, former University of Chicago Dean Stanley Fish challenged Bok in NYT editorial in 2004 commenting:

         
          Dean Fish, now a law professor in Florida, amplified his definition of academic freedom in a recent editorial in the NYT. ( 7/23/2006, p 13) He explained that it was the right to teach anything a professor chose as long as it was not presented as “indoctrination.” 
          Is it this abstract search for truth without a goal or focus that has made an educational anarchy in the universities? Bacon criticized the quality of truth seeking in his time, has anything changed?

          
          The confusion of mission by Deans and Presidents is matched by confusion by professors about the Enlightenment’s “search for truth.” Harvard philosopher professor John Rawls was amazed when his book on a just society sold 200,000 copies. Unfortunately, two decades later, he lost his idealism and commented: 

          Was the conclusion by Rawls that it is impossible to organize human affairs rationally a reaction to the failure of alternative political systems? Did this intellectual fatigue result from failure to perfect society by an elite design: it did not work; ergo, it cannot be done? Was the alternative examined that it did not work because it started at the political, not the economic end? Those who declare defeat and walk off the field leave government policy free for the finance capitalists who spend huge amounts to protect their exploitive system; and the military-industrial complex with its great momentum and political support in the march towards nuclear destruction
          Edward Wilson, a Harvard professor of biology and winner of both Nobel and Pulitzer prizes wrote Consilience about the unification of knowledge for human betterment. Wilsonrespected the Enlightenment:

          Wilson identified single-discipline scholarship in academia and the under-prepared media as serious impediments to the unification of knowledge requisite to the rational organization of human affairs: 

          This dichotomy illustrates why knowledge is not integrated for the betterment of the human condition, it is, instead, specialized and fragmented. The curriculum devolves into a state of anarchy as professors and students each chose what they feel like teaching or studying. The search for cohesive, integrated truth about the human condition, that is, all is requisite pieces in a logical relationship, is not pursued but frequently ridiculed. The faculty aggressively protects its freedom, but, freedom from what, and for what? 
          The world has continued with folly and violence because the reform minded intellectual community has been satisfied with criticizing the economic system and promoting political solutions while not examining how to refine capitalism. Democratic capitalism is rarely offered for student examination, although the capitalism that tries to maximize profits by suppressing wages and benefits, in an environment of fear and intimidation, receives substantial student visibility through criticism by most professors. Socially sensitive students are “indoctrinated” to an anti-capitalist attitude, not by course material but by their professors and instructors. They do not learn the simple ways to reform capitalism because their teachers cannot teach what they have not learned.
          There are no solutions because there is no agreement on the starting point or whether it should be started at all. I believe that identifying the superior economic system is the starting point? A core curricula could examine the integration of knowledge by the Enlightenment summarized by Condorcet. It would begin with practice in the truth seeking process of the scientists amplified by the careful method of Bacon. It would include integration of knowledge by Smith and Mill with an understanding of how close Marx came to the same integration. It would study Kant in order to better understand the need for the U. N. and the need for reform.
          The solution to inadequate citizen education then is better education about economic freedom with particular concentration on Smith’s conditions for success. Democratic power will not counteract the lobby power of finance capitalists until citizens understand that neutral money means a supply, cost, and volatility that does not affect the commercial process, and control of currency and credit for the general welfare means limits on speculation with borrowed money. 
          Students can also understand the economic alternatives by studying the mistakes by the few: Woodrow Wilson’s ignorance of economic freedom at the 1919 Peace talks that made WW II inevitable, and Herbert Hoover’s three mistakes in the supply of money, taxes, and tariffs that exported the overdue stock market Crash of ’29 into the Great Depression. 
          Democratic capitalism should be examined in the Liberal Arts courses because it improves the human condition; it should be examined in business schools because it maximizes profits. Democratic capitalism is a moral system that can eliminate material scarcity and unite people in economic common purpose. The debate over “core curricula” should be over. This is the minimum knowledge needed by all citizens. It will take hard work, however, considering the erosion of idealism by professors like Rawls and the rejection of citizen education by Deans like Fish. 
          Does an economic system function better because it is moral? Can the moral economic system be a model for other elements of the culture? Is it true that performance improves in every human association with trust and cooperation? These radical propositions must be examined aggressively because their promise is so great and the alternatives so lacking. 
          Academicians are uncomfortable with the concept of a bridge between reason and faith. The record shows, however, that the universities dominated until a century ago by religious dogma have yet to find an alternative after that dogma was abandoned by many. Society needs a universal value system that bridges the secular and religious, one in which faith stretches the horizon of the ideal by transcending the world of misery and violence, and reason specifies the means to the ideal. In a world of increasing violence and clash of cultures this sounds optimistic, if not naïve, but the universal ideal is grounded in the economic system that improves lives in both democratic and authoritarian countries. Young people in totalitarian countries will view the good life on TV and the Internet and, in time, change their governments to provide similar opportunities. Authoritarian countries will gradually move toward political freedom as they learn from world competition that economic freedom works best with full democratic freedoms. The value system of trust and cooperation will spread not because of eloquent sermons, but, rather, because of the inexorable pressure of competition on companies and countries. People of faith will recognize a value system consistent with religious teaching; people who rely exclusively on reason will find the value system consistent with an examination of human nature.

          These impediments to social progress, concentration of wealth and violence among nations and peoples, are interrelated and can be eliminated only through understanding gained through integrated knowledge. A core curricula for this examination, however, would be rejected by the faculty. The concept that social progress depends on movement to a superior economic system is alien to most professors. Further, the proposition that this system can be a model for the rest of the culture because performance in every human association improves with trust and cooperation is anathema to those who still harbor feelings that commerce is amoral at best and more likely immoral.
          This rejection is due to cultural conditioning that goes back thousands of years and will not be easy to neutralize. It began with the contempt for commerce expressed by both Plato and Aristotle, their love of the political state of their design, and their view that human potential can be reached only in a contemplative life, in contemporary terms, a Ph. D. with tenure. As the mode of production at that time was slavery, most individuals did not have an opportunity to reach full potential and the search for a just society was elitist.
          Marx’s criticism of capitalism has been enjoyed by many who at the same time ignore his most important contribution: Priority for the superior economic system, assimilated by the culture, with the political structure modified in its support. Because improvement of the human condition depends on the efficacy of the economic system, this intellectual myopia is the first cause of a society still full of misery, violence, and folly. 
          Enlightenment II can educate citizens by a rededication to Bacon’s process to purge the superficial, politicized habits that have contaminated non-scientific truth seeking in the universities. The process can then specify the means and validate the ideal of indefinite human progress, as it did for the 18th century Enlightenment.
          Professor Wilson offered this peace proposal:

          The quality of the truth-seeking process employed by Enlightenment II will be critical for citizens to reform their economic system to build more wealth broadly distributed and to reform foreign policy to unite the world in economic common purpose. Those who worry that war and violence are inevitable must give trust and cooperation a chance. They will discover a benign inversion in which the standard of living goes up, and the violence goes down. They will discover that performance improves with trust and cooperation in every human association including families, education, companies, nations, and the world

Ibid., pp. 62-73.
Ibid. p. 432.
Ibid., pp.81-89.
Theory of Moral Sentiments, Wealth of Nations 
Ibid. p. 171.
Ibid. p. 49.
Ibid. pp. 278-291.
Former President Derek Bok, Harry Lewis, Dean of Harvard and President Harold Shapiro of Princeton. Lewis’s book is titled Excellence Without a Soul with a subtitle How A Great University Forgot Education. 
Ibid. 444

A Crossroad In Human History                                                                 

          Human history has been a conflict between those uniting in economic common purpose to improve lives, and those using force to dominate others for economic benefit. With the advent of the European nation-state in the 16th century, imperialism became the use of such force on an international scale. Throughout history nations and religions have also used force to dominate others for ideological reasons.
          Economic freedom can provide the necessities for humans to reach full potential, including food, clothing, shelter, education, good health, and hope. This capacity has been the American dream realized for two centuries and was confirmed during the 20th century by both authoritarian and democratic countries when China and India took one-half billion people out of extreme poverty in a decade. 
          Economic common purpose can unite people and stop the violence in an inversion in which as the standard of living goes up, the violence goes down. This was confirmed after WW II first by the Marshall Plan in Japan and Germany, and later by the European Union.
          After the demise of communism, late in the 20th century the world seemed ready to move to economic common purpose. The age of imperialism was over as there was no further economic benefit and people everywhere sought their freedom. Great Britain left India reluctantly while France was thrown out of Algiers and Vietnam in bloody wars. 
          The country with the proud record to lead the world towards economic common purpose failed spectacularly and instead after WW II became the only remaining imperialist but for ideological reasons. Beginning with the overthrow of the democratically elected head of Iran in 1953, and including the humiliating defeat by the freedom fighters of Vietnam, America has used force to try to run the world. The result has been reciprocal atrocities that are then used in defense of more force. The military-industrial complex supports American imperialism and new enemies are provoked both by accident and deliberately to rationalize this enormous waste of the peoples’ money. 
          Late in 2006 the conflict between a world of economic common purpose and a world dominated by an ideological imperialist was being won by the militaristic, nationalistic, power-adoring few American fascists. The following chapters review the history of economic freedom, the mistakes of imperialism, and the urgent need for an Enlightenment II to educate and arouse the citizens in order to take their country back from the fascists, make economic common purpose the priority, and get the world back on the way to peace and plenty. 

Economic Freedom- A History

          Capitalism in its democratic form can purge the privileges, distribute wealth broadly, provide basic needs for all, unite people in economic common purpose, and stop the violence. “Capitalism” in the 21st century continues to be a pejorative expression for many because record concentration of wealth still prevents it from reaching full potential. Citizens must first reform the economic system before it can lead the world to economic common purpose.
          In the late 18th century Adam Smith presented the economic system that, for the first time, could eliminate material scarcity. If Smith’s few conditions were met, there was no further need for nations and people to battle over finite resources. In mid-19th century Karl Marx described why the superior economic system was the starting point for social progress to be assimilated by the culture in order to modify the political structure in its support. Marx proposed that ownership participation would change the work culture from alienation to cooperation thereby adding to the production of wealth. John Stuart Mill also proposed this new mode of production but advised that it must be integrated with private property and competition. Mill presented the synergy between quantity of production and quality of life in a work culture of trust and cooperation. This was Mill’s signature concept: a capitalism that produced more wealth because it was moral.
          Smith’s conditions for the success of economic freedom were peace, neutral money, and broad distribution of wealth. Peace because war is the greatest waste of lives and resources that should be invested in economic growth, infrastructure and environmental needs. Neutral money because economic freedom needs a medium of exchange that is enough, but no too much, patient, and non-volatile. Speculators with borrowed money demonstrate the damage from non-neutral money as they deflect capital from the job-growth economy.
          Broad wealth distribution is fundamental to the success of economic freedom in four ways: motivation, multiplier effect, elimination of social tensions and diffusion of political power. It motivates the wage earner to innovate and produce through ownership participation. The rewards from superior performance are saved as patient investment capital, or spent with the greatest multiplier effect. Purchases by wage earners add volume to the commodities that energize Smith’s wealth spreading dynamic in comparison to luxury purchases by the wealthy It is this growing volume that reduces the cost to produce and through competition passes that reduction onto the consumer in lower prices. Lower prices in turn open up markets for those who could not purchase at the higher level and continue the addition of volume with lower costs and prices. This benign deflation with new products with functions and features at constantly lower price is more dramatic in the Information Age. Broad wealth distribution substitutes a sense of unity and a just society for the social tensions caused by concentrated wealth, and finally diffusion of economic power is prerequisite to diffusion of political power.
          Free trade is the extension of Smith’s dynamic to the global economy and is the way to fulfill basic needs for the one-third of the world’s population that tries to live on less than $2 a day. Lack of understanding of Smith’s dynamic, however, is nowhere more flagrant than in world trade. “Globalization and Outsourcing” have joined “capitalism” as pejorative expressions by many who do not understand that world trade is the way to feed the world and stop the violence. Nor do they understand that free trade needs only broad distribution of wealth to provide the spendable income for reciprocal purchases that adds jobs in all countries.
          Instead of treating ”globalization” as a dirty word with implications that it hurts people, citizens should demand an end to the hundreds of billions of dollars of subsidies of big agricultural companies for sugar, cotton and rice.         These purely political actions in the rich countries of Europe, America, and Japan waste the peoples’ taxes and result in higher prices for poor people in the countries providing the subsidies, and no work for the even poorer people in emerging nations trying to farm their way out of extreme poverty.
          Reformers at the time of Smith failed to understand his conditions and use democratic power to modify the political structure. The powerful few continued to concentrate wealth. Reformers responded to the exploitation by trying to redistribute wealth by government instead of purging the privileges and meeting Smith’s conditions. 
Students sensitive to the human condition since then have not had an opportunity to study democratic capitalism because teachers cannot teach what they have not learned. Instead they were conditioned to contempt for generic capitalism. This lack of visibility of the system that can feed the world and stop the violence is a scandal that must be addressed by the universities.
          At home and abroad it is capitalism with broad wealth distribution and free of tariffs and subsidies that adds to economic growth and limits the demands on government. It motivates, rewards, and elevates spirits in an environment of trust and cooperation to keep the economic perpetual motion machine running, none of which are accomplished by wealth redistribution by the government. 
          The many forms of commerce, loosely defined as capitalism, gain focus by examining three preconditions: Freedom, secure property, and discipline to restrain present consumption in order to invest for future return. They can be observed in the most basic form of commerce, farming. The farmer must be free to invest labor and cash; his or her property must be secure, protected by law from predators including the state, and the farmer must discipline consumption to invest for future gain.
          There are three levels of freedom needed for democratic capitalism: state, company, and individual. Capitalism will function at full potential when all three levels are fully free, however, economic freedom is so powerful that it provides benefits when the companies are free and the individuals motivated to produce and innovate. In time freedom at this level will expand political freedom in the state and until it does there will be an economic penalty.
          The state must assure the security of property and encourage long-term investment. It was clear by the end of the 20th century that the command economies of communism and socialism cannot provide basics needs because central control cannot match the performance of spontaneous order and it de-motivates people.. At the company level there must be freedom to decide what, where, and at what price products or services are built and sold. Within the company individual involvement and motivation will depend on the quality of management and the democratic work culture. History demonstrates at every level that more freedom works better than less freedom in the culture of trust and cooperation. This should not be surprising as it draws on basic human urges to be free and to work towards a better life. It is this force that should give history its direction towards peace and plenty.
          It has also been demonstrated that at each level performance improves with trust and cooperation. This demonstrates that capitalism that in its democratic form is a moral system capable of spreading morality in the contiguous community. There are studies that show a reduction in crime and cost of police protection in communities with a concentration of cooperatives with a work culture of trust and cooperation. 
          The free market according to both Adam Smith and Thomas Jefferson works best with minimum government, which has been confirmed but that leaves plenty of room for debate. The true function of government is to do whatever is required in support of the free market system and that can vary widely depending on time and circumstances. An emerging economy, for example, may need subsidies and tariffs until they build sufficient critical mass to absorb costs. Wealthy nations, however, have no excuse for thousands of tariffs and hundreds of billions of dollars in subsidies. 
          China is a work-in-progress, an authoritarian country that abandoned the command economy and selected economic freedom. They have been criticized for human rights abuses and political oppression by those with little understanding of the delicate act required to privatize companies putting millions out of work in the move to economic freedom. The Chinese have added real human rights by taking 300 million of their people out of extreme poverty in a decade. American human rights advocates would better focus their concerns on the quality of education for African-American males because there are now more in the criminal process system than in college.
          Economic freedom has demonstrated its capacity to improve lives in both authoritarian and democratic states. In time, it will lead to political freedom because involved, independent thinking people needed in the Information Age will carry that freedom of thought into the community. Countries resisting movement towards more political freedom will incur a commercial penalty that will sustain pressure towards freedom. Tyrannical countries will be pressured by the same urge towards freedom and a better life by their young people who can view it on the T V and Internet. It may now take a generation as relations with the Muslim world have been set back badly by the egregious mistakes of American imperialists.
          The following are specific cases of the irresistible movement towards freedom

          Hammurabi (2123-2081 B C) replaced violence with law, invested in infrastructure, lent money at no interest to stimulate commerce, prevented exploitation by predators, . Broad wealth distribution and better education improved the standard of living and stimulated momentum in all branches of knowledge. (DC 426)

          Confucius (542-479B C ) understood the unifying effect of broad distribution of wealth when he commented:” The centralization of wealth is the way to scatter the people, and letting it be scattered among them is the way to collect the people.” (D C 455) 
11th Century
          China is also an example of what “secure property rights” means in practice. Rodney Stark describes how entrepreneurs in northern China in the 11th century built smelters producing more than one hundred thousand tons of iron, a wholly private enterprise . Mandarins in the imperial court envied the commoners gaining new wealth, ignored the security of their property, and nationalized the smelters. Within a few years the industry had disappeared. 

          The term “Capitalist” was first used in the 19th century as a pejorative expression denoting wealth and privilege. Idealists, however, could see that its unprecedented capacity to produce wealth made a world of peace and plenty a practical opportunity.
Singapore 1980-2000
          Singapore demonstrated this pattern but it is complicated in China because the hawks in America need enemies to support their ½ trillion a year in military waste. China is a designated enemy and America is seducing India into being part of a power block around China. This madness will intrude on the world movement to economic freedom and will destroy the opportunity to unite in economic common purpose to stop the violence.

1974-2006 ERISA
2006 B P
2006 OPOs
Prof Putnam of Harvard, study in Northern Italy. 
Robert Start, The Victory of Reason, How Christianity Led to Freedom, Capitalism, and Weatern Success, ( New York: Random House, 2005) p.72

Citizen Forum

          Since the Industrial Revolution in the 18th century there has been a fundamental conflict in the economic system among ultra-capitalism, democratic capitalism and collectivism. Ultra-capitalism, or mercantilism, was the prevailing system and had the support of the wealthy and powerful. Profits were based on suppression of the wages and benefits of the workers in a culture of fear and intimidation. Concentrated wealth was used to concentrate political power. Imperialism dominated other nations for perceived economic benefit. Hard currency was hoarded to fund the next war. It survived and grew through the support of the establishment.
          Democratic capitalism is the economic system in which more wealth is produced and distributed broadly based on the participation of the workers motivated by a fair share of the improvement. The work culture is trust and cooperation. It holds that free trade can unite the world in economic common purpose and stop the violence. It has survived and grown based in its innate social and economic logic.
         Collectivism has had the support of the reform minded intellectual community responding to the exploitive nature of ultra-capitalism. Instead of synthesizing Smith. Marx, and Mill in order to advance capitalism to a new mode they applied their reform energies to changing the political system. 
          Collectivism, in the form of socialism and communism, tried to centrally plan the economy in order to better distribute wealth. It failed because central planning cannot assimilate complex, rapidly changing data, only the spontaneous order of the free market can do this job. Central planning also rules based, not results based, an environment that de-motivates the people. Both the inefficiencies of central planning and the de-motivation of people reduce the amount of wealth created thereby limiting the intended better distribution. 
          Democratic capitalism depends on financial motivation from ownership participation in a work culture of trust and cooperation. This culture in turn depends on the education and quality of managers. Democratic capitalism continues to grow and demonstrate its superior capacity to build and distribute wealth but it has been limited by the lack of assimilation by the intellectual community and by the lack of visibility in education. It is not offered to liberal arts students as the way to improve the human condition, nor is it offered to business school students as the way to manage for superior performance. Every generation of democratic capitalists has to reinvent it by trial and error.
          Despite this handicap there are more than 25 million American wage earners who now have ownership participation plus the more remote ownership represented by pensions and 401 (k) savings. Employee ownership is promulgated and supported by organizations such as NCEO (National Center for Employee Ownership) and the Beyster Institute. Books on the subject such as Jeff Gates Ownership Solution include enthusiastic testimonies from senior Republicans and Democrats along with Martin Luther King Jr’s widow. The author of Russian perestroika, Mikhail Gorbachev, a 20th century visionary, described worker ownership as the central issue that can transcend the conflict between capitalism and socialism in order “to create a new sustainable civilization.” Despite this broad support as the long sought “third way,” democratic capitalism is still not offered in the universities, the American political structure is even more dominated by ultra-capitalism, and the academic debate is still between ultra-capitalism and collectivism.
          Students with an opportunity to examine democratic capitalism would discover, contrary to prevailing intellectual views, that the most effective form of capitalism is moral. Religions and democrats would find common cause with communism in democratic capitalism because of its belief in the worth and potential of each person, or as Marx expressed it: “the greatest development of each is the condition for the greatest development of all.” 
          A democratic capitalist education should include a study of Adam Smith’s first book on benevolence along with his second book on the Wealth of Nations, in which he outlined the economic system that could provide the ultimate benevolence-the elimination of material scarcity in the world. The conflict between ultra-capitalism and democratic capitalism would be resolved if enough citizens understood the few conditions that Smith specified for its success, peace, neutral money, that is without influence on the commercial process, and control of the speculators with borrowed money. The education of students in democratic capitalism could continue with study of Marx and Mill in mid 19th century. After identifying concentrated wealth as the continuing impediment to economic freedom reaching full potential, both proposed worker ownership as the way to build more wealth and distribute it broadly. Marx also identified world wide economic common purpose as the force that would erode the influence of the warrior state. Mill avoided Marx’s fatal error and integrated the benefits of worker ownership with private property, competition, and skilled management.
          America for over two centuries has provided the opportunity for more people to live well than any other system in human history. It has, however, functioned well under full potential because of a fundamental disagreement in how the political-economic system should function. Thomas Jefferson believed in a system based on the involvement of independent thinking, educated, citizens. His ideal was reflected in the Declaration of Independence and the Constitution. Alexander Hamilton, on the other hand, believed that the new nation would depend on the involvement of the wealthy and powerful and that privileges would have to be given them to gain that involvement. The new nation was structured according to Hamilton’s elitist philosophy, not the democratic optimism about people of Jefferson.
          America was a new start to history according to Thomas Paine. It was the ‘Happy land where the hand of genius was free ??” according to the Marquis de Condorcet. Its mission was to combine democracy and free market capitalism in a synergistic way. It never has and from the beginning democracy and capitalism have been in tension..
It failed because both democracy and capitalism reach full potential only from the participation of well-educated people. It failed because the political structure provided non-democratic privileges to the few that resulted in concentration of wealth. It failed because citizens were not educated in those matters requiring reform.
          Reform of the American economic system is urgent but conceptually simple. It is the flip side of the reasons for its failure beginning with citizens educated in financial matters sufficiently to demand that currency and credit are, in fact, controlled for the general welfare, not for the benefit of the speculators.
          Americans still celebrate the democratic theory but the political-economic reality is still the flawed operating system installed by Hamilton as Secretary of Treasury in Washington’s first administration. The privileges were mainly the opportunity to speculate with borrowed money free of government control of asset inflation in stocks and real estate. It is this flaw that has caused repetitive recessions beginning in 1818, including the Crash of’29 and the Great Depression, the Bubble economy of the 1990s, and the recession now beginning in 2006. Currency and credit has been controlled, not for the general welfare, but rather for Hamilton’s constituency, the wealthy and powerful with the present result record concentration of wealth and a diverting of much of the peoples’ pension investment money into consumption by the finance capitalists.
          ERISA mandated in 1974 full funding of potential pensions, that is, money taken out of companies and presumably invested for future gain. This enormous new flow of cash, seeking good investment, was instead diverted to Wall Street where much of it is going into annual consumption by the finance capitalists. The fundamental discipline of capitalism, to invest present surplus for future gain, is being contradicted with a large part of the cash going into consumption. The greatest investment opportunity in the history of capitalism was lost and the mission to protect pensions failed for both private and public plans. The funds are not there for these plans, nor Medicare, social security, and government pensions including the military. The country is broke while the feast goes on!
          The only thing that can make this picture worse is a country already at record levels of private and public debt growing at 50% faster than the country’s GDP. Debt is not a bad thing if it is going into investment for future gain. American debt, however, is funding consumer spending and the military-industrial complex, not investment for long-term gain.
          America had two extraordinary opportunities during the last quarter of the 20th century. In combination they represented the world’s best chance for peace and plenty from the synergistic combination of democracy and capitalism. One was ERISA whose mission was the protection of pensions but whose enormous capital mandated for investment provided the opportunity to democratize capitalism. The other opportunity was the world moving toward economic common purpose dramatized by China and India taking about one-half billion people out of extreme poverty in a decade. Instead of leading in economic freedom at home and economic common purpose abroad, America was trapped by earlier mistakes of its leaders and tried to use its military power to change countries. Instead of the world’s biggest economy joining China in economic common purpose, the American military-industrial complex was systemically trying to make China an enemy to support their one-half trillion dollar annual budget. China in the meantime is making commercial arrangements and inviting countries around the world: “let’s get rich together.”
          Both political parties are intimidated by the military-industrial complex and their regular “call to arms.” The most fundamental ideological battle is between those who believe that war is inevitable and those who think that reason is ready to prevail in the relations among nations and people. Taiwan is already being set up by our military support as the next matter of “national honor” that can provoke war with China and more young people sent to other parts of the world to be killed and hurt.
          Democratic Capitalism, The Way To a World of Peace and Plenty examines democratic capitalism and the conflict with ultra-capitalism. This second book examines how Americans have a special responsibility as citizens of the world’s most powerful nation to examine and act on matters that will determine how humans will live in the 21st century. Citizens will find that reform of the American economic system must be the starting point. Economic freedom has been demonstrated as the way to eliminate material scarcity in the world but it is now functioning at a fraction of potential because of record concentration of wealth. Until citizens reform the economic system America will not be able to lead the world in economic common purpose, the only alternative to continued violence.
          After the world is united in economic common purpose and the standard of living is visibly going up then young people in all cultures will pressure their governments to provide them similar opportunities. The Singapore experience demonstrated that movement from tyranny to economic freedom is actually easier in authoritarian countries than democratic. The participation of independent thinking people in companies free to compete will in time encourage all freedoms. While an authoritarian country can move faster to economic freedom its most productive form ultimately requires democratic freedom. Once the freedom genie is out of the bottle, however, it will spread from the economic sphere to all political freedoms.
          American must face, however, the fact that both participatory democracy and free market capitalism are now seriously flawed. American policy is not based on the “will and wisdom” of the people filtered by an “aristocracy of talent and virtue,” it is lobbied by a few for either greedy purposes or for an ideology inconsistent with democratic principles. America has not spread democracy in the world we have regularly used covert means, CIA, to get rid of democratically elected leaders from Iran to Guatemala. America is making a mockery out of free market principles by allowing easy credit to fund disasters from hedge fund LTCM (Long Term Capital Management) to hedge fund on top of a gas line, Enron.. America proclaims free trade while continuing with thousands of tariffs and worse hundreds of billions of dollars for rich farmers that raises prices for poor consumers and deprives farmers in poor countries of their best change to work their way out of misery.
          It is not a proud record but reform is not complicated: return to the Founders’ democratic ideal of a country of, for, and by the people. After the universities and popular media provide the knowledge the people will get it right in the long term. Their informed consensus will displace the egregious mistakes of the few.. 
          The people can learn Adam Smith’s conditions for the success of free markets and use democratic power to modify the political structure and distribute wealth broadly. People will learn the refinement of Smith’s free market by Marx’s and Mill’s cooperative work culture and worker ownership that both builds more wealth and distributes it broadly. People will learn to prioritize economic common purpose in the world as the only way to stop the violence. It will take time but as the standard of living visibly goes up the violence will go down. Young people in totalitarian countries will view the good life on TV and the Internet and, in time, will demand the same opportunities. 
          This is the way to a world of peace and plenty.