1. The Greatest Opportunity in Human History                                                     Print this article      

          The economic crisis of 2008-09 devastated the lives of millions of people around the world. It was an unnecessary disaster caused by the greed and incompetence of Wall Street. Its immediate damage is clear, but its long-term damage is the deferral of the greatest opportunity in human history: After thousands of years of folly and violence, the way to a world of peace and plenty was tested and available.
          Before the crisis, China and India, took hundreds of millions out of poverty. These formerly colonized and exploited countries have no economic motivation to couple their rising economic power with rising military power. They want to copy the European Union that, after five centuries of local killing and colonization of the world, is demonstrating how to displace violence with economic cooperation.
          The second force that provides this opportunity is the economic system needed by Information Age industries. The leading work culture of our time depends on the cognitive power of their people based on the full development of each in an environment of trust and cooperation. This economically determined morality causes a dramatic change in the work culture: Whereas the Industrial Revolution demeaned the manual laborer; the Information Age celebrates the knowledge worker.
          Eighteenth-century Enlightenment minds identified the way to peace and plenty and expected that America would lead the world. Two impediments, however, deferred the opportunity : 1) Persistent European wars forced America into a military-industrial complex to survive. 2) Educators failed to equip citizens with practical understanding of economic matters, many even ridiculed “democratic capitalism” as an oxymoron. Finance capitalism was free to dominate the economy. 
          In response to this educational need, the “Introduction to Democratic Capitalism” on our web site www.democratic-capitalism.com makes available a working knowledge of democratized capitalism. You will find brief discussion of the thoughts of Smith, Kant, Marx, Mill, and others. The full text of Democratic Capitalism: The Way to a World of Peace and Plenty, other books, essays, and DVDs, offer additional study opportunities. The educational community is invited to improve this curriculum and pursue the research that is the responsibility of those who educate citizens about economic life. 
          The evidence is growing that an ideal world is no longer a utopian dream but a pragmatic opportunity. The movement of millions of people from desperate poverty to freedom and comfort is evident in the comparative results of three 20th century visionaries: Lee Kuan Yew, Deng Xiaoping, and Mikhail Gorbachev. Beginning in 1965, Lee Kuan Yew, by introducing economic freedom to his nation, led Singapore from an average per-capita income of a few hundred dollars a year to the world’s fourth-highest, $30,000. In China, Deng Xiaoping in 1979 copied this economic freedom to produce an economic growth rate of 9% over the next thirty years, and a sevenfold improvement in average income. In contrast, after Mikhail Gorbachev gave priority in 1990 to glasnot (a democratic ideology), but not to perestroika ( structural changes needed to support economic freedom), Russia suffered the worst asset stripping in modern history, and the condition of ordinary Russian citizens went backwards for a decade. 
          Both Deng in Beijing and Gorbachev in Moscow had consulted with Lee about the Singapore experience, but only Deng understood the management of change, and the structural support needed from government. Deng rejected ideology, commenting that he did not care whether the cat was white or black as long as it could catch mice. Russia listened to professors and too many American finance capitalists who had little understanding of management of change; consequently, their prescription of economic “shock therapy” resulted in too much shock and not enough therapy. 
          After the inevitable failure of centrally planned communism, America did not recognize its new role in the world as the leader towards economic common purpose. Instead, it ignored the end of imperialism and used the military power left over from the Cold War to try to impose democracy instead of encouraging economic freedom. Democratic elections, however, do not provide food, clothing, shelter, education, and good health care, but economic freedom does. 
At the same time that America was taking the wrong role in the world, the ideologues of the liberalization of capital markets were deregulating and eventually wrecking the economy. The power-adoring Neocons did not realize that imperialism was over; the ultra-capitalists ignored the inherent instabilities in finance capitalism. 
          Realization of the ideal depends on reform of the economic system, and America’s changing its role in the world from imperialist to cooperative team player. The world will then be positioned to move towards the ideal for these special reasons:

          When enough citizens understand that economic freedom can eliminate material scarcity, that economic common purpose can unite people and stop the violence, and that the inherent morality of democratic capitalism can elevate society, the ideal will become reality.              

2. What Is Democratic Capitalism?                                                    Print this article

 
          Democratic capitalism is the economic-political system based on the worth and potential of each in an environment of trust and cooperation. Performance improves because profit sharing and ownership opportunities motivate wage earners, while leadership harmonizes individual development and the cooperative work culture. By contrast, finance capitalism concentrates wealth and slows growth, and collectivism redistributes wealth through government and impedes growth.
          For some “ employee ownership” has a threatening connotation as though it is a new form of socialism. It is rather the ownership by wage earners though their retirement savings and stock purchase plans such as the one I implemented at ADT (see Democratic Capitalism pp. 39-47), in which the employees buy ownership through payroll deductions. More direct forms of ownership include cooperatives, and Employee Stock Option Plans (ESOPS).
          China and India took 500 million out of extreme poverty in a decade demonstrating democratic capitalism’s productive capacity to feed, clothe, shelter, educate, and provide good health care and hope for the world’s 6.4 billion humans, including more than 2 billion living in misery on less that $2 a day. The European Union demonstrated that people can unite in economic common purpose and reverse the 20th century’s barbaric retrogression in which 160 million soldiers and citizens were killed by governments.
          Democratic capitalism needs little from government except peace and the control of currency and credit for the general welfare. Violations of these minimal conditions by policies lobbied by Wall Street, however, have caused economic disasters from the Panic of 1818 to the Panic of 2008. Out-of-control speculation with borrowed money in the past decade inevitably climaxed, crashed, and did extreme damage to ordinary people. The mistakes of Wall Street and Washington, however, have been so egregious that angry citizens are demanding a better alternative..
          Companies like Costco, Toyota, and Fortune’s “100 Best” share democratic capitalistic features that include a morality broadly understood, customer and employee loyalty, generous retirement benefits from pensions and stock ownership, high levels of productivity and innovation, job security, meritocracy, minimal and decentralized structure, action orientation, and a fair compensation system.
          The following benefits of economic freedom, promulgated by Information Age communication, will stimulate young people in all cultures to move from tyranny to freedom:
 

          Democratic capitalism has functioned at a fraction of its potential because its capacity to eliminate material scarcity and unite in economic common purpose has never been assimilated by the intellectual community and translated into government support. My examination of this superior alternative in the “Introduction to Democratic Capitalism.” articles on www.democratic-capitalism.com.

          The 18th-century Enlightenment issued a challenge to apply scientific truth-seeking methods, validated in the natural sciences, to improve the organization of human affairs. The intellectual community has, however, failed to respond to this challenge for reasons described in article # 12. As a result, human folly and violence continue. Now, however, angry citizens can collaborate in reforms that shift support to democratic capitalism.
       

3. Carey Re-discovers Democratic Capitalism                                            Print this article

          As president of my high-school class and co-captain of the football team, I learned that human associations work better when based on individual development in an environment of cooperation and trust. In team sports, each player is responsible for skills training and conditioning, but each is also responsible for contributing to the team spirit that makes the whole larger than the sum of its parts. This combination of individual responsibility and group support later seemed obvious in business as it seemed natural in Gardner, Mass. 
          My subsequent education at Holy Cross College certainly confirmed the worth of each individual in an environment of mutual love, but Liberal Arts education did not then—and does not now—relate these values to the potential economic system. Later, at Harvard Business School, no one proposed examination of a management theory that would harmonize individual ambitions within a cooperative whole. 
          When in 1955 I became plant manager, and later president, of the Electro Dynamic Division (ED) of General Dynamics, I knew that my job was to invest in the people and build team spirit. The company was very old, unprofitable; housed in dirty, dark buildings full of sullen people. Investments in training, lighting, painting, safety, health care, and an open house for the families changed this persistent loser into a successful leader in a high-tech part of the electric motor industry. The same people still worked there, but now they were listened to and respected.
          After six years of success at ED, the whole operation burned down one night, all fourteen buildings, equipment, and drawings. Corporate officials saw it as the end of this complex business, but the ED people united to rebuild the company in a matter of months. This experience gave me a unique appreciation of what people can accomplish when they are united in common purpose. 
          In 1970, when I became CEO of ADT, Inc., I knew that my job was the same: provide the circumstances for the people to reach their full potential and build an environment of trust and cooperation. Lessons learned in Gardner and confirmed at ED were repeated at ADT. My new associates responded naturally and changed a stagnant company into the industry leader.
          After a few years of reorganization, building technological momentum, and changing the work culture from top-down to cooperation, it was time for ADT associates to share in the improvements. Our new profit-sharing and ownership plan was called Care and Share, named by a woman in a contest who said: “The more people care, the more they will have to share.” Thousands joined the voluntary plan, and within a decade, 13% of the company was owned by the workers. Twenty years later, I still get cards signed Care and Share from ADT associates living well in their retirement!
          The management template at ADT comprised four elements: integrity fundamental to the culture; maximum freedom for people to participate; minimum but sophisticated structure to discipline the freedom; and competence and intensity to execute well.
          Intensity is emphasized because team spirit is not enough unless people have the drive to make things happen.
          How does a large company with branches all over the world assure integrity? That value must be merchandised relentlessly in all company meetings: It is a simple matter of right and wrong; the source of long-term better profits; the ethic that feels good from the CEO to the most recently hired; plus, it is easy to remember. 
          Minimum structure includes policy and execution. For example, at ADT the head of the internal audit, who was responsible for monitoring company integrity, reported directly to the CEO and to the chair of the Board audit committee. This function, previously part of the finance department, was strengthened by this reporting relationship because immediate access to the CEO meant that reports would result in quick action.
          Shortly after joining ADT, I was at lunch with local managers, and we were interrupted by a caller from Texas who described a large order that would come to ADT if we would give a hunting rifle to the purchasing agent. Was this a test? Without hesitation I told him that we did not do business that way and that “we would not even give him a peashooter.” This exchange reverberated throughout the company. . 
          After running ADT for 18 years, I began my study of why the simple principles that had changed ED from a loser into a winner, and made ADT the industry leader, were not equally applicable in all human associations: companies, schools, nations, the world. I found that The Way to a World of Peace and Plenty had long before been well defined by Adam Smith, Karl Marx, and J.S.Mill. This discovery changed my personal mission: If the way was so clear, then why was it not being followed?   

4. Adam Smith: A World of Plenty                                                   Print this article

          Young students can begin to understand the meaning of “free markets” and Adam Smith’s conditions for their success. They will learn that he was a friend of the worker, not an apologist for greed, and that he warned that speculators would divert capital and corporations would ignore the public trust.
          Adam Smith (1723-1790) was born in Kirkaldy, Scotland. He studied at Oxford and then lectured in Edinburgh until he was appointed professor of Moral Philosophy at the University of Glasgow. Smith spent the first part of his life studying and writing about the human instinct for trust and cooperation, reflected in his book The Theory of Moral Sentiments:

          Smith then spent the second part of his life studying and writing about how economic freedom could improve all lives if money were a simple medium of exchange, and speculators (“prodigals and projectors,” as Smith called them) had limits on borrowed money. 
          On a tour of the Continent in the 1760s, Smith met with the leaders of the French Enlightenment, including the laissez-faire physiocrats, Turgot, who had written on wealth creation and distribution; and Voltaire, who had brought back from his banishment to England the contributions of Bacon, Newton, and Locke. 
          Smith returned to Scotland to spend ten years writing The Wealth of Nations, in which he theorized about an economic system that could provide adequate food, shelter, clothing, education, and good health care for all.
          Smith described an economic perpetual-motion machine in which motivated workers would be coupled with the technology of the Industrial Revolution to reduce costs; competition would drive prices down to a level affordable by new consumers; increased demand would generate more jobs; wages of additional workers would add to demand for products; and the rising volume would produce another iteration of cost reduction through economies of scale. Thus the wealth-spreading cycle would continue:

          Smith’s dynamic depended on wages high enough to motivate workers and sufficient for purchases beyond mere subsistence.

          Smith knew that the privileged would write rules for personal gain at the expense of the public good:

          Smith pointed out that the masters by law could combine to suppress wages but the workers could not combine to raise them. Smith concluded:

          Smith was honored for his book, but his theory of free markets with its conditions was not assimilated by governments and corporations, neither was it offered by the universities for student examination. Such examination could have stimulated democratic action and changed the public policy to support democratic capitalism. Instead, finance capitalism continued to dominate.
          The optimism of the Enlightenment for social progress was conditioned on high- quality education. Smith, however, targeted the universities with strong criticism:

          The challenge of the Enlightenment was to apply the scientific truth-seeking protocols effective in the natural sciences to find the best social organization. The universities should be the place where ideas about human progress are debated, tested, refined, vetted, and codified like the natural sciences, but they were not then, and are not now. Smith’s criticism of the universities at the end of the 18th century echoed Bacon’s criticism at the beginning of the 17th and anticipated the present critique.
          Because of American citizens’ lack of education about Smith’s conditions, the government has allowed speculation with borrowed money to concentrate wealth, cause asset inflation, trigger recessions, and prevent democratized capitalism from uniting the world in economic common purpose.

5. Immanuel Kant: A World of Peace                                                   Print this article

          Immanuel Kant (1724-1804) was born in Königsberg, Prussia. His father was a harness maker, his grandfather had emigrated from Scotland. Kant was five feet tall, stooped, famous for punctuality, witty, and popular. His early schooling had started at 5:30 a.m. to give enough time for prayers. Kant entered the University of Königsberg at age sixteen and stayed there for the rest of his life as student, tutor, and professor. Study of Newton, mathematics, physics, and astronomy allowed him to sharpen his scientific truth-seeking methods 
          Smith showed that the way to plenty is economic freedom with people united in economic common purpose. Kant showed that the way to peace during the transition to common purpose requires an international organization to contain the violence:

          Kant was not utopian about the international structure:

          Kant, however, offered this Enlightenment view: 

          Kant knew, however, that the achievement of international peace would take generations: 

          Kant had an epiphany in his late thirties in which he learned that academic responsibility was not for fragmented and specialized knowledge, but rather for integration of knowledge to improve the human condition. With high-quality education, Kant believed, that ordinary citizens would then have the “courage to use their own reason” and “hit the mark as well as philosophers can” with wisdom necessary for the republican form of self-government. 

          Citizens of the republic, would be inclined towards peace. Kant believed: 

          Wars would be ended if citizens’ agreement were required and if it were to be paid for by an immediate increase in taxes.
          Kant’s principles were consistent with those of the American Founders, democratic capitalism, religions, and humanism, that is, the worth and potential of each in an environment of trust and cooperation. The harmonization of these human impulses improves all performance according to a practical morality fundamental to government: 

          Kant understood why Smith’s first condition for the success of economic freedom must be peace:

          Kant’s proposed League of Nations would have a narrow mission:

          Militaristic, nationalistic, imperialistic power-adoring, theorists see threats to sovereignty from any world order. One advocate, Robert Kagan, presumed to speak for the people in a 2003 book: “Americans do not believe that we are as close to the Kantian dream as do Europeans.” How does he know that? 
          In contrast, Kant saw civilization as moving “naturally” towards perpetual peace:

6. The Marquis de Condorcet: The Integrator of Enlightenment Knowledge 

                                                                                                                        Print this article

          Nicolas de Caritat, the Marquis de Condorcet, (1743-1794) was born in Picardy, France, of an ancient family, and educated by the Jesuits. He was elected to the Académie des Sciences, contributed to the Encyclopédie, and was welcome in the salons of Paris where his benevolence was as respected as his intelligence. 
          Condorcet was elected to the Legislative Assembly and became chair of the Committee of Public Instruction. Napoleon later used Condorcet’s plan for free and universal education for both sexes when he reorganized French education. Condorcet also drafted a national constitution, but his anonymous pamphlet opposing the Jacobin constitution led to his arrest and eventual death. 
          While in hiding during the Reign of Terror, Condorcet wrote his Sketch for the History of the Progress of the Human Mind, his version of human progress. After Condorcet’s death, the government distributed thousands of copies of the Sketch. Condorcet also wrote an admiring biography of Turgot. If Louis XVI had followed Turgot’s reforms, he might have kept both his crown and head. 
          Condorcet expanded on Smith’s way to plenty: 

Condorcet expanded on Kant’s way to peace:

Condorcet on equality:

Condorcet on women’s rights:

Condorcet on developing nations: 

          The universities-- the proper place to study, assimilate, organize, integrate, and promulgate knowledge--did not take up Condorcet’s Enlightenment challenge, either then or now. Many educators still do not even try to integrate knowledge to improve the human condition. The ugly events of the 20th century caused them to abandon Condorcet’s vision of gradual progress from barbarism to civilization, an optimism supported by a rising standard of living with more people, including women, who have become educated and enabled:

          From this process citizens will understand rational government and will elect representatives that meet the Founders’ “ aristocracy of talent and virtue.” Condorcet counted heavily on America to show the way to a “time when the sun will shine only on free men who know no master but their reason.”
          Condorcet summarized the 18th century Enlightenment with this classical liberal manifesto:

7. Thomas Jefferson: Listen to the People                                              Print this article 

          Thomas Jefferson (1743-1826) was born in Virginia, son of an independent thinking, industrious farmer with an extensive plantation. Thomas was the oldest child, tall, strong, studious, a violin player, and expert horseman. 
          Jefferson went to William and Mary College. Later he and James Madison, as members of the Virginia Assembly, worked against concentration of wealth through inheritance, for the separation of church and state, and in support of education. Jefferson was governor during the Revolution.
          Jefferson’s wife Martha died, aged 34, in childbirth, after which, in 1784, he joined Benjamin Franklin in France, not returning for five years. Franklin had successfully kept France providing money, troops, and naval support without which the Revolution could not have been won. 
          When Jefferson returned, George Washington, the first President, asked him to become the first Secretary of State. Alexander Hamilton was the first Secretary of Treasury, and it was the battle between Jefferson and Hamilton that produced the unintended two-party political system. Jefferson believed in a government responsive to the people; Hamilton was responsive to the wealthy and powerful. Jefferson understood Smith’s economic freedom but limited it to independent farmers while rejecting the wage slaves of manufacturing as not fit to be participating citizens.
          Jefferson got tired of losing arguments with Hamilton and went home to Monticello to farm. He returned as Vice President in John Adam’s one term and then in 1801 became the third president, ironically needing Hamilton’s assistance to break an electoral-college tie with Hamilton’s enemy Aaron Burr.
          In 1776, at the Constitutional Convention, Jefferson helped draft this Declaration of Independence:

          In this Declaration, our Founders affirmed the principles of the worth of each individual, the environment of mutual support, and government policies directed by the people. Jefferson, however, never broke out of his cultural conditioning as a Virginia planter and did not include the slaves in his beliefs in equality. From his early time in the Virginia Assembly, however, he tried to end slavery as a protected institution.
          This new Republic was the first time when a government was designed by studious people, not by force or accident. The Founders had studied John Locke’s (1632-1704) theory of inalienable rights for all, and the diffusion of power in a “mixed” republic as proposed by Montesquieu (1689-1753). They believed that the collective wisdom of the people could displace the violence and misery caused by the incompetence of monarchs. Their confidence was based on high-quality, universal education of citizens whose “will and wisdom” would then be filtered through their elected representatives, an “aristocracy of talent and virtue.”
          The Founders were initially optimistic that they could avoid foreign entanglements, and would not need a navy or standing army. They wrote the 2nd Amendment to the Constitution to endorse an armed militia as the only protection.
The original plan was for a small government, decentralized, with single political party, and a unified agenda. The president would be selected for ability to maintain consensus, and steer a steady course. 
          Condorcet expressed the Enlightenment view that the new Republic would confirm the benefits of freedom:

          Some of the Founders’ design made it into practice but much of it did not because the world was dominated politically by the European warrior states, and economically by mercantilism. This condition continued for another two centuries. 
          Early in the 21st century, the not-so-new Republic, America, is still not reflecting Jefferson’s and most of the Founders’ philosophy. Wealth is concentrated in record amounts and then used to lobby politicians thus displacing the “will and wisdom” of the people. It was this collective wisdom that was supposed to eliminate the terrible mistakes made by a few arrogant and ignorant men. The results of this compromised democracy are terrible mistakes by a new generation of arrogant and ignorant men. The question in 2009 is will the people take back their country and correct the terrible mistakes?
          

8. Alexander Hamilton: Listen to the Wealthy and Powerful              Print this article

          Alexander Hamilton (1757-1804) was born in Nevis in the British West Indies. His mother had two sons with James Hamilton without a divorce from her first husband. The family moved to St Croix, where 22,000 African slaves harvested the sugar crop while 2,000 whites tried to keep order. This experience conditioned Hamilton to a society in which the few controlled the many. 
          An orphan at 11, Hamilton’s prodigious reading, hard work, and published letters encouraged two sponsors to fund his college education at Columbia. He joined the Revolutionary army, took part in the evacuation of New York, and crossed the Delaware with Washington, who promoted Hamilton to lieutenant colonel at age 19. After the war, Hamilton published articles, took a law degree, and married into a prominent New York family.
          As New York delegate to both the Continental Congress in 1782, and the Constitutional Congress in 1787, Hamilton favored a strong central government and opposed States Rights. He wanted either a monarch or president-for-life and a structure of tax revenues and friendly bankers to fund an army and navy. He rejected democracy, stating:

          Secretary of Treasury during Washington’s administration, Hamilton’s policies resulted in a standing army and a navy of 54 warships. Hamilton’s theories of government were contrary to democracy but they were “realistic” policies that protected the fledging country from the warrior states of Europe. Although James Madison did not agree with Hamilton’s anti-democratic theories, he nevertheless joined him in writing the Federalist Papers in order to get the Constitution ratified by the States.
          The contrast between Jefferson and Hamilton, the two most contentious members of President Washington’s cabinet, could hardly have been more striking. Hamilton, the first Secretary of the Treasury was five-foot-seven while Jefferson, the first Secretary of State, towered at six-foot-two. Hamilton was intense, argumentative, ambitious, determined to grow manufacturing. His background never left him, however, John Adams referred to him as “that bastard son of a Scottish peddler.” Jefferson having the manner of the Virginia gentry was a patriotic agrarian whose vision of America was a nation of hard working, independent-thinking farmers.
          The financial capitalists helped Hamilton fund the army and navy and he helped them make money by not limiting borrowed money for speculation. To serve the general welfare the government could have prevented cycles and recessions but Washington and Jefferson did not understand these matters. They did know that their democratic experiment depended on quality education but did not include understanding of the economy, nor the choice between finance capitalism and democratic capitalism in a failure of education that is still with us.
          Hamilton modeled his policies on the British:

          He established credit by assuming the colonies’ debts including his payment in full of the Continental script, the soldiers’ pay. Speculators sent carriages and boats out with literally bags of money, mostly borrowed, to buy up this script. Most veterans sold for less than 25% of full value believing that it “was not worth a continental.” The fairness argument raged in Congress, but the speculators won.
          Hamilton’s next mission was a national bank but contrary to the Bank of England the government would provide one-fifth of the capital with the rest privately subscribed. Madison fought the plan on Constitutional grounds, Jefferson whined that Hamilton’s policies would “enrich swindlers at the expense of the honest and industrious.” When Jefferson became president in 1801, he instructed his own Secretary of Treasury to get control of Wall Street: 

          Hamilton’s policies that allowed speculation with borrowed money resulted in the post-war boon in real estate and stocks followed by the panic of 1818: A half-million urban workers were thrown out of work; farmers were devastated by low prices; and thousands were jailed for small debts. Since then, this unnecessary damage to ordinary people has been repeated a dozen times, including the ’08-;09 recession caused by an out-of-control Wall Street. 
          The American democratic experiment worked: It improved the lives of millions, and led the world towards freedom. It, however, functioned at a fraction of potential because finance capitalism dominated the economy and the government. The goal of the Founders to substitute the “will and wisdom” of the people, for the devastating mistakes by monarchs was replaced by mistakes by ignorant and arrogant men who usurped the power of the people. 
          Five centuries of colonization by European warrior states is now over, and the new economic powers lack economic motivation for imperialism, now knowing that economic common purpose works better than violence. Americans, consequently, have a new opportunity to examine the nature of their government, including a review of the original intentions of the Founders. The military-industrial-financial-complex fashioned by Hamilton over two centuries ago is no longer required. The world is ready to be led by America to a world of plenty, in ways outlined by Smith, and a world of peace, in ways outlined by Kant.         
 

9. Robert Owen: "Good" versus "Bad" Capitalism                                 Print this article

          Robert Owen (1771-1858) was born in Wales, left home at age ten, learned how to spin thread, and then became the manager of a factory. By age 28, Owen had become managing partner of a concern that bought New Lanark, a large spinning mill near Glasgow. 
          Owen’s years of experience interacting with workers on the factory floor gave him great respect for the potential of ordinary people:

          Owen had learned two principles necessary to release the enormous productivity and innovation of turned-on people: the worth and potential of each, and an environment of trust and cooperation. Owen took action to provide free education, training, clean housing, health care, job security, and encouraging sobriety. Young children learned to relate to each other with trust and cooperation. Over a twelve-year period, out of 3,000 students in Owen’s school, not a single criminal action occurred. Owen was criticized for these uncommon investments but he made greater profits than the “ bad” capitalism that tried to maximize profits by suppressing wages and benefits. 
          A generation earlier, Adam Smith had written that material scarcity in the world could be eliminated. Owen spent his early life on the factory floor observing peoples’ response to opportunities. Smith was a philosopher seeking truth, Owen was a factory manager seeking a better product, who also provided experimental verification of Smith’s theories, the final convincing step in the Enlightenment truth-seeking process. 
          Owen commented as follows on the potential for democratic capitalism:

          When Owen toured other mills he found, instead of his work culture of human development, one of brutal exploitation. Owen’s son, Robert Dale Owen, reported: 

          Owen petitioned Parliament to limit hours for workers under 18 to 10 ½, to prohibit children younger than 10 from factory work, and older children from working on the night shift. Owen also visited authorities in the Church of England thinking that they would be excited about supporting an economic system with inherent morality, and would be impressed with the results of his educational program. 
          The universities, with the mission to investigate and illuminate, unify and elevate, might have recognized this coherent workable system and presented it for student consideration. The churches, concerned to feed the hungry, clothe the naked, and house the homeless might have blessed Owen’s discovery. Governments, dedicated to promoting the general welfare might have supported Owen’s capitalism as the best economic opportunity, the prerequisite to benefiting from other freedoms.
          It did not work out that way. Both Parliament and the Church rejected the proposals of this evangelist with his low-class Welsh accent. The other capitalism, however, was so vile that reformers, and later Victorian writers such as Dickens, became enraged and attacked the problem by passing laws, instead of examining and reforming the system. 
          Most of society failed to recognize that democratic capitalism was the way to peace and plenty. This myopia continues to the present but with a difference: Now the work culture demonstrated by Owen is required in Information Age industries with substantially greater participation by the workers. Because the “good” capitalism produces greater profits now, as it did then for Owen, it is growing on its own economic and social logic. The “bad” capitalism, however, has been given a new life by ultra-capitalism that treats the wage earner as a disposable commodity and in which finance capitalism is dominant. 
          When people finally realize that it was “bad” capitalism that caused such damage to so many in ’08-’09, then the “good “capitalism will prevail. The time it takes to move from the “bad” to the “good “ capitalism will be determined by how long it takes for universities, religions, school-teachers, political reformers, and the media to discover democratic capitalism.         
 

10. Karl Marx: Almost a Democratic Capitalist                                      Print this article

          Karl Marx (1818-1883) was born in Trier, Germany, of a Jewish family that had converted to Christianity. After university, Marx got in trouble with the Prussian government over his revolutionary writings so he moved to Paris where he met his life-long collaborator, Friedrich Engels. They co-published The Communist Manifesto in 1848. Marx, with his wife and children, spent the rest of his life in London, studying and writing in the British Museum where he produced his most famous work, Das Kapital.
          Marx’s basic insight was that adequate food, clothing, shelter, education, and good health depend on the economic system. 

            This basic premise that only the economic system, not the political structure, can feed people seems obvious. Marx’s insight was, however, radical because reformers, politicians, philosophers, and other ideologists sought progress through political solutions, not economic reform, and still do!
          Marx’s related insights defined a work culture that would maximize the building and distribution of wealth:

          Smith had believed that economic freedom could end the battle over scarce resources, but Marx’s vision goes further: Marx foresaw a world uniting in economic common purpose in which the standard of living will go up, the violence will go down, and the Warrior State will become irrelevant. This was Marx’s radical vision that, contrary to history, war was not inevitable, and humans could unite in freedom.
          Marx, the visionary intellectual, was, however, also an angry radical with the bitter view that capitalism needs to be destroyed, not improved:

            Engels shared Marx’s anger:

          This anger precluded evolutionary improvements; it resulted in faulty central- planning structures, erected by communists and socialists, that de-motivated the individual and could not assimilate complex, fast-changing information. Marx’s visions would have freed individuals, but his Marxist followers built structures that tyrannized them. Governments after Marx, thus became grid locked by two power structures: The traditional one in which nations exploited colonies, and capitalists exploited workers, and the new one in which reformers tried to use government to redistribute wealth. 
          In Capital, Marx had traced the mode of production from slavery in ancient Greece, to the serfs of the Middle Ages, to the wage slaves of the Industrial Revolution, to Marx’s new mode intended to displace exploitive capitalism. Late in the 20th century, trends emerged to make a new mode more probable. Technology continued to add to the humans’ capacity to produce and achieve comfort, but now Information Age industries also needed the democratic work culture to release the cognitive power of their people. Profits were now maximized through the development and motivation of the individual, and the wage earner, through pension savings and ownership plans, have now become “capitalists.” A new more productive, cooperative mode seemed inevitable as “labor” and “capital” were joined.
          Despite these positive factors, Smith and Marx’s precepts have been violated as never before. Money is not being kept a simple medium of exchange, wealth is concentrated in record amounts, speculators are allowed to make bets with borrowed money more than fifty times their own capital. Finance capitalists pay themselves enormous amounts while the workers’ capital is funding speculation and not being used to invest in long-term growth. The capitalism that had previously exploited the workers’ labor has now learned how to exploit their capital, an intolerable contradiction that produced the economic crisis. 
          Marx’s visions, however, have been confirmed in practice. China and India have used economic freedom to take 500 million humans out of extreme poverty in a decade. The European Union has unified people in economic common purpose and stopped killing millions of young soldiers and civilians in stupid wars.
          Despite the quality of Smith and Marx’s examination, confirmed by empirical evidence, most educators have institutionalized criticism of generic capitalism, and have yet to examine democratic capitalism. As a consequence, citizens are not educated in democratic capitalism, government is not structured in its support, and the economy that has functioned at a fraction of potential is now in a recession. 
          Educators of the world unite! You have nothing to lose but your bias against economic solutions!

11. John Stuart Mill Connects the Dots                                                 Print this article

John Stuart Mill (1806-1873) was born to a Scottish family living in London. Home-schooled by his father, Mill was studying Greek at age three, Latin at eight, and economics and social theory at twelve with economist David Ricardo and utilitarian philosopher Jeremy Bentham. Mill worked at the East India Company, wrote six books, and served in Parliament from 1865 to 1868 where he promoted women’s rights.                                           

          Mill accepted this Enlightenment mission:

          Mill then integrated the components in this democratic capitalist manifesto:

By integrating private property and competition with the motivation from profit- sharing and ownership, Mill completed the definition of democratic capitalism, including the moral dimension. It needed government support, but reformers favored political solutions, and those who held the power would not give it up. Mill knew it would be a slow process:   

We’re still waiting. Capitalism continues to be dominated by concentrated wealth, currency and credit continue to be abused by speculators, and American foreign policy has failed to copy the European Union to unite people in economic common purpose. Reformers failed to synthesize the ideal and means presented by Smith, Marx, and Mill, and consequently failed to modify the political structure.

           Mill offered these dots for future Enlightenment connection:

          Mill had a pragmatic view of government including the limits of laissez-faire. He believed that government must do more in the earlier stages of a country’s development to educate, to create jobs, and then free the people to be increasingly responsible. He also knew that a truly democratic-capitalist government could do more for less through decentralization, meritocracy, and an organization based on  results, not rules.

          Mill’s intellectual development was broadened from his dialogue with Frenchman Auguste Comte (1798-1857) about his scientific sociology. Comte in turn had studied and benefited from Condorcet’s Sketch for the History of the Progress of the Human Mind.

          Two great thinkers of the 19^th century thus emphasized the danger of isolating economics from other disciplines, an emphasis that is now lost in higher education where the Humanities are intellectually, and frequently physically, remote from Economics and Business.         

          Mill added this final challenge:

          Thus Smith, Kant, Marx, and Mill all believed that the “natural” human tendency would be towards peace and cooperation in opposition to that mother of all lies that violence and war are part of human “nature.” Those with little understanding of the power of democratic capitalism and economic common purpose still give tacit support to that ugly concept that war is inevitable.

12. Educators' Persistent Failure to Examine Democratic                         Print this article Capitalism                                                                                      

          The 18th-century Enlightenment presented economic freedom in a plan for human progress. America built the political structure intended to support this freedom. Success was conditioned on education of the citizens. 
          Educators failed in that responsibility, however, and the world is still full of folly and violence. Educators have not examined Adam Smith’s economic system of participation and high wages, did not accept Karl Marx’s advice to begin sociology with the economic system, and failed to follow the Enlightenment in the integration of knowledge. Despite sufficient freedom to improve lives, the system has functioned well below its potential for over 200 years.
          Democratic capitalism can be the engine that drives the world to peace and plenty, but it needs the colleges and universities to research public policy, train leaders, and educate citizens. A new generation can learn that ownership participation will build and distribute more wealth, and that violence can be displaced by economic common purpose. The vision of the American founders of a government based on the “will and wisdom” of educated citizens, filtered by an “aristocracy of talent and virtue,” can become reality. Young people in all cultures will choose freedom and comfort as the alternative to tyranny. While democratic capitalism needs support from the university, the university needs democratic capitalism to regain purpose and fill its moral vacuum. 
          Most universities left their moral base from religious associations in the 19th-century and have yet to find a secular alternative. Political correctness, relativism, and abandonment of idealism have provoked criticism from professors, college presidents, and deans about a fundamental confusion of purpose:

          Rawls was a philosopher looking for political solutions; Wilson, a scientist like the 18th-century thinkers, used the truth-seeking protocols of the hard sciences. Bok organized hundreds of college presidents in support of his position; Fish taunted educators in his 2008 book, Save the World, On Your Own Time! 
          A study of economic alternatives depends on an epiphany among educators who will then present the following tenets for student examination:

          When educators discover democratic capitalism, they will become excited by its capacity to eliminate material scarcity, break the political gridlock, end the culture wars, and unite the world. They will find that the principles of democratic capitalism affirm the worth of each individual in an environment of trust and cooperation, a secular morality consistent with most religions and humanism. When educators unleash democratic capitalism, this powerful force will improve lives and displace violence with economic common purpose. 

13. Congress Designs ERISA, An Economic Bomb                                Print this article

          The financialization of an economy is an insidious thing: Manufacturing shrinks, financial services expand, and capital shifts to speculation. Kevin Phillips traced this in Boiling Point (1994) from Spain in the 16th century, to the Netherlands in the 18th, to Great Britain in the 20th. These countries went out with a whimper; America in 2008-2009 had a bang big enough to make citizens mad and demand real reform.
          This financialization of the American economy began after a large auto company went broke and left many without pensions. Congress then passed the Employee Retirement Insurance Security Act (ERISA) of 1974, requiring companies to put cash into investments that would assure wage earners of money to live on in retirement.
          ERISA could have been the greatest savings-investment opportunity in the history of capitalism, had most of the trillions of dollars had been invested in new stock for company growth, bonds to fix bridges and build schools, educational loans, and responses to environmental needs. The wage earners’ nest egg could have grown from these investments, along with a “capital wage” of 5% dividends which the new capitalists could either have saved or spent, further benefiting economic growth. ERISA, however, was not designed that way.
          Congress did not anticipate that this enormous amount of new funds would change the dynamics of finance capitalism so dramatically and ultimately so tragically away from the traditional function of moving savings into investment. Congress did not take due notice of where ERISA money would go and how much it would cost to get there.
          Most of the money stayed in Wall Street to be recycled by money managers. Finance capitalism was able to dominate the economy and concentrate wealth, the process that culminated in the unnecessary economic disaster of 2008-09. ERISA money was used to increase the profits of financial services from 4% to 40% of total corporate profits; to drive dividend income down from 6% to under 2 %; to inflate money managers’ fees to ten times the amount charged by index funds; to build commissions by trading stocks once a year instead of every six years; to bankroll deals in which all engaged in a compensation feeding frenzy; for hundreds of billions of dollars annually for stock buy backs instead of dividends returned to the economy; to fund high-risk hedge funds; and to fund private equity companies for their buy it, strip it, flip it acquisitions.
          How did this happen? CEOs and Directors were concerned about this new responsibility to invest ERISA money, and passed the responsibility to outside money managers. These managers were called on the carpet every quarter and fired if their short-term performance was not competitive. Stock analysts quickly applied a quarterly earnings-per-share to corporate performance, encouraging companies to sacrifice long-range plans for the benefit of short-term earnings. The price of the stock became an obsession not only because of the benefits of stock options for top executives but also because a high P/E, (the relationship of stock price to earnings), could help companies expand by acquisition. Conversely, a low P/E made companies vulnerable to takeover. Corporate America had fallen into a short-term trap of their making.

          Many of the plans were later shifted from “defined benefit” (a fixed amount to be paid on retirement) to “defined contribution” (a fixed amount invested for the wage earner). The laws, however, locked the money in as taxes were deferred until retirement, and there were penalties for early withdrawal. The wage earners could decide the mix of stocks and bonds but had no further influence on investment decisions. They were now capitalists but finance capitalism that had traditionally exploited the wage earners’ labor now learned how to exploit their capital.

          ERISA, by law, limited risky investments of this money, but persistent lobbying by Wall Street eventually pressed Congress to allow money managers to invest pension money in high-risk hedge funds. Retirees will be shocked when they find out that the “toxic waste” they read about ended up losing over $ 2 trillion of their pension savings. The government also took the interest rate down to nearly zero, causing the housing bubble while cutting the pensioners’ bond income.

          Wall Street had an excess of cash to do all of these things in contradiction to the principles of economic freedom. Adam Smith had warned that money must be kept a simple medium of exchange, not itself a commodity to be traded. Smith called for constraint of “prodigals and projectors” who must be prevented from deflecting capital from job growth to speculation. The ideologues of the “liberation of capital markets” led by Fed chairman Greenspan and Treasury Secretary Rubin lobbied further deregulation while resisting efforts to get control of derivatives. They made a monster error in misapplying to financial services the classical free-market theory of seeking equilibrium.

          The 2008-09 economic disaster demonstrated once again what happens when the government does not prevent asset inflation in stocks and real estate. Every boom-and-bust business cycle in American economic history has followed the same pattern: No controls in the up direction and then a cutting back of loans in the down direction, just when the loans are most needed. As the bubble expands, the higher values collateralize more borrowing. After the crash the banks try to repair their ratio of loans to reserves by cutting credit for even good companies. The solution would be for the government to prevent asset inflation in the up part of the cycle by limiting borrowed money for speculation in a coordinated use of interest rates, money supply, margin requirements, bank reserve requirements, bank regulation extended to all source of credit, and various taxes.

          After the present damage is controlled, the need will remain to reform ERISA in order to fulfill the original mission: Protect pensions and maximize the money available when workers retire. The pensioners will have to use their democratic power to instruct their money managers in these reforms:

          Ultra-capitalism concentrates wealth and causes recessions; democratic capitalism through economic freedom can eliminate material scarcity, and through economic common purpose can eliminate the violence. The choice is obvious.

14. Warren Buffett Warns about an Unnecessary Economic Disaster       Print this article

          Warren Buffet is the world’s best-known investor. Thousands of shareholders make the trip to Omaha for his Berkshire-Hathaway annual meetings which have more the good feeling of a family picnic than the typical annual meetings. Buffet served on the SEC Advisory Board, and then “got serious,” about unambiguous communication and with Carol Loomis, wrote Buffet’s 2002 annual report. Loomis, a senior Fortune writer, also wrote a 1997 article on derivatives, titled “Alligators in the Swamp.” 
          Buffet began with his usual straight talk, saying that he and his partner, Charlie Munger, “are of one mind in how we feel about derivatives and the trading activities that go with them. We view them as time bombs, both for the parties that deal in them and the economic system.” Buffet explained that they were shutting down derivatives in their insurance company. Buffet’s letter was released on March 8, 2003, and published in Fortune on March 17. On March 11, the feature editorialist of The Wall Street Journal attacked Buffet’s argument in a reaction by the defenders of Wall Street that was quick and insulting.
          WSJ described Buffet as “grumpy” and featured in bold print: “Every great investor makes an occasional mistake.” The article calls attention to a decline in the value of Buffet’s stock from $80,000 to $60,000, it does not mention, however, that the stock had been at about $40,000 a year earlier. The article concluded that Buffet “is not only shooting the messenger, he’s also blaming the gun.” Instead of a critical examination of the macroeconomic effects of derivatives raised by Buffet, the WSJ article was patronizing and superficial.
          The WSJ called derivatives “little miracles of financial engineering,” and made the following points:

          These standard derivative defenses are used by ultra-capitalists, including former Fed Chairman Greenspan, to beat back efforts to get government regulation of derivatives-even after disasters such as LTCM. In a puzzling way, however, The WSJ editorial then proceeded to contradict itself and agree with some of Buffet’s most important points:

          If one were to read these points, and not the cheap shots, one could conclude that The WSJ agreed that a marauding monster was out there and we’d better get control of it. The WSJ describes the need for “scrutiny,” scrutiny by whom, and for what purpose?
          This difference between Buffet and Wall Street, was an opportunity to examine the conflict between democratic capitalism and ultra-capitalism when the disaster could have been avoided. Ultra-capitalism was determined to deregulate financial services and oppose regulation of new instruments like derivatives. This fundamental error shaped government policy, but it contradicts economic freedom as described by Adam Smith and classical economics. As famous speculator George Soros has emphasized, finance capitalism will not find equilibrium on its own, like commerce, and needs monetary and fiscal controls. Ultra-capitalism, however, has such lobby power, and reformers are so limited in their understanding that Wall Street continued to lobby destructive policies until they caused the disaster. Citizens are now aroused but are they sufficiently educated to neutralize Wall Street? 
          Derivatives barely existed before 1987. Measured by the value of the underlying asset on which they are based, derivatives grew to about $10 trillion in 1994, an grew to $450 trillion in 2008, before the crash. This astronomical number dwarfs the total market value of all stocks and bonds. A Business Week article in 2002 questioned, “Are Derivatives Dangerous?” and then answered with the subtitle: “Without adequate collateral, one big default could set off a chain reaction imperiling the whole financial system.” Few were listening, and fewer were comprehending.
          Investor Buffett, and speculator Soros, warned that instabilities in financial capitalism seriously threatened the world’s economy. Throw in the examples of LTCM and Enron, and then how much wisdom and how many clear examples did we need for the democratic will to combat the lobby power of Wall Street? We ignored these warnings, or did not understand them, and reforms did not happen. As predicted, bad things did happen and, as usual, ordinary people who believed that their pensions and insurance money were being protected by their government were badly hurt. 
          The hurt is so deep and broad this time that people will persist to find the knowledge for reform. This Introduction to Democratic Capitalism can help.

15. The "Liberators of Capital Markets" Destroy the Indonesian  Economy    

                                                                                                              Print this article

          After the demise of the U. S. S. R., economic freedom was spreading around the world improving lives, and economic common purpose was reducing the violence. Indonesia was a poster child of this improvement, according to Paul Blustein:

          This extraordinary performance in the world’s largest Muslim nation had begun in 1966, when Suharto, President for many years, delegated economic planning to Widjojo Nitisastro, a Ph. D. graduate of the University of California who understood the fundamentals of economic freedom. He quelled triple-digit inflation by restraints on government spending, opened the economy to foreign investment and trade, and reduced government regulation. The result was an average annual growth of 7 percent from 1979 to 1996, and stable prices. Millions of people became better educated, enjoyed better health, and lived with greater freedom.
          When promoters of human and civil rights study Indonesia, they can learn that economic freedom can improve lives despite imperfections in the political structure. Suharto’s government was far from democratic, and at times, it was repressive; however; when he let the freedom genie out of the bottle in the economic sphere, other freedoms followed. A basic premise of democratic capitalism is that when a culture moves to economic freedom, political and civil rights freedoms follow naturally in time. 
          What, then, caused the Asian crisis of 1997? Joseph E. Stiglitz, former Chair of Clinton’s Economic Council, former Chief Economist of the World Bank, and a Nobel Prize winner, offered this clear and sharp opinion: 

          Both President Clinton and Treasury Secretary Rubin exhorted the emerging economies to take down all cross-border capital controls. They failed to recognize that no there was no structure in place to discipline the rush of short-term speculative money that overheated the Asian economies. The consequent economic weakness might have been corrected by a modest tightening, however, short-term hot money fled the country with the click of a mouse; currency went into free fall, dropping 70%; and economic progress was reversed. Previously successful businesses suddenly had their dollar denominated debts multiplied by four and went out of business. The unifying force of a rising standard of living was displaced by unemployment, falling wages, higher prices, and social, ethnic, and religious tensions. . 
          Not only were controls lacking on the amount and type of money coming in but also no mechanism was in place to stop its outward flow. The downward spiral could have been stopped by a conversion of short-term money to long-term debt, but this approach was opposed by the IMF and the U. S. government, calling it “an infringement on economic freedom.” Hot money and currency speculation are the corruptions in ultra-capitalism that regularly destroy the benefits of economic freedom, and yet the constituted authorities nonetheless defended them on the faulty basis of their being “free capital roaming the world.”
          The IMF and the U.S. Treasury Department seemed determined to change the politics and culture and helped in removing Suharto, and agitated for democratic elections. Despite his record of improving lives, the ideologues of the “liberalization of capital markets” ignored the record and applied the wrong solutions. Their common denominator was promotion of foreign markets for Wall Street services. 
          Malaysian Muslim Prime Minister Mahathir called currency speculation “unnecessary, unproductive, and immoral,” and proceeded to put back capital controls, ignored IMF advice, and had a faster recovery than the other nations. 
          Many in the popular media of the West are economically illiterate. According to their disinformation the Asian countries would become more short-term profit oriented and lay off more workers, an emphasis on cost-cutting rather than growth. A crisis caused by ultra-capitalism would be corrected by more ultra-capitalism, if you believe the media. 
          The apologists for ultra-capitalism argue that a currency attack by speculators is a useful discipline. Mature economies, led by the United States, have let the international monetary system go so out of control that the final insult to the injured victims is to describe the extraordinarily leveraged speculators as providing a “discipline.” Real discipline will come only from purging the excessive volatility and excessive liquidity from the system.
          How can these crises be avoided: Government international agreement to prevent asset inflation, the root cause of the business cycle and recessions. The American government fights price inflation aggressively but ignores asset inflation for the simple reason that Wall Street loses money through price inflation but makes money with asset inflation. In the up direction of the business cycle the rich get richer and then get out in time for the poor to get poorer in the down direction. Former Fed Chairman Greenspan, even told Congress that the Fed could not prevent asset inflation. Other disagree: The BIS (Bank for International Settlement), the central bankers’ club in Switzerland, published in April 2006, paper No. 205 by William White titled “Is Price Stability Enough?” In May, 2008, libertarian think tank CATO issued Briefing Paper No. 103 by Gerald P. O’Driscoll, Jr. titled “Asset Bubbles and Their Consequences.” O’Driscoll, a former vice president of the Federal Reserve Bank of Dallas, followed with an article in the WSJ on November 17, 2008 titled “To Prevent Bubbles, Restrain the Fed” 
          This seems like strong momentum towards the elimination of speculative bubbles that devastate people but, as usual, the logic will have to have sufficient democratic support to withstand the lobby power of Wall Street that, so far, has a perfect record of protecting their money tree.
          Other reforms in the interdependent global market must include agreement about the following:

16. Wall Street Lobbies Deregulation and Destroys the Economy             Print this article

 

          In 1999, Wall Street’s protectors in Washington, Greenspan, Chair of the Fed, and Rubin, Secretary of Treasury, beat back reformers’ efforts to exercise reasonable control of derivatives, and they convinced Congress to repeal the Glass-Steagall Act. This Act had been passed in 1933 to eliminate a conflict of interest by separating commercial banking and investment banking. 
          Soon after the repeal, Citigroup demonstrated why the act had been a necessary part of government structure to regulate banking. Citigroup, acting as commercial bankers, provided Enron with billions of dollars of loans so that Citigroup, acting as investment bankers, could get the billions of dollars of deals that Citigroup helped Enron negotiate. In time, the loans turned into bad loans and many of the deals into bad deals. The financial motivation to ignore the quality of the loans in order to obtain the profitable deals resulted in the easy credit that allowed Enron to happen. Easy credit, which had caused economic disasters since the beginning of the republic, was now coupled with derivatives that added new ways to bet, new ways to borrow, and new ways to duck regulations.
          Disturbed by the collapse of hedge fund LTCM, Brooksley Born, chair of the Commodities Futures Trading Commission (CFTC), recommended that Congress consider regulation of derivatives. On November 9, 1999, the President’s “Working Group on Financial Markets” issued its report recommending to Congress that it bar the CFTC from regulating derivatives. Besides Greenspan and Rubin, the committee included the head of the Securities and Exchange Commission, and the new head of CFTC. Born’s lonely democratic voice was silent, since she had resigned. This event also illustrates that responsibility is spread among so many agencies that it is not possible for government to have a unified policy to control leveraged speculation. 
          Derivatives are bets on the direction that underlying financial instruments will go. Apologists argue that derivatives are a way for companies to hedge their business, for example, a farmer could buy a “future” to insure that the price of soybeans when delivered was no lower than when planted. This defense is weak because it diverts attention from the fact that use of derivatives for speculation dwarfs their use as a business hedge.
          Representative John Dingell (D., Michigan), the ranking Democrat on the House Commerce Committee, commented in 1999: “After six months of study, the working group has basically concluded that we should get rid of almost all regulation of these products and let the good times roll.” Disagreeing with the committee, however, Dingell added: “Proposals for the creation of totally unregulated institutional markets are dangerous follies.” 
          Democrats frequently issue such warnings after another triumph of the Wall Street lobby, but the warnings have never become serious efforts at comprehensive reform and the domination by finance capitalism only grows stronger. Confidence in the lobby power was so great that the Citigroup merger was already a fait accompli when President Clinton signed the Bill. Little or no discussion took place in Congress about adding hundreds of billions of dollars of potential obligations onto the taxpayers to bail out the enormous financial services corporations that this Bill encouraged, nor the effect on bankers to ignore the quality of loans. The repeal of Glass-Steagall made the “too big to fail” rule; into the “the really too big to fail” rule that grabbed hundreds of billions of taxpayers’ bail-out dollars a decade later when these actions resulted in an economic disaster.
          By 2002, Citigroup had hired both Robert Rubin and Stanley Fisher, prime movers behind the “liberalization of capital markets” while Rubin had been Secretary of the Treasury and Fisher was the top American at the International Monetary fund ( IMF). Rubin became chair of Citigroup’s Executive Committee, and Fisher vice-chair of the Board. Rubin “earned” about $16 million in 2001 plus options, the year in which Citigroup was a major source of the easy credit for Enron, and Citi’s Smith Barney was successfully sued for misleading small investors.
          Rubin retired from government just weeks before Glass-Steagall was repealed. His move to Citi provoked a letter from a coalition including the Center for Community Change, The Association of Community Organizations for Reform Now, The Greenlining Institute, The New York Public Interest Research Group, and Ralph Nader. The letter to the Office for Government Ethics objected to Rubin’s move as “turnstile behavior with an undeniable appearance of impropriety.” The coalition had fired its pop-gun; the Wall Street lobby remained nuclear armed.
           In 2000, ultra-capitalism capped its amazing political performance by successfully passing the Commodities Futures Act. Not satisfied with merely avoiding control of derivatives, this act, with heavy lobbying by Enron, effectively allowed speculators to buy stock futures for 10 cents on the dollar. In 1933, the SEC had reduced the amount that speculators could borrow from brokerage firms from 90% to 50%. The 2000 act brings leverage opportunities back to 90%!
          By the beginning of the new millennium, Wall Street’s mission to deregulate finance capitalism was nearly complete with currency and credit controlled for the benefit of the speculators, not the general welfare. The “liberators of capital markets” had made their monster error of assuming that free market forces that brought commerce back to equilibrium also applied to finance capitalism. These corruptions fed on themselves until they exploded in the financial disaster of 2007-2009.         

24. Help the Victims                                                                              Print this article

          To date, the government has responded to the economic disaster quickly and with great determination by pumping hundreds of billions of your Fed money into the financial institutions that caused the problem. No equivalent action has been taken, however, to help the millions of victims.
          The problem is jobs now and jobs in the future. Jobs now will require movement of retirement savings out of Wall Street into infrastructure repair. Still almost $3 trillion of 401 (k) money is in Wall Street while $2 trillion’s worth of overdue repair of roads and bridges goes unfixed. Government action is needed to act on this opportunity.
          Jobs in the future and solution of the deficit problem will come only from rebuilding the annual rate of economic growth from under 2% to over 3.5%. This growth will have to reverse the destructive effect of downsizing, shareholder capitalism’s regular sacrifice of long-term building programs for short-term stock price. This ugly capitalism is still with us. Read the recent headlines about the Cisco CEO who responded to Wall Street and the financial media’s heckling about quarterly earnings by announcing that 8,000 people will be fired.
          An amazing amount of cash sits idle in corporate surplus--$ 1 trillion abroad and another $1 trillion at home. Much of this is the result of having fired people for the last quarter century. Nothing could be fairer than to use this money to rebuild both the economy and retirement accounts. If this money is not moved into the economy through either growth investment or dividends, then it should be taxed. Taxes should also penalize its use for stock buy backs and deals, but taxes would be eliminated on the return of foreign funds to the American economy.
          There has been Washington discussion of activating this idle cash but no action: “ Politicians have been carping about the more than $2 trillion in cash sitting idle in corporate coffers even as unemployment remains high. But much of that cash isn’t in the U. S; it’s abroad and wont come home unless tax laws are changed.”
          This plan should be coupled with tax-free dividends for low-and middle-income wage earners with these benefits:
 

          These tax changes would result in a double-digit steady return: one-half from 5% dividends and the other half a modest 5% increase in earnings and stock price. Dividends would again generate 50% of the return from capitalism, and the workers could join in J.P. Morgan’s chorus: “ Don’t talk to me about return on capital, talk to me about return of capital!”
          For the past quarter-century “shareholder capitalism” has dominated the economy. Growth programs were sacrificed, people fired, and stock bought back, all to hype the stock price. Total buy backs from 2005-2007 was $1.4 trillion, 56% more than the previous 6 years combined. Cisco is an example of a company that has accumulated cash despite weak growth: Currently on hand, $43 billion, all but $5 billion in foreign countries.
          These suggestion are made in an environment in which currency and credit are controlled for the benefit of the speculators, not for the general welfare, and the Fed is a protector--not regulator--of finance capitalism. Most of those responsible for reform come from Wall Street, so they inevitably bring that mind-set with them. Wall Street money dominates the politicians and leaves the victims un-represented. For this reason, citizens must build their own reform agenda.



 

25. We Were Warned                                                                               Print this article

          Ultra-capitalism: A late-20th century corruption of the economic system in which finance capitalism dominates, and employees are treated as disposable cost commodities.

          President Nixon “closed the gold window” in 1971, that is, he stopped other countries from trading in their dollars for gold. For the first time in history, the international monetary system was without a stabilizing mechanism. The “market” would now determine the relative values of national currencies. Kevin Phillips warned in 1994 that the resulting excessive “volatilities gave electronic speculation what it needed to feed on and flourish beyond the wildest expectation.”
          The American dollar continued to be the de facto international currency, but during the next quarter century, America went from being the world’s largest creditor nation to being the world’s largest debtor with an inevitable devaluing effect on the dollar. An international currency or pegging to a basket of currencies were both recommended as alternative stabilizing mechanisms but lacked American support.
          In 1974, the American government passed a law requiring companies to fund the future pension benefits that previously had been paid mainly out of earnings. This law would have made trillions of dollars available to democratize capitalism, had it been invested in economic growth, infrastructure, education, and environmental needs. Congress, however, did not analyze where the money would go or how much it would cost to get it there. Where it did go was to Wall Street where the peoples’ money was charged ten times the rate of index funds, and provided the borrowing leverage to fund the wild speculation.
          Joel Kurtzman in 1993 warned that the new combination of excessive volatility and liquidity “created enormous arbitrage possibilities and set the stage for the invention of a myriad of new financial products.” The “money” economy was uncoupled from the “real” economy, and “the era of long-term investing ended.” “By the 1990s, through a twenty-four-hour-a-day cascade of electronic hedging and speculating, the financial sector had swollen to an annual volume of trading thirty or forty times greater than the dollar turnover of the ‘real’ economy.” Derivatives did not exist in any size before 1987, they grew to about $10 trillion in 1994, $20 trillion in ’96, almost $40 trillion in ’98, and then in 2002 to a world-wide market of $105 trillion.
          Adam Smith, author of the free-market philosophy, had warned in 1776 of the speculators, “prodigals and projectors” as he called them, who would deflect capital from the job-growth economy. Not only has his warning been ignored but also Wall Street leaders such as Robert Rubin, Secretary of the Treasury in the Clinton administration, and Alan Greenspan, long-time head of the Federal Reserve Board, misapplied free- market theory in support of deregulation of finance capitalism. At the Congressional hearing in 1998 on the collapse of Long-Term Capital Management (LTCM), Alan Greenspan said:” Regulation of derivative transactions that are privately negotiated by professionals is unnecessary.” Robert Rubin, former head of Goldman Sachs, added: “New rules or regulatory oversight on derivatives could increase legal uncertainty in a thriving global market place.”
          This theory was, however, specifically rejected by the world’s most famous speculator, George Soros, who cautioned in 1998 that free-market theory does not apply to finance capitalism: “Without supervision, the international financial system will not follow the supply/demand equation and return to equilibrium.”
          Hedge funds, banks, investment banks, and companies acting like hedge funds soon were making extraordinary profits by way of electronic speculation. Most of these were sucker bets that anomalies between national currencies would return to historical relationships, but the bets produced huge returns through leverage. As the “trading” field became more crowded, the hedge funds and their wannabes maintained their profit momentum merely by increasing the amount of leverage in their bet.
          In 1998, the crash of LTCM provided all of the lessons needed to avoid a crisis, but, apparently, no one was watching and learning. John Meriwether organized LTCM in a spin-off from Solomon Brothers after they got in trouble playing games on government bond bids. Robert Lenzer, Forbes reporter, warned that the extraordinary profits, as much as 40% a year, were the product of risky leverage: “What Meriwether really had was nerve-wracking leverage. You would make $5,000 on a $1-million trade when the discrepancy is eliminated. But introduce the Archimedes principle and the picture changes. Suppose that you were able to buy $1-million worth of Treasuries on $10,000 margin. Now that $5,000 profit is not just 5% on your money, it is 50% on your money.” The “discrepancy” referred to is currency values different from historical relationships. If 10 times your capital did not produce the desired profit, try 15 times, or 20 times. If that did not work, then move hundreds of billions of dollars off your balance sheet, a bit of financial engineering that broke the rules.
          Right up to the crash, the head of the Fed who was supposed to insure financial stability, was, instead, behaving like a cheerleader for Wall Street and all of those new, clever financial instruments. Greenspan appeared before the House Banking Committee investigating the LTCM debacle, and told them that hedge funds do not need regulation because their funds are “controlled through the banks who are regulated,” and he wasn’t kidding! Roger Lowenstein in his examination of LTCM questioned: “Why, then, does Greenspan endorse a system in which banks can rack up any amount of exposure that they choose, as long as that exposure is in the form of derivatives? The Fed’s policy is two headed, head in the sand before a crisis, intervention after the fact.”
          One favorite derivative was the credit default swap that gave the users of this extreme leverage the comfortable feeling that they had insured all risk. A major source of these derivatives was the London-based Financial Products Division of the monster insurance company AIG. “Between 1999 and 2005, the division’s revenues soared 342%, to $3.26 billion, as its financial engineers delved into the business of selling insurance on credit default swaps to investors.” This insurance was particularly profitable because of the incredible assumption that there would be no claims; consequently, there was no need to take money out of profits in order to build reserves. It was like hurricane insurance with the assumption that there would be no hurricanes. The difference was that State insurance regulators would be all over any insurance company with inadequate reserves. AIG sent financials to the Office of Thrift Supervision (OTS), but neither regulation was forthcoming nor questions about the lack of claim reserves for credit default swaps gone bad. After the crisis, the Treasury Department used over $100 billion of your taxpayer money to bail out AIG. In effect, the peoples’ money was the reserve used to pay claims by companies like Goldman Sachs on their bad bets.
          By 1999, all of the investment banks had gone public. They shifted their loyalty from clients to shareholders, and they began to act like hedge funds, making high-stakes bets with other peoples’ money. Wall Street introduced the wonderful concept of percentage-of-the-deal pricing that guaranteed enormous fees with no relationship to hours worked or creative content. Goldman Sachs, for example, had fifty employees in 2006 making more than $20 million. The smartest ones made some of their riches through a form of Wall Street cannibalism. They would make leveraged bets that the troubled company’s stock would go down and then call for more collateral on loans to companies like Bear Sterns and Lehman Brothers. After stripping this cash, they would eliminate overnight loans, thereby making failure certain.
          Takeovers, too, were part of the so-called “shareholder capitalism” that made everyone involved very wealthy. Most of the media, indulging their bias against capitalism, aided the takeover artists by describing management as “entrenched.” The money managers were eager to support deals because they improved their record for the year’s performance. They bet the people’s money in favor of takeovers that in time resulted in many of the same people losing their jobs in the inevitable downsizing.
Marty Lipton, a famous mergers and acquisitions lawyer, made $20 million fees from the M&A craze, but then in 1987, Marty evaluated takeovers in a law review. He wondered how much the job sector might have been improved if the $139 billion that financed M&As in 1985 had been invested in new products and new markets. His evaluation included the following judgments:

          Ultra-capitalism did its damage abroad, as well. Rubin and Clinton talked emerging nations into taking down their cross-border capital controls to allow capital to “seek its most efficient investment.” “Hot money” then rushed in and out of countries seeking, not investment in the economy, but short-term gains on speculation. Among other Asian nations, Indonesia was devastated with a 70% drop in the value of its currency. Once the poster child of improving the lives of their people through economic freedom, Indonesia had brought the percentage of their 211 million people from over 40% below the poverty line to less than 10%. The ideologues of the liberalization of capital markets quickly brought poverty back to over 50%. Joseph Stiglitz, Clinton’s Chair of the Council of Economic Advisors and later Chief Economist at the World Bank, was clear: “Capital account liberalization was the single most important factor leading to the crisis.” Stiglitz pointed out further that “the countries in East Asia had no need for additional capital, given their high savings rate, but still capital liberalization was pushed on these countries in the late eighties and early nineties.”
          Among the concerned citizens shouting their warnings were these others:

          The ultra-capitalists not only have friends in high places in government but also the leading financial paper. The Wall Street Journal rushed a defense of derivatives into print. After calling Buffett “grumpy” and featuring the headline, “Every great investor makes an occasional mistake,” the WSJ proceeded to defend derivatives as “little miracles of financial engineering.” Despite this knee-jerk defense of derivatives, the WSJ actually confirmed Buffett’s opinions with these observations: “Investors can’t get a clear picture of potential danger because disclosure remains inadequate. Accounting for derivatives is a mug’s game. Valuing derivatives on a mark-to-market basis can be an exercise in fantasy. The result is inflated earnings,” and “Limited and fanciful disclosure can also mask the possibility that risk, rather than being widely dispersed, has actually migrated to one or two sectors--insurance and pension funds come to mind—or even a few companies.” This thoughtful examination by the WSJ after trashing Buffett, who had made these same points, concluded with the observation that these matters needed more “scrutiny” but did not suggest by whom and when.
          Despite all of these warnings, currency and credit continued to be controlled for the benefit of the speculators not the general public. The politicians now are even more in the debt of Wall Street, and the democratic republic has become dysfunctional with both parties ignoring what is needed to bring economic growth back up to over 3.5 %. The Republicans acted like the problems of over 20 million out of work could be solved by cutting spending, the Democrats acted like the problems could be solved by redistribution of wealth by an already broke government.
          The Republican strategy is to obstruct Wall Street reform, win the 2012 election, and then institutionalize the dominance by finance capitalism until the next crisis. This strategy is working: “The Dodd-Frank Wall Street Reform and Consumer Protection Act is under siege and behind schedule.” “The law was intended to rein in the opaque derivatives market, tighten lending standards, and address other structural problems that led to the crisis. Over the last several months, conservative law-makers have moved to chip away at crucial components of the law, the derivatives rules among them. Some two dozen bills are pending in Congress to delay, dismantle, or repeal the law altogether.”
          In my book, Democratic Capitalism, published in 2004, well before the collapse, I summarized these warnings:
          One must conclude that instabilities in financial markets do seriously threaten the world’s economy. Throw in, as well, the negative examples of LTCM and Enron, and then I have to ask how much wisdom and how many clear examples do we need before the democratic will can be energized to combat the lobby power of the ultra-capitalists? If we continue to ignore these warnings, bad things will happen, and, as usual, those bad things will hurt the ordinary people who believed that their pensions and insurance money were being well protected by their government. The conclusion based on both logic and experience is that derivatives urgently need government regulation.

26. Don’t Blame Capitalism                                                            Print this article

          Protestors have blamed “capitalism” for the economic disaster. Blame instead the money managers and traders who used the peoples’ capital to speculate. They are not capitalists, and the perversion they engage in is not capitalism. Capitalism is the peoples’ trillions of dollars invested in companies that produce and distribute goods and services. Wall Street deflected this capital away from job growth exactly as Adam Smith warned that the “prodigals and projectors” would do.
          Citizens should be angry about this deflection of capital to speculation, and even angrier that their government has spent trillions of dollars not on jobs but rather on putting the speculators back in business. The $700 billion TARP money from the Treasury was pocket change compared to the $7.7 trillion the Fed pumped into finance capitalism. The banks borrowed at rates as low as .01% and then “earned” about $13 billion by “investing” in government bonds.
          It is a scandal that the peoples’ capital was not invested for the benefit of the economy and retirees’ savings. An even greater scandal will be if the surplus cash is not now invested for the benefit of the economy and retirees’ savings. For a quarter-century, now, “Shareholder Capitalism” has sacrificed job-growth programs for the price of the stock, thereby building up enormous cash surplus from layoffs. There is $1 trillion of corporate cash surplus in the domestic economy, with another $1 trillion abroad, about $3 trillion left in 401 (k) savings, and $1 trillion over required reserves sitting idle in the banks for lack of borrowers.
          If your government had applied some of the energy and creativity to putting people back to work that they applied to putting the Wall Street speculators back in business, our economic crisis would be over. With a few changes in tax law, money could be moved out of Wall Street into infrastructure repair bonds, investment in growth programs, and additions to consumer demand from dividends. Please refer to article # 22 “Are You Angry Enough to Reform Capitalism?”



 

27. Worker-Owners of America, Unite!                                         Print this article
By GAR ALPEROVITZ
College Park, Md.

          The Occupy Wall Street protests have come and mostly gone, and whether they continue to have an impact or not, they have brought an astounding fact to the public’s attention: a mere 1 percent of Americans own just under half of the country’s financial assets and other investments. America, it would seem, is less equitable than ever, thanks to our no-holds-barred capitalist system.
          But at another level, something different has been quietly brewing in recent decades: more and more Americans are involved in co-ops, worker-owned companies and other alternatives to the traditional capitalist model. We may, in fact, be moving toward a hybrid system, something different from both traditional capitalism and socialism, without anyone even noticing.
          Some 130 million Americans, for example, now participate in the ownership of co-op businesses and credit unions. More than 13 million Americans have become worker-owners of more than 11,000 employee-owned companies, six million more than belong to private-sector unions.
          And worker-owned companies make a difference. In Cleveland, for instance, an integrated group of worker-owned companies, supported in part by the purchasing power of large hospitals and universities, has taken the lead in local solar-panel installation, “green” institutional laundry services and a commercial hydroponic greenhouse capable of producing more than three million heads of lettuce a year.
          Local and state governments are likewise changing the nature of American capitalism. Almost half the states manage venture capital efforts, taking partial ownership in new businesses. Calpers, California’s public pension authority, helps finance local development projects; in Alaska, state oil revenues provide each resident with dividends from public investment strategies as a matter of right; in Alabama, public pension investing has long focused on state economic development.
          Moreover, this year some 14 states began to consider legislation to create public banks similar to the longstanding Bank of North Dakota; 15 more began to consider some form of single-payer or public-option health care plan.
Some of these developments, like rural co-ops and credit unions, have their origins in the New Deal era; some go back even further, to the Grange movement of the 1880s. The most widespread form of worker ownership stems from 1970s legislation that provided tax benefits to owners of small businesses who sold to their employees when they retired. Reagan-era domestic-spending cuts spurred nonprofits to form social enterprises that used profits to help finance their missions.
          Recently, growing economic pain has provided a further catalyst. The Cleveland cooperatives are an answer to urban decay that traditional job training, small-business and other development strategies simply do not touch. They also build on a 30-year history of Ohio employee-ownership experiments traceable to the collapse of the steel industry in the 1970s and ’80s.
          Further policy changes are likely. In Indiana, the Republican state treasurer, Richard Mourdock, is using state deposits to lower interest costs to employee-owned companies, a precedent others states could easily follow. Senator Sherrod Brown, Democrat of Ohio, is developing legislation to support worker-owned strategies like that of Cleveland in other cities. And several policy analysts have proposed expanding existing government “set aside” procurement programs for small businesses to include co-ops and other democratized enterprises.
          If such cooperative efforts continue to increase in number, scale and sophistication, they may suggest the outlines, however tentative, of something very different from both traditional, corporate-dominated capitalism and traditional socialism.
          It’s easy to overestimate the possibilities of a new system. These efforts are minor compared with the power of Wall Street banks and the other giants of the American economy. On the other hand, it is precisely these institutions that have created enormous economic problems and fueled public anger.
          During the populist and progressive eras, a decades-long buildup of public anger led to major policy shifts, many of which simply took existing ideas from local and state efforts to the national stage. Furthermore, we have already seen how, in moments of crisis, the nationalization of auto giants like General Motors and Chrysler can suddenly become a reality. When the next financial breakdown occurs, huge injections of public money may well lead to de facto takeovers of major banks.
          And while the American public has long supported the capitalist model, that, too, may be changing. In 2009 a Rasmussen poll reported that Americans under 30 years old were “essentially evenly divided” as to whether they preferred “capitalism” or “socialism.”
          A long era of economic stagnation could well lead to a profound national debate about an America that is dominated neither by giant corporations nor by socialist bureaucrats. It would be a fitting next direction for a troubled nation that has long styled itself as of, by and for the people.
 

Gar Alperovitz, a professor of political economy at the University of Maryland and a founder of the Democracy Collaborative, is the author of “America Beyond Capitalism.”


 

28. The Book of Jobs
January 2012

          Forget monetary policy. Re-examining the cause of the Great Depression—the revolution in agriculture that threw millions out of work—the author argues that the U.S. is now facing and must manage a similar shift in the “real” economy, from industry to service, or risk a tragic replay of 80 years ago.
By Joseph E. Stiglitz

          DOMINO THEORY  The financial meltdown is the Depression parallel everyone notices. The more frightening parallel is everything else.
          It has now been almost five years since the bursting of the housing bubble, and four years since the onset of the recession. There are 6.6 million fewer jobs in the United States than there were four years ago. Some 23 million Americans who would like to work full-time cannot get a job. Almost half of those who are unemployed have been unemployed long-term. Wages are falling—the real income of a typical American household is now below the level it was in 1997.
          We knew the crisis was serious back in 2008. And we thought we knew who the “bad guys” were—the nation’s big banks, which through cynical lending and reckless gambling had brought the U.S. to the brink of ruin. The Bush and Obama administrations justified a bailout on the grounds that only if the banks were handed money without limit—and without conditions—could the economy recover. We did this not because we loved the banks but because (we were told) we couldn’t do without the lending that they made possible. Many, especially in the financial sector, argued that strong, resolute, and generous action to save not just the banks but the bankers, their shareholders, and their creditors would return the economy to where it had been before the crisis. In the meantime, a short-term stimulus, moderate in size, would suffice to tide the economy over until the banks could be restored to health.
          The banks got their bailout. Some of the money went to bonuses. Little of it went to lending. And the economy didn’t really recover—output is barely greater than it was before the crisis, and the job situation is bleak. The diagnosis of our condition and the prescription that followed from it were incorrect. First, it was wrong to think that the bankers would mend their ways—that they would start to lend, if only they were treated nicely enough. We were told, in effect: “Don’t put conditions on the banks to require them to restructure the mortgages or to behave more honestly in their foreclosures. Don’t force them to use the money to lend. Such conditions will upset our delicate markets.” In the end, bank managers looked out for themselves and did what they are accustomed to doing.
          Even when we fully repair the banking system, we’ll still be in deep trouble—because we were already in deep trouble. That seeming golden age of 2007 was far from a paradise. Yes, America had many things about which it could be proud. Companies in the information-technology field were at the leading edge of a revolution. But incomes for most working Americans still hadn’t returned to their levels prior to the previous recession. The American standard of living was sustained only by rising debt—debt so large that the U.S. savings rate had dropped to near zero. And “zero” doesn’t really tell the story. Because the rich have always been able to save a significant percentage of their income, putting them in the positive column, an average rate of close to zero means that everyone else must be in negative numbers. (Here’s the reality: in the years leading up to the recession, according to research done by my Columbia           University colleague Bruce Greenwald, the bottom 80 percent of the American population had been spending around 110 percent of its income.) What made this level of indebtedness possible was the housing bubble, which Alan Greenspan and then Ben Bernanke, chairmen of the Federal Reserve Board, helped to engineer through low interest rates and nonregulation—not even using the regulatory tools they had. As we now know, this enabled banks to lend and households to borrow on the basis of assets whose value was determined in part by mass delusion.
          The fact is the economy in the years before the current crisis was fundamentally weak, with the bubble, and the unsustainable consumption to which it gave rise, acting as life support. Without these, unemployment would have been high. It was absurd to think that fixing the banking system could by itself restore the economy to health. Bringing the economy back to “where it was” does nothing to address the underlying problems.
          The trauma we’re experiencing right now resembles the trauma we experienced 80 years ago, during the Great Depression, and it has been brought on by an analogous set of circumstances. Then, as now, we faced a breakdown of the banking system. But then, as now, the breakdown of the banking system was in part a consequence of deeper problems. Even if we correctly respond to the trauma—the failures of the financial sector—it will take a decade or more to achieve full recovery. Under the best of conditions, we will endure a Long Slump. If we respond incorrectly, as we have been, the Long Slump will last even longer, and the parallel with the Depression will take on a tragic new dimension.
          Until now, the Depression was the last time in American history that unemployment exceeded 8 percent four years after the onset of recession. And never in the last 60 years has economic output been barely greater, four years after a recession, than it was before the recession started. The percentage of the civilian population at work has fallen by twice as much as in any post-World War II downturn. Not surprisingly, economists have begun to reflect on the similarities and differences between our Long Slump and the Great Depression. Extracting the right lessons is not easy.
          Many have argued that the Depression was caused primarily by excessive tightening of the money supply on the part of the Federal Reserve Board. Ben Bernanke, a scholar of the Depression, has stated publicly that this was the lesson he took away, and the reason he opened the monetary spigots. He opened them very wide. Beginning in 2008, the balance sheet of the Fed doubled and then rose to three times its earlier level. Today it is $2.8 trillion. While the Fed, by doing this, may have succeeded in saving the banks, it didn’t succeed in saving the economy.
          Reality has not only discredited the Fed but also raised questions about one of the conventional interpretations of the origins of the Depression. The argument has been made that the Fed caused the Depression by tightening money, and if only the Fed back then had increased the money supply—in other words, had done what the Fed has done today—a full-blown Depression would likely have been averted. In economics, it’s difficult to test hypotheses with controlled experiments of the kind the hard sciences can conduct. But the inability of the monetary expansion to counteract this current recession should forever lay to rest the idea that monetary policy was the prime culprit in the 1930s. The problem today, as it was then, is something else. The problem today is the so-called real economy. It’s a problem rooted in the kinds of jobs we have, the kind we need, and the kind we’re losing, and rooted as well in the kind of workers we want and the kind we don’t know what to do with. The real economy has been in a state of wrenching transition for decades, and its dislocations have never been squarely faced. A crisis of the real economy lies behind the Long Slump, just as it lay behind the Great Depression.
          For the past several years, Bruce Greenwald and I have been engaged in research on an alternative theory of the Depression—and an alternative analysis of what is ailing the economy today. This explanation sees the financial crisis of the 1930s as a consequence not so much of a financial implosion but of the economy’s underlying weakness. The breakdown of the banking system didn’t culminate until 1933, long after the Depression began and long after unemployment had started to soar. By 1931 unemployment was already around 16 percent, and it reached 23 percent in 1932. Shantytown “Hoovervilles” were springing up everywhere. The underlying cause was a structural change in the real economy: the widespread decline in agricultural prices and incomes, caused by what is ordinarily a “good thing”—greater productivity.
          At the beginning of the Depression, more than a fifth of all Americans worked on farms. Between 1929 and 1932, these people saw their incomes cut by somewhere between one-third and two-thirds, compounding problems that farmers had faced for years. Agriculture had been a victim of its own success. In 1900, it took a large portion of the U.S. population to produce enough food for the country as a whole. Then came a revolution in agriculture that would gain pace throughout the century—better seeds, better fertilizer, better farming practices, along with widespread mechanization. Today, 2 percent of Americans produce more food than we can consume.


 

Organizations that Promote Democratic Capitalism        

Democratic capitalist organizations involved in democratizing the workplace and employee ownership plans:

Beyster Institute 
Rady School of Management/UCSD
1241 Cave St.
La Jolla, CA 92037
858-826-1680
www.beyster.org
David Binns
Assoc Director
Beyster Institute
1919 Pennsylvania Avenue, suite 650
Washington, DC 2006
dbinns@beyster.org

Carey Center for Democratic Capitalism
www.democratic-capitalism.com 
Ray Carey, Director

The Center for Public Integrity
Bill Buzenberg, Executive Director
910 17th St. NW Suite 700
Washington, DC 20006202-466-1300
www.publicintegrity.org

Center for the Study of Islam and Democracy
Radwan A. Amsmoudi, President
10612-D Providence Road, Suite 704
Charlotte, NC 28277

The Democracy Foundation
1505 Gwynedd View Rd.
North Wales, PA 19454
215-774-1122

www.demofound.org
info@democfound.org

Bring the people – American voters – into a decision-making role in government as citizen-lawmakers in partnership with their elected representatives. The National Initiative for Democracy, (NI4D), a legislative proposal that amends the Constitution and provides legislative procedures in a Federal Statute, does just that: empowers citizens (you and I) to be able to vote on the public policies that affect our lives – empowers citizens (us) as lawmakers.

EFES, European Federation of Employee Share Ownership
Marc Mathieu, Secretary General
Avenue Voltaire 135, 
B-1030 Brussels
efes@efesonline.org
www.efesonline.org
EFES objective is to act as the umbrella organization of employee owners, companies, and all persons, trade unions, researchers, and institutions looking to promote ownership and participation in Europe.

Great Place to Work Institute
Robert Levering, Co-founder
Author of Fortune magazine’s annual list:“100 Best Companies to Work For In America.” 

NCEO The National Center for Employee Owenrship
Corey Rosen, President
crosen@nceo.org
1736 Franklin St. 8th Floor
Oakland, CA 94612-3423
510-893-9510
www.nceo.org
Offers information on ESOPs, equity compensation plans, and ownership culture.

Ohio Employee Ownership Center
Worker Ownership Institute
John Logue, Director
Kent State University
113 McGilvrey Hall
Kent, OH 44242 
313-331-2567

Social Venture Network
Deborah Nelson, Executive Director
P.O. Box 29221
San Francisco, CA 94129
415-561-6501
www.svn.org
larso@svn.org
 

United for a Fair Economy
Chuck Collins
37 Temple Place, 2nd Floor
Boston, MA 02111
617-423-2148
info@fairEconomy.org
www.FairEconomy.org 

WorldBlu
Traci Fenton, Founder and CEO 
traci@worldblu.com
6607 Brodie Lane, # 738 
Austin, TX 78745
512-686-0489
www.worldblu.com 
Founded in 2003 for the design and development of democratizing capitalism. Publishes annually a list of “Most Democratic Work Places” proposed by the employees. 

Bibliography      

Books helpful in democratizing the work place and promoting employee ownership:

Aguago, Rafael,. Dr. Deming. New York: Lyle Stuart, 1990.

Deming is a famous proponent of quality control with the emphasis that the culture must be democratic and empowered.

Ahmed, Liaquat,  Lords of Finance: The Bankers Who Broke the World. Penguin Press, 2009.

Ahner, Gene, Business Ethics:  Making a Life, Not Just a Living. Maryknoll, New York: Orbis Books, 2007.

Albert, Michel, Capitalism vs. Capitalism:  How America’s Obsession with Individual Achievement and Short-term Profits Had Led to the Brink of Collapse. Introduction by Felix Rohatyn, New York: Four Walls Eight Windows, 1993.

French businessman Albert’s early identification of America’s malaise.

Annunzio, Susan L.,  Contagious Success, Spreading High Performance Through Your Organization. New York: Penguin Group, 2004.

Badaracco, Joseph and L. Richard Ellsworth, Leadership and the Quest for Integrity, Boston: Harvard Business School Press, 1989.

Beattie, Alan, False Economy, A Surprising Economic History of the World, New York, Riverhead Books, 2009.

Berger, Peter L. and Richard J. Neuhaus, To Empower People. Washington, D. C. American Enterprise Institute, 1977.

Blasi, Joseph R. and Douglas Kruse, and Aaron Bernstein, In The Company of Owners, The Truth About Stock Options, and why every employee should have them. New York, Basic Books 2003.

Blasi, Joseph R. and Douglas Kruse, The New Owners: The Mass Emergence of Employee Ownership in Public Companies and What It Means to American Business. New York: Harper Business, 1991.

Blasi, Joseph R. and Douglas Kruse, Richard R. Freeman, Shared Capitalism at Work: Employee Ownership, Profit & Gain Sharing, and Broad-Based Stock Options, University of Chicago Press, 2010.

Blustein, Paul, The Chastening: Inside the Crisis that Rocked the Global Financial System and Humbled the IMF.  New York :  Public Affairs, 2001.  

Byham, William C., Zapp! How to Improve Quality, Productivity, and Employee Satisfaction. New York: Fawcett Columbine, 1988.

Cantoni, Craig, J., Corporate Dandelions, How the Weed of Bureaucracy Is Choking American Companies and What You Can Do to Uproot It .New York: Amacom, 1993.

Ray Carey, Democratic Capitalism: The Way to a World of Peace and Plenty. Indianapolis: AuthorHouse, 2004. Full text available on line at www.democratic-capitalism.com See index for references to Smith, Kant, Condorcet, Marx, and Mill.

Cloke, Kenneth, and Joan Goldsmtih, The End of Management and the Rise of Organizational Democrac.  San Francisco: Jossey-Bass, 2002.

How to create “collaborative, democratic, self-managing organizations.”

Cohen, Stephen, Failed Crusade
 

Collins, Chuck, and Mary Wright, The Moral Measure of the Economy,  Maryknoll, New York, Orbis Books, 2007.

Collins, James C. and Jerry I. Porras, Built To Last: Successful Habits of Visionary Companies, New York: Harper Business, 1994.

Condorcet, Sketch for a Historical Picture of the Progress of the Human Mind
 

Conger, Jay A., Lawler III, Edward E. and Finegold, David L., Corporate Bonds, New Strategies for Adding Value at the Top, San Francisco: Josey-Bass, 2001

Corfe, Robert, Social Capitalism, In Theory and Practice, Arena Books, Bury St. Edmunds, England, 2008 

Costa, John Dalla, The Ethical Imperative, Why Moral Leadership Is Good for Business   Cambridge, Mass,  Persus Publishing 1998 

Crystal, Graef, In Search of Excess

Deming, W. Edwards, Out of the Crisis.  Cambridge, Mass:. MIT Center for Advanced Learning, 1982.

Drucker, Peter, Post-Capitalist Society.  New York: Harper Business, 1993.

Idem: “They’re Not Employees, They’re People,” Harvard Business Review, February, 2002, p. 73.

Dumaine, Brian, “Creating a New Company Culture,” Fortune, January, 15, 1990, p. 127.

Fingleton, Eamon, In Praise of Hard Industry

Fukuyama, Francis, The End of History and the Last Man.  New York: The Free Press, 1992.

How the world was moving towards economic freedom before America upset the momentum.

Gabor, Andrea, The Man Who Discovered Quality: How W. Edwards Deming Brought the Quality Revolution to America. New York: Random House, 1990.

Gates, Jeff, The Ownership Solution: Toward a Shared Capitalism for the Twenty-First Century.  Reading, Mass: Addison Wesley Longmans, 1998. 

Required reading for anyone interested in democratic capitalism. Received enthusiastic bi-partisan support from various Congressmen.

Idem,  Democracy At Risk: Rescuing Main Street from Wall Street. Cambridge, Mass: Perseus, 2000.

George, William, Authentic Leadership, Rediscovering the Secrets to Creating Lasting Value. San Francisco: Jossey-Bass 2003.

Goodell, Edward, The Noble Philosopher

Greider, William, Who Will Tell the People?: The Betrayal of American Democracy. New York: Simon & Schuster, 1992.

 A prolific writer and editor at Nation about globalization and democratization.

Gross, Daniel, Dumb Money, How Our Greatest Financial Minds Bankrupted the Nation, New York: Free Press 2009

Hsieh, Tony, Delivering Happiness, New York: Business Plus 2010

Idem., Fortress America, The American Military and the Consequences of Peace, New York: Public Affairs, 1998.

 Includes statistics showing that government policies are not related to the views of the people. Democracy is not functioning.

Hamel, Gary, The Future of Management. Boston, Mass. Harvard Business School Press, 2007.

Hamel’s vision of 21^st century management that can unleash the potential of all.

Hammer, Michael, Beyond Reengineering: How the Process-Centered Organization Is Changing Our Work and Our World.  New York: Harper Business, 1996.

Harry, Mikel, and Richard Schroeder, Six Sigma: The Breakthrough Management Strategy Revolutionizing the World’s Top Corporations. New York: Currency, 2000.

The previous entry and this one are about the power of the microprocessor and distributed processing. To be effective, however, they need the democratized work culture. The two movements will both gain strength by being coupled.

Hayek, Friedrich, The Fatal Conceit

Hayek, Friedrich, Road to Serfdom

Hohria, Nitin, Beyond the Hype, Rediscovering the Essence of Management, Harvard Business School Press, 1992.

Jackson, William M., Gainsharing, Boosting Productivity, Quality, and Profit. Marion, Indiana: Mascotte Publishing,  1996.

John Paul II, Centesimus Annus (May 1, 1991) Washington, D.C.: United States Catholic Conference, Publication No. 436-8, 1991. There is commonality among democratic capitalists, religions and humanism, and all three can gain by examining this commonality. The Pope writes of “a society of free work, of enterprise, of participation” that is the true “free market.”

Johnson, Chalmers, Blowback

Johnson, Chalmers, The Sorrows of Empire, Militarism, Secrecy and the End of the Republic, New York: Henry Holt & Co., 2004

Johnson, Simon  & Kwak, James, 13 Bankers, The Wall Street Takeover and the Next Financial Meltdown, New York: Pantheon Books 2010

Kagan, Robert, The Return of History, and the End of Dreams. A.A. Knopf, New York, 2008,

Kelso, Louis O. and Mortimer Adler, The Capitalist Manifesto.  Westport, Conn. Greenwood Press, 1958.

 Kelso is the visionary who encouraged Senator Long to pass 15 bills giving tax benefits to ESOPS. Jeff Gates was involved at the time.

Kelso, Louis,O. and Patricia Hetter Kelso, Democracy and Economic Power Extending the ESOP Revolution.  Cambridge, Mass: Ballinger, 1986.

Kennedy, Paul, Rise and Fall of Great Powers
 

Khurana, Rakesh, From Higher Aims to Hired Hands, Princeton, Princeton University Press, 2007.

Kotter, John P., A Force for Change:  How Leadership Differs from Management. New York: The Free Press, 1990.

Krugman, Paul, The Return of Depression Economics, and the Crisis of 2008, W.W. Norton & Co., New York, 2009

Lee, Kuan Yew, From 3rd World to 1st
 

Levering, Robert, Milton Moskowitz, and Michael Katz, The 100 Best Companies to Work for in America, Reading, Mass: Addison Wesley,  1984.

Lewis, Michael, The Big Short, Inside the Doomsday Machine. New York, W.W. Norton 2010

Logue, John, Participatory Employee Ownership: How It Works, Best Practices in Employee Ownership, Kent State University: Worker Ownership Institute, 1998.

Lowenstein, Roger, The End of Wall Street,  New York: The Penguin Press, 2010.

Lowenstein, Roger, When Genius Failed
 

Lowney, Chris, Heroic Leadership: Best Practices from a  450-year Old Company that Changed the World. Chicago: Loyola Press, 2003.

Martin, Roger L, Fixing the Game, Bubbles. Crashes, and What Capitalism Can Learn from the NFL, Boston, Harvard Business Review Press, 2011

Marx, Karl, Communist Manifesto
 

McGee, Suzanne, Chasing Goldmans Sachs  How the masters of the universe melted Wall Street down...and why they'll take us to the brink again, New York: Crown business 2010 

McNamara, Robert, Wilson’s Ghost
 

von Mises, Ludwig, Human Action
 

Mill, John Stuart, Principles of Political Economy with Some of Their Applications to Social Philosophy.  Fairfield, New Jersey: Augustus M. Kelley, 1987.

 Written in 1848, the same year as the Communist Manifesto.  Special attention should be given to Mill’s Chapter VII, Book IV pages 752-792 “On the Probable Futurity of the Labouring Class.”

Mills, D. Quinn, Rebirth of the Corporation, New York: John Wiley &  Sons, 1991.

Novak, Michael, The Spirit of Democratic Capitalism, New York: Touchstone Books, 1982.

Nye, Joseph S., Jr. The Paradox of American Power; Why the World’s Only Superpower Can’t Go It Alone.  New York: Oxford Univ Press, 2002.

 A nation cannot practice real democracy at home or in companies if it is practicing imperialism abroad. Nye’s book explains the conflict between “soft” and “hard” power.

O’Reilly, Charles A., III, and Jeffrey Pfeffer, Hidden Value: How Great Companies Achieve Extraordinary Results with Ordinary People.  Boston: Harvard Business School Press, 2000.

Owen, Robert Dale, Threading My Way

Owen, Robert, A New View of Society
 

Patterson, Scott, The Quants, How a New Breed of Math Wizards Conquered Wall Street and Nearly Destroyed It. New York: Crown Business (Random House) 2010

Peters, Tom, Liberation Management, New York: Alfred A. Knopf, 1992.

Pfeffer, Jeffrey, Competitive Advantage Through People: Unleashing the Power of the Work Force. Boston: Harvard Business School Press, 1994.

Phillips, Kevin, Boiling Point, Random House Value Publishing, May 1995

Phillips, Kevin, Boiling Point, Republicans, Democrats, and Decline of Middle-Class Prosperity, New York: Random House, 1993

Reichheld, Fredrick F. with Thomas Teal, The Loyalty Effect: The Hidden Force Behind Growth, Profits, and Lasting Value. Boston: Harvard Business School Press, 1996.

Rohatyn, Felix, Bold Endeavors, How Our Government Built America, and Why It Must Rebuild Now. New York Simon & Schuster 2009.

Ropke, Wilhelm, A Humane Economy
 

Sandel, Michael J., Justice, What's the Right Thing To Do?   New York: Farrar, Straus and Giroux 2009

Schultz, Howard, How Starbucks Built a Company One Cup At a Time:  Pour Your Heart Into It.  New York: Hyperion, 1997.

Sen, Amartya, Development As Freedom
 

Speiser, Stuart M., Ethical Economics and the Faith Community: How We Can Have Work and Ownership For All. Bloomington, Indiana: Meyer-Stone Books, 1989.

Stack, Jack, The Great Game of Business, New York: Currency Doubleday, 1992.

Stiglitz, Joseph,  Free Fall, America, Free Markets, and the Sinking of the world Economy. New York: W.W. Norton  2010.

Stiglitz, Joseph E., Globalization and Its Discontents.  New York :  W. W. Norton, 2002.  

Tocqueville, de A, Democracy in America
 

Tuchman, Barbara, The March of Folly: From Troy to Vietnam
 

Woodward, Bob, Obama's Wars. New York: Simon & Schuster 2010

Zakaria, Fareed, The Post-American World, New York: W. W. Norton & Co, 2008.

Zandi, Mark, Financial Shock: A 360 Look at the Subprime Mprtgage Exposion, and How to Avoid the Next Financial Crisis, FT Press, New York, 2009

Mark Zandi, Chief Economics and Co-founder Moody's Economy.

Zimmerman, Bob, The American Challenge, Twenty-One Winning Strategies for the 21st Century, Uxor Press, 2003.

Zinn, Howard, A Peoples History of the United States. Harper Parennial,  New York 1980, 1995, 1998, 2003.