Is Capitalism in Its Death Throes?

“A great industrial nation is controlled by its system of credit. Our system of credit is privately concentrated. The growth of the Nation, therefore, and all our activities are in the hands of a few men… We have come to be one of the worst ruled, one of the most completely controlled and dominated, governments in the civilized world—no longer a government by free opinion, no longer a government by conviction and the vote of the majority, but a government by the opinion and the duress of small groups of dominant men.” – Woodrow Wilson

MarketWatch on Tuesday ran a very provocative article by Paul Farrell titled “The Death Of Soul Capitalism: 20 Reasons America Has Lost Its Soul And Collapse Is Inevitable.” Of course, such a title attracts attention, and as of the time of this writing the article had well over 1,000 comments. Screaming “fire” in a crowded theater attracts attention, after all. Mr. Farrell’s story, however, isn’t just the latest case of screaming “fire” in a crowded theater. This country and capitalism as we know it are at an incredibly important juncture in history.

While I agree with parts of the article, the overriding outlook is incorrect in my opinion. Despite the current sad state of affairs I have not lost faith in the system that has created more wealth and more prosperity in 200 short years than any other system in the history of man. We are on a slippery slope, but not a hopeless slope. Despite this, I believe there is a fundamental misunderstanding between the capitalist system upon which this country was founded and the banking controlled capitalist system that has run amok these last two decades. Fixing our problems involves fixing the banking controlled crony capitalism that currently has a stranglehold on the country.

The article begins by referring to the lopsided state of affairs on Main Street and Wall Street. As regular readers know I am furious at the way the banks have taken advantage of the taxpayer. I am furious about the Fed’s plan to try to print our way to prosperity. I am furious about the government’s continued irresponsible fiscal policy. I am furious that the government and the Federal Reserve are so willing to destroy the dollar’s we work so hard for due to their irresponsible policies and spending. But the recent weaknesses exposed in the U.S. economy is not the fault of the capitalist system that made it so great, but the reckless actions of a group of bankers who have taken advantage of that system for the gain of a small minority.

Capitalism is an economic and social system in which the means of production (also known as capital) are privately controlled. The last 25 years have seen an unprecedented growth in the financial sector. Meanwhile, the wealth gap and the public’s dependence on banks and bankers has grown exponentially. Capital is no longer controlled by the corporations that build widgets. Capital is controlled by the bankers who create CDO’s and package loans. This system of “privately” controlled capital is in fact, not privately controlled at all. It is controlled by a Central Bank of the United States that claims to be “independent”, but as we all know from the events of the last 18 months, is as closely tied to the U.S. government as the U.S. Treasury or any branch of government. How can you claim that the capitalist system has failed when the last 25 years of bank controlled capitalism have been characterized by anything but privately controlled capitalism? You can’t.

Mr. Farrell makes his argument through 20 points. The first few show why his argument isn’t exactly correct:

1. Collapse is now inevitable

Capitalism is not doomed to collapse. In fact, capitalism is being copied by nations around the world with great success. Even Communist China has implemented its own form of capitalism and is seeing the same surge in wealth that America experienced earlier in the 1900’s. What China doesn’t currently suffer from is the reckless banking component of the capitalist system that American’s have tolerated for the last two decades. What needs to collapse (and will collapse) is the form of bank controlled crony capitalism that has taken control of the U.S. over the last 25 years.

2. Nobody’s planning for a ‘Black Swan’

While the timing may be uncertain, the trigger is certain. Societies collapse because they fail to plan ahead, cannot act fast enough when a catastrophic crisis hits. Think “Black Swan” and read evolutionary biologist Jared Diamond’s “Collapse: How Societies Choose to Fail or Succeed.”

Again, Mr. Farrell points out one of the key flaws of bank controlled crony capitalism. The Federal Reserve System is based on guessing and manipulating interest rates and monetary policy in false attempts to predict future economic activity. This creates the boom/bust environment that American’s have been forced to suffer through for th e last 20 years. Bank controlled capitalism doesn’t plan for Black Swans because it can’t plan for black swans. If there is one thing we’ve learned from the boom/bust cycle of the last 20 years it is that Central Bankers can’t fix economic problems via monetary policy. Traditional Capitalism depends on black swans to help root out the losers from the system. In a true capitalist system the savers are rewarded, the winners win and the losers lose. Does that sound like the environment we live in?

3. Wall Street sacked Washington

Who’s in power? Irrelevant. The “happy conspiracy” controls both parties, writes the laws to suit its needs, with absolute control of America’s fiscal and monetary policies. Sorry Jack, but the “Battle for the Soul of Capitalism” really was lost.

Mr. Farrell points out the primary problem with bank controlled capitalism. The bankers own Washington. They are in the pockets of the politicians and they influence policy in ways that maintains their stranglehold on the taxpayer. The last 18 months are clear evidence of this.

4. When greed was legalized

Go see Michael Moore’s documentary, “Capitalism: A Love Story.” “Disaster Capitalism” author Naomi Klein recently interviewed Moore in The Nation magazine: “Capitalism is the legalization of this greed. Greed has been with human beings forever. We have a number of things in our species that you would call the dark side, and greed is one of them. If you don’t put certain structures in place or restrictions on those parts of our being that come from that dark place, then it gets out of control.”

Again, this is simply the recent evolution of what Mr. Farrell and Mr. Moore incorrectly refer to as “capitalism.” This is not the system that the Founding Fathers envisioned. In fact, it is quite the opposite. A system that is controlled by the Central Bank and their cohorts is not described or permitted anywhere in the Constitution.

Mr. Farrell believes we are doomed:

“America Capitalism” is a “Lost Soul” … we’ve lost our moral compass … the coming collapse is the end of an “inevitable” historical cycle stalking all great empires to their graves. Downsize your lifestyle expectations, trust no one, not even media.

There is a high probability of a crisis and collapse by 2012. The “Great Depression 2″ is dead ahead. Unfortunately, there’s absolutely nothing you can do to hide from this unfolding reality or prevent the rush of the historical imperative.

Taking America back means taking control of capital from the bankers who have abused this power and threatened the greatest economic engine in the history of man. The collapse of capitalism is not “inevitable” and the Great Depression 2 is not unavoidable. But if we allow the Central Bank to manipulate our currency, the U.S. Treasury to uncontrollably print money and the Congress and President to recklessly inflate our debts I can guarantee you the era of U.S. dominance is over and capitalism may very well be destroyed with it. Bank controlled crony capitalism will certainly destroy America. It’s time to take the power back from the bankers and put it back in the hands of hard working citizens. It’s time for the re-emergence of old fashioned American Capitalism.

Auditing the Fed is the first step...

Comments

[chap08:]

"It’s time to take the power back from the bankers and put it back in the hands of hard working citizens".

Ironically, this sounds like something said by Karl Marx. If we don't fix the capitalist system, we'll end up hearing a lot more things once said by Karl Marx.

Oct 21 01:14 PM

[User 353732:]

Capitalism is atrophying in the US, UK and Japan but in many other parts of the world, especially Asia, the foundational premises of capitalism(tradeable and enforceable property rights, voluntary contracts, mutual exchange of value) are being accepted as organizing principles for a dynamic economy.

The US, UK and Japan or even the West are not the World.
It is not capitalism that is dying on Earth but what are diseased and becoming more enervated by the day are the collectivized, coerced and kleptocratic economies of the US, UK, Japan, France, Italy, Spain and perhaps Russia( whose vast energy and mineral wealth is gift that will sustain brutal, sick and corrupt Russia for another couple of decades)

Oct 21 01:44 PM

[aussiereader4:]

I think that the USA is on an inevitable decline. Crony capitalism exists because of crony government. The American citizen is to blame.

Sometime in the last 60 years you were turned from a people who fought Adolf Hitler into a nation of people who were reality TV watching slobs. You allowed the media (television) to dominate your lives and the media fuelled a type of consumerism that has sent you broke.

The financialisation of the economy is but a product of this process of decline. It was fuelled by the 'something for nothing' mentality. Americans are somehow 'owed a living'. 'It is the fault of the fed', Those 'greedy bankers'. It is easier to point the finger and blame rather to examine ones own role.

The economy is a product of the fundamental change in your society over the last 50 years, stop blaming others and get on with it. America got 'fat' on the back of Chinese labour. You need to go on a diet and look at sort of society you really want for your children.

That is why China will be the next super power. It has nothing to do with capitalism.

Oct 21 03:02 PM

[The Simple ...:]

Hmm...Karl Marx wrote about the transition from entrepreneurial capitalism to large industrial capitalism, with increasing concentration and the squeezing out of the small proprietor, what, 150 years ago?

How delicious an irony - Marx, thoroughly discredited by the incompetence of his most avid devotees, finally vindicated by the brilliance of his most ardent detractors. Who says God has no sense of humour?

Oct 21 04:13 PM

[Graham and ...:]

Capitalism is not on its last legs. But it does have a severe case of "pneumonia."

Oct 21 04:19 PM

[The Simple ...:]

...or capitalism isn't dead, it just smells funny

Oct 21 04:40 PM

[untrusting ...:]

PG,
Good article. But it is not just the Wall Street bankers although they are certainly the key ringleaders and effect significant control because of the massive money/capital they control and their proximity to the lifeblood (money) of the system.

It is much broader than that. It is basically the entire public corporation system and their executives. The bankers are just the ringleaders and key manipulators. But most if not all of our public companies and their executives are just as much involved and corrupt as well.

The level of fraud, misrepresentation, greed, manipulation, theft of wealth, regulatory capture, politcal influence and payoff, etc is nothing short of staggering. It probably has always been a problem, but certainly not at the scale, scope, or magnitude that it has developed into over the last couple of decades. If one looks at history, there are certainly examples of business defrauding Abraham Lincoln and the US during the Civil War and becoming wealthy providing shoddy, defective, over-priced, etc products to the US government and union army. But they were nowhere near the levels and scale they are today.

All one has to do to understand the scope and scale of fraud and theft being perputated on the American people today by our public corporations is just to consider the hugh number of examples of illegal and self-serving behavior. Some examples would include:
1) Haliburton - Iraq and Niageria frauds & link to Dick Cheney.
2) Pfizer - 4th admission of fraud just a few months ago and agreed to settle (not admit guilt) for over $2 billion.
3) Calpers - director of California penison fund being investigated for kickbacks.
4) Boeing - admitted fraud and payoffs on militiary contracts a few years ago.
5) Countrywide Mortgage - Mozelli and his executives - key players cashing in hundreds of millions on mortgage frauds.
6) Rating agencies - Moodys', Fitch - key players in fraudently rating securitized mortgages AAA when they were FFF.
7) Madoff, Stanford, Galleon Hedge Fund, etc.
8) Enron, Worldcom, Arthur Anderson, dotcom frauds by analysts, LTCM, and many tens of thousands of others since just the late 1990's.

The list just on and on and on and on. It encompasses virtually every manner and type of US public company, and the examples don't even mention the bankers like GS, JPM, Merrill, and many other predecessors.

And that's just the fraud and theft in non-existent goods and services, stealing investors money with fraudlent investment and reporting claims, stealing the government's money with bogus claims or overbilled invoices, etc.

Perhaps just as much of the fraud, corruption, and theft by our US public corporations has involved the grossly excessive compensation (salary, bonus, options, personal perks, etc.) that public company executives have awared themselves for decades now. It certainly is in the hundreds of billions of dollars and probably in the trillions. And for what? They claim it is for performance. The fact is they have NOT performed for well over a decade and the real owners/shareholders had a negative return over the past decade. Thus corporate have effectively stolen their execess compensation from shareholders. Why? Because they could and they the handful of insiders controlled the process. If one compares executive compensation in the US in say about 1985, it was about 100-200x higher than their average employees. Today it is many thousands to hundreds of thousands times higher. Why? Legalized theft by the public corporation.

And finally, one has to also consider the taxation levels of both the public corporation as well as the executives of them (the wealthy). A simple look at US Federal Income tax brackets from 1900- 2009 will clearly show anyone that the Top tax brackets have been hughly reduced since about 1985. Why? The pure greed and ability of the public corporations and their executives to use their massive wealth, influence, power, and payoffs to politicans/lobbyists to increase their retention of their ill-gotten wealth. A great case can certainly be made that public corporations and their wealthy executives get most of the wealth now, but pay nowhere near the costs of society (roads, military, schools, court system, etc.) that enable them to get that wealth.

In short, in our view, the corruption and dysfunction spreads thoughout the nepotism and self-serving evident between the government, lobbyists, and the entire public corporation sector.
One can call it capitalism it they want to delude themselves, but in our view it is no more capitalism and free market enterprise than is communism, facism, or totalarism. If anything it much more akin to economic and political slavery similar to plantation slavery as practiced in the Old South circa 1860. The new plantation owners are the politicans, lobbyists, and public company executives and the new slaves are the average American citizen.

Oct 21 04:50 PM

[The Geoffster:]

Capitalism in America has been perverted by ever creeping socialism and most people seem to like it, but if you told them the programs they rely on are socialist, they would think you daft.

Oct 21 05:05 PM

[Tony Petroski:]

I'll bet Mr. Pragmatic Capitalist that Capitalism is not in its death throes.

It's an easy bet, because it's like betting that breathing is in its death throes.

Oct 21 05:13 PM

[notsosmart:]

the system is perverted & will not change for the better.china combines capitalism & dictatorship.how well & for how long this will work i dont know.here in the U.S. we are in decline & nothing will change that unless we can grind granite counters into energy of some sort.the prevailing thinking is "screw you,while i fill my pockets" & hide the loot overseas in tax free accounts.dumb-dumbs abound(50% high school dropout,50% 1st year college dropout) & if you graduate the wall st ponzi/casino has fixed it so you can ask"may i take your order?".sad.

Oct 21 05:55 PM

[LilBob:]

When you get too great a concentration of capital in the hands of too few people you end up with a situation where you have too many investment dollars chasing too few consumer dollars, ergo businesses are not able to keep their doors open, employment goes into decline, and more aggressive investment schemes are cooked up to create false impressions of economic security for the investment class. It's entirely appropriate that you should use a quote from Woodrow Wilson, as his tenure at Princeton, his association with Teddy Roosevelt and Howard Taft and later his presidency were all within the 1895 to 1920 time frame-a period of extreme economic volatility-that laid the groundwork for the excesses of the 1920s and eventually the 1929 crash.

So what happens next? History tends to run in cycles and chances are we'll see exactly what happened the last time. Labor starts organizing again; we see huge growth in entrepreneurship, corporations get divided up by anti-trust legislation to create more competition in the marketplace and therefore better value for consumers; the dollar gets devalued (we're already seeing that and I'm convinced it's intentional); and eventually the consumer base is restored to a position of relative economic security that creates the perception of widespread prosperity. Then the whole cycle begins again and our grandchildren will probably be discussing the financial collapse of the nation and how the president and congress are to blame at some point in the future. The missing link this time is how do we create the rapid transition which was WWII the last time around. I've been repeating in my comments that GI Pay, Rosie the Riveter's wages and interest on US war bonds paved the way to 1950s prosperity. This time around we'll need some transformative technology as I don't think any large enough event is on the horizon. Alternative energy and the prospect of energy independence has the potential to be our transformative technology but it's going to take a lot of entrepreneurs who can create results without having to whine to the government for billions in subsidies first.

Oct 21 08:30 PM

[bob adamson:]

Arguably if you asked each person who has posted comments to this article (and 30 other SA readers chosen at random) for their detailed definition of capitalism you would get more than 25 different answers and these answers would range significantly on several core details. Further, the nature of capitalism and the perception of its structure, strengths and weaknesses undoubtedly varies from country to country and changes over time.

All that is to say that capitalism has many forms both in reality and in the minds of its detractors and supporters. From this two conclusions might be drawn:
1. Capitalism isn’t and will not die but it will change from time to time and from place to place as circumstances and expectations change.
2. Part of this dynamic of change will be the relationship of the state in relation to the private sector. Arguably there is a pendulum motion from symbiosis to repulsion and back again on the issue of state involvement in the capitalist economy. This reflects the extent of perceived unfairness or restriction of opportunity in the society at a given time and the desire to rectify this shortfall.

Much the same can be said about democratic socialism or social democracy.

Oct 21 08:35 PM

[The Simple ...:]

Well, certainly anything like the "ideal" or "pure" form of capitalism likely to be put forward by most people, would be a kind of entrepreneurial capitalism consisting mainly of small proprietors. The problem of an advanced industrial society is a structural one, because a world of small proprietor capitalism can't achieve the scale required to innovate and produce the goods and services required. So, something like the Pareto principle (a.k.a. the 80/20 rule) holds, where a small number of large firms utterly dominate the much larger number of small firms.

The downside of this is that large institutions are required, and that creates a massive agency problem. Poor governance and managerial self-serving at the expense of shareholders, in a broad sense, explain much of what we have seen as recurring problems of capitalism over that past decades. In a sense, the agency problems appear in a similar form in representative government, where elected officials look after their own interests before those of their constituents. Therefore ownership, the basis of capitalism and democracy in theory, is weaker than management, which produces all sorts of distortions.

Oct 22 08:49 AM

[Steve in Gr...:]

Capitalism is what people do when 1) their property rights are enforced and 2) the government leaves them alone to exercise their rights to "life, liberty and property".

Capitalism begins to die in any jurisdiction where either of these two conditions are removed. For example, the Fed's ongoing debasement of the USD is an attempt to violate my property rights in my USD savings. Luckily, I can move to CHF, AUD or Au. Redistributive taxation is another example of property rights violation. CAFE standards, carbon taxation, socialized healthcare....

Enough of this parasitism by the tyrannical U.S. government and the underlying economy dies or slumbers at a permanently lower level of income and wealth.

Oct 22 08:57 AM

[perceptions...:]

I have not yet read the Market Watch article, but assuming your report is accurate, I would agree that the current economic system is indeed dying.

Further, there has been a systemic failure that has not properly provided for three Black Swan events, which are currently working their way thru the economic system.

Those events relate to Population Aging, Energy (Oil) & Climate Change.

However, these events are not just economic, they also go to the core of the current Political systems, with both the so called Democractic & Communist systems likely to undergo enormous stresses & change, in the next twenty years.

The prognosis being that the next twenty years, will bear little resemblance to the last twenty years!

Finally, I would agree with the last line of your article, the FED & inded the entire Banking/Finance/Insurance sector, needs to be audited, with intent!!!

Oct 22 10:07 AM

[Glen L.:]

Capitalism is the natural economic order that arises from free enterprise. It has existed, at least in rudimentary form, since the first humans saved seeds from wild plants and planted their own crops. Without capitalism the human race itself can perhaps exist, but never thrive; we come into the world totally unequipped to survive without clothing and shelter, the most efficient production of which requires capitalism.

All forms of socialism employ at least a modicum of capitalism, or they couldn't exist either. The Soviet Union survived for 70 years because it had enough raw materials to sell to foreign capitalists, and because it had a two-tier system wherein the party aparatchiks secretly enjoyed the illicit fruits of the freest of all enterprise, i.e. the black market.

So, if capitalism really is in its death throes, so is the human race.

The author is completely correct in his points about crony capitalism, which is a hallmark of the fascist version of socialism. There is some confusion, however, about the banks controlling capital; the banks, via the Fed, control the money supply. This is a socialistic institution, and if not abolished it will eventually destroy every fiat currency and wreak havoc worldwide. There cannot be true, free market capitalism until money is treated as a free market good, with competing brands, private production, distribution, etc. Until then, capitalism will never be allowed to flourish and shower its benefits on all humanity, as it should be allowed to do.

Oct 22 12:53 PM

[johnbee:]

The whole basis of banking and stock market capitalism which has served apparent growth so well is a well disguised mirage. When the general public make more money than they need to eat they either spend it on things they could well do without or buy a bigger house or believe they are saving it beneficially or putting it into a pension for retirement it or investing it on the Stock Market. They are greatly encouraged to do this both by Governments, and by investment advisors who live off the commissions. Inflation constantly creates higher values for these purchases so that it appears money is being created, and Stock Market indexes are constantly adjusted with stocks with poor prospects being replaced by those with good ones so as to give the impression of a constant uptrend. Pensions when finally obtained years later are frequently less (after inflation adjustment) than the money saved. Some investments do grow faster than others in a time period but are more than balanced by those going down. The trick is to pick the right ones and it seems only the rich can manage this through use of skilled advisors working for hedge funds etc. But are they really so skilled? Isn't their trick really to have managed to get control over small savers low interest money and to create money against it out of thin air like magicians and then take half of the thin air and turn it back into cash for themselves while leaving the small savers holding the magical baby (in the form of thin air)! Who perpetrates this trick? The big name investment bankers who station themselves in every important position to do with money. Why is BofA in a mess? Because the directors and staff aren't so smart as the likes of Goldman Sachs.Why do GS people get huge salaries? Because they manage to dream up new tricks and keep quiet about how they do it as if they public knew the ride they are being taken for they would - do what? That's the nub. The public do nothing and governments do nothing because without the banks the wholes system folds as it nearly did back in January this year. But without the banks and their control over savings and their constant creation of money and the Stock market hype that the average company can be valued on 30 times its last years profit (as if anyone could see 30 years ahead) there would be little or no growth (apparent or not).
Hope and speculation that enables entrepreneurs to dream up ideas and financed would be taken out of the market along with competition and Government t revenues would fall hugely and law and order would be out of control. In short the world either sticks to non growth barter where we grow our own potatoes to swap for eggs and protect ourselves with pitchforks or we competitively get on the treadmill of borrowing and easy credit to obtain what we think we need before we have earned it. As the treadmill speeds with more and more people on it then it will inevitably crash from time to time until a new one will be patched up and the wheels oiled again with more temptation or competitive need until it revolves so fast that crises happen almost without any intermission that benefits anyone excepting those who are in a position to pull the wheels that stop and start it and so take any profit gained while the rest of us take the loss. From Cicero to Jesus to Lincoln and beyond bankers have existed to create the mirage of competitive growth. Yes we have TV's and cars and roofs over our head. Well some of us do, but the rest (the billions who still live in poverty) are those who enable it for those who have as the world's resources are not evenly shared. But when they are then poverty will become far more apparent in the Western world to everyone but smart bankers. They will need take to the seas in large armed yachts or live in hiding to survive but they will survive as if they don't then we are all in the shit.

Oct 23 02:35 PM