Modern Capitalism Can Be Improved


History can teach us a lot about how to live better in the present. Rarely does one hear any reference to past mistakes or even the past successes that could best resolve our current problems. In the world of capitalist economics this country has decided to embrace the “me” rather than the “we”. Granted capitalism is about individual freedom to prosper and private ownership but, as in all economic systems, short-sightedness and greed can skew the results to the detriment of the economy as a whole. Past periods of prosperity provide a fundamental roadmap to maneuver through the mess we are in and if we are too busy amassing our personal fortunes to scour the history books, we need only look to Germany’s success in this age of recession for guidance and encouragement.

Hedrick Smith writing for The New York Times did take a look back at our post-World War II boom and related it to current German economic growth as opposed to what has been happening economically in the United States over the last few decades.

Between 1945 and 1973 America experienced unprecedented middle-class growth and economic equality in spite of much higher tax rates. Companies bought into the theory that treating workers well benefitted everyone. Economists called it the “virtuous circle of growth” described as “well-paid workers generating consumer demand that in turn promotes business expansion and hiring”. Unions came of age during this period as workers pay and benefits improved. Henry Ford first espoused the theory of elevating the worker as far back as 1914 when he paid his workers much better than the going rate of the time citing the belief that business is more secure when workers earn enough to be good customers. Today we call that “consumer confidence”. When individuals can plan for the future they become more productive and demand more goods and services.

As Smith looked back at the statistics from the late 1970s through 2011, he noticed a dramatic change occurring in productivity and economic status. Whereas previously there was a direct relationship between increased productivity and increased wages, now there was a huge disparity. As productivity increased by 80.1 percent, average wages gained only 4.2 percent and hourly pay only 10 percent during those years while corporate profits soared. Right before the Great Recession in 2006 corporate profits accounted for the largest share of national income since 1942 and salaries and wages were at the lowest level since 1929. Since the recession, corporate profits are back and we hear everyday how companies are sitting on their profits while cutting workers pay and benefits to the bare bones. It is a fact that middle-class incomes have stagnated. This disparity cannot be explained away by globalization or technological innovation because this same stagnation of the middle-class is not evident in any other advanced economies. It is a world of dwindling incentives and opportunities.

Germany is doing well economically and their exports are strong. They provide training for their workers at all levels and the average pay for workers has increased five times faster since 1985 than in the United States. Klaus Kleinfeld, formerly with Siemens in Germany and now at Alcoa in the United States, says the secret of the German success is “the social contract: the willingness of business, labor and political leaders to put aside some of their differences and make agreements in the national interests”. They are not mired in a short-term mentality focused on higher profits at the expense of their workers to benefit investors. The Germans understand that if the workers do not have steady jobs with increasing rewards (incentives) that their economy will not move forward.

A look at history can provide answers for the future. Several smaller recessions in the 1990s failed to culminate in job creation. Frank W. Abrams, chairman of Standard Oil of New Jersey, is a big promoter of “stakeholder capitalism”. He feels that the job of management “is to maintain an equitable and working balance among the claims of the various directly affected interest groups, i.e., stockholders, employees and the public at large”. History has also taught us that the greater the disparity between the top and the bottom of society the more likely governments may be overturned and heads literally roll as in the French Revolution of 1789. A history lesson on the bigger picture is in order before we can achieve economic prosperity.

Page Perry is an Atlanta-based law firm with over 170 years of collective experience maintaining integrity in the investment markets and protecting investor rights.