If we don’t close the wealth gap, capitalism will disappear
By Dr. Larry Fedewa (March 30, 2019)
“American capitalism is now in crisis because most financial assets, most ownership of stock, and most capital income from dividends and interest and capital gains are concentrated in the top 1%, 5%, and 10% of the population. As these levels of concentration approach 80%, our society could soon arrive at the level of ownership that English lords and ladies had of all English land before the American Revolution.” (Blast and Freeman, FORTUNE, April 17, 2014). That system was essentially medieval feudalism, with serfs and masters.
Henry Ford understood the fundamental dynamic of capitalism, namely, that sharing profits with employees gives them more money with which to buy his products, which in turn increases profits, and that increases everyone’s wealth. This simple fact has been forgotten by the American business culture. The very purpose of capitalism is to increase the wealth of the entire nation and so to give everyone a stake in diligently pursuing a peaceful, productive life.
Excessive concentration of wealth defeats this purpose at its foundation by depriving the vast majority of the population of the means to enhance their standard of living. Without this motivation, that population will eventually turn to violence and revolution to regain its hope for a better life.
So, how did this situation come about? There were at least two stimulants: inflation and digitalization. A very convincing analysis of the problem has been supplied by Porter Stansberry, a financial futurist of sorts. He traces the steadily advancing discrepancy between the 1% and the rest of us to inflation. His chart showing the rate of inflation compared to the rate of distribution of wealth from 1971 (the year Nixon took the US off the gold standard) to the present is very illustrative.
His principal thesis is that a sound (i.e. gold-backed) currency forces a wide distribution of buying power, because it reflects the advance or decline of a culture’s productivity. For example, a “strong” dollar buys as much for the middle-class workman as it does for a billionaire. But it takes a much higher percentage of “weak” dollars to buy that workman’s necessities. The elite buyer has in fact many more dollars to spend even though such purchases are only a small portion of his overall income. His wealth therefore provides him with an ever-higher standard of living, while the workman sinks ever closer to poverty. Since the workman made a major contribution to the production of the item which was then sold for a profit, the capitalist philosophy would dictate that he share in the resulting profits. If he doesn’t, he gets angry.
Stansberry sees the violent revolution as having already begun — citing the recent wave of violence and terrorism. But his solution is very discouraging — he predicts an “American Jubilee” like those held every 50 years or so in the Bible. In modern terms, that is a collapse of the current economic structure and its replacement by a new normal. He expects a much more catastrophic event than 2007-8. His advice: head for the 50 or so enclaves of the rich and powerful which will be heavily armed. IOW, a new French Revolution.
In his impassioned plea for raising the minimum wage, billionaire Nick Hanauer uses the striking image of the deprived masses picking up their pitchforks to overcome the elite. (“Pitchfork Economics”) He too cites the Henry Ford mantra. His solution, however correct, was originally too narrow – the minimum wage is but one factor in a much more complex economy.
An obvious temptation for undercutting the buying power of the middle class has been the digital revolution, which has contributed so monumentally to the productivity increase we have experienced in the past generation. Among its many advances has been the communications revolution, especially the internet, which has enabled workers from developing countries to participate in the US job market. Distances offer no obstacles in today’s world. Competition for jobs today has become worldwide. The result has been catastrophic for America’s workers.
Corporate chieftains took one look at the wage advantage of foreign workers in Asia and Latin America and fell into their arms. There was no thought of the harm they were doing to their own compatriots, and eventually to themselves, as they gleefully set about the destruction of American capitalism. It has taken one of their own, in the person of Donald J. Trump, to wage a mighty counter-offensive to this movement through his trade and tariff policies. But that also is not enough.
How can we rescue our unique American capitalist system from its current path to feudalism? The key is to institute compensation programs for middle class workers which allow them to share in the prosperity their productivity has helped to create by implementing the labor-saving technologies invented by the elite.
For the answer, we can look to companies which have structured their employee compensation to reflect the employees’ contributions to profits. Three such corporations are Southwest Airlines, Federal Express, and Walmart. Each has developed a profit-sharing system which not only reflects the proportionate contributions of ownership, management and labor to the profitability of the total enterprise, but they have also avoided the potential clash between employees and shareholders by issuing part of the workers’ bonuses in the form of shares or options. Thus the two groups have overlapping memberships.
A pioneer in this movement was Sam Walton, the founder of Walmart. When he took the company public, he simultaneously provided his employees with highly discounted stock options. The result over time was a company of millionaires, which also became for a time the largest retailer in the world. No matter the current labor relation problems of the company, no one can dispute the legacy of the founder.
The last piece of this puzzle is the Labor movement. The American Labor movement succeeded from the 1930’s to the 1960’s in winning for its members significant benefits in what might be called “lifestyle” features, such as, worker safety, pensions, health care, and wages. Since the 1970’s, however, these benefits have become more or less standard at least in big companies. In other words, Labor won.
Since then Labor seems to have lost not only its way, but also its membership. I suggest that Labor adopt a new cause, “Luxury Benefits”: recapturing for its members their rightful share of the immense financial rewards our country has earned. It is no secret that the captains of industry are not going to hand over significant portions of their wealth to their employees without a fight – even if it is in their long-term interest to do so. Someone is going to have to help them “see the light”. Nobody is as equipped by history, organization and numbers to undertake this 21st century fight as organized Labor.
(To be continued next week.)
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