CAPITALISM WITH BROAD DISTRIBUTION: A “SHARED MARKET ECONOMY”
While the shift from work to capital implies the need for a broad distribution of income, that distribution is not incompatible with a vigorous market economy. It certainly does not imply government ownership or control of business (which is the definition often given to socialism). Along with a broad system of economic distribution that will include a great many people who will no longer be sustained by “work,” it will be desirable to continue a dynamic market economy both as a spur to innovation and as a freedom-enhancing option for individuals. It may not at first glance seem so, but there will be no contradiction in having such a continuing free market. It will be sufficient if we come to have a “shared market economy” that will feature a vigorous market from which all people will derive an income as part-owners.
By a shared market economy I mean an economic system in which
(a) The competitive market will continue to play a central role, with firms competing vigorously for profit in a global marketplace that will drive firms toward continuing innovation and the lowest-cost production.
Public policies will need to be followed that will assure a competitive internal market and that will prevent foreign competition from forcing a deindustrialization of the nation’s economy. Even though it will run counter to the current ethos, this will require whatever amount of protectionism is necessary for the purpose. A re-industrialization should be attainable with increasing ease as the enterprises adopt a more-and-more perfected labor-saving technology, since the main competition at that point will be other technology, not the enormous overhang of cheap foreign labor.
The “global marketplace,” while still vigorous and innovative, will need to be one in which the activity is kept on a scale that is manageable for central banks and governments.
(b) The engine that keeps the market going with its innovation and productivity will continue by including the right of those owning private shares and conducting the enterprises to reap rewards (or losses) considerably greater than any individual portion that will go to others. The outcome will not be one of total leveling of wealth and income, although the society will be wise to prevent a polarity that is so extensive that it threatens to introduce aristocracy.
This private conduct of the enterprises should not preclude legal and ethical measures to eliminate the “cronyism” that has warped so much recent corporate life, where boards of directors and executive officers have colluded to produce remuneration to themselves far in excess of what a competitive situation would call for.
This sort of internal cronyism has gone hand in hand with yet another form of cronyism, a “crony state capitalism” that involves an incestuous interplay of government and business enterprise. It is this that has come to be identified as “the free market” or “capitalism” in recent years – but such a thing is qualitatively different from the free market we have known in the past. The political system has become corrupted by the marriage of government with money and lobbying. The result is repugnant to, rather than consistent with, a free political and economic system as envisioned by Americans throughout their history.
(c) Much but not all of the capital ownership will be held by "index mutual funds" (i.e., funds that hold a broad array of shares representative of the market, perhaps of the global market, as a whole). These funds should take an active owner’s interest in the sound conduct of the firms they invest in, but are not intended to dictate any sort of central planning. Since as index funds they will invest in firms in an amount proportional to the firms’ weight in the market, their role will be essentially neutral as among firms.
(d) A good deal of the stock in these index funds will have in turn been purchased by an independent public agency, which will in effect distribute to each person in the society a portion of ownership in those mutual fund shares (or of income from them), thereby providing each individual the source of an income even if he is not employed in the economy. Each person’s share will not be transferable, since the intent is to provide a vehicle for income on a long-term basis.
David Smick, the author of The World is Curved (2008), expresses the need that is addressed by this distribution: “The challenge comes down to how to dramatically expand society’s base of winners. The best way to do that is to expand the base of the investor class. In fact, bringing more people into the economy as capital owners may in the long run be the only means politically of saving globalization” [to which we should add “capitalism”].
(e) The public agency, elected or appointed in a manner that will assure both its representative quality and its independence from the government per se, will need money with which to purchase the mutual fund shares. It will receive those funds from taxation and other sources and that classical liberal principles will themselves find sound in principle for reasons I will explain in the final chapter of this book.
It seems unwise at this time to set out seemingly definitive details about exactly how some of this should work. Will the national government supply the money to the independent agency for the purchase of the mutual fund shares, or will it be the central bank that does so, or will the agency perhaps be given powers, such as of taxation, to generate that money itself? Will the independent agency actually distribute mutual fund shares to each citizen, or shares of stock in the agency itself, or simply send income to each citizen without seeing a need to interject a specified unit of ownership? How are the members of the independent agency to be chosen? What oversight, if any, is to be given to the agency’s decisions? These issues, and perhaps many others, will be subject to debate among experts and to the complicated processes of political decision.
In his excellent book The Battle for the Soul of Capitalism, John Bogle, founder of the Vanguard Mutual Fund group, has made an observation that is pertinent here. Discussing the George W. Bush administration’s proposal partially to “privatize” Social Security by creating a pool of savings in which each citizen would have an account, he points out that the proposal would involve an intermediary between each citizen and the businesses that make up the economy. We should notice that the idea of a public agency under a shared market economy to purchase and hold index mutual fund shares involves the same use of an intermediary agency (two of them, in fact). Bogle gives this admonition: “It is essential that we appoint a group of our wisest, most experienced, and most independent citizens to serve as trustees [of the fund].” This is excellent advice, but it is worth noting that the intermediaries in the proposal for a shared market economy will each have a largely non-directive role. The index funds will buy stocks representative of the stock market as a whole, and the independent public agency will buy stock in the index funds. (We will soon see why this double intermediation is desirable.)
The result will be a broad distribution of the ownership of competitive capitalism, providing incomes and continued purchasing power, while at the same time furnishing the business firms that attract the capital of the mutual funds and other investors with abundant capital.
A word to explain elements (c), (d) and (e): From a classical liberal point of view, the new conditions will make it as important as ever to “chain the state down” to prevent the abuse of concentrated power. Those elements are meant to incorporate the time-honored principle of the “separation of power,” and this can be satisfied by a Constitutionally-mandated separation of the distributional mechanism from the part of the state that exercises regulatory, military and police functions. That is why I have called for an “independent public agency” in (c).
There is a similar reason I have provided for an independent public agency and its investment in mutual funds, rather than just having the agency itself invest in the business enterprises. My purpose is to build in a safeguard against any central direction of the enterprises themselves, which are intended to be left free to decide the direction of their efforts and investment of resources. “Central planning” is not a feature of the plan. If the independent agency were to buy corporate stocks, itself acting as an index fund (rather than going through such funds), the law creating the agency could command that the agency leave the corporations alone to make business decisions. But we can well imagine that this constraint would erode over time, at least de facto, and perhaps even be repealed eventually. If that were to happen, we would wind up with what would best be described as “state capitalism.”
This is not to say that the index mutual funds that serve, in effect, as the intermediary between the business enterprises and the independent distributing agency should not themselves serve as “active owners,” which I mentioned above. Bogle has argued that a major reason capitalism has gone astray is that the stockholders of business firms have stopped being active, allowing the executives to become loose cannons serving their own interests rather than the stockholders’. He urges especially that institutional investors, such as mutual funds, feel themselves responsible, as fiduciaries for their own owners, to play a major oversight role. That will certainly be desirable, and will not itself amount to directive control.
It helps to see how the “shared market economy” will differ from government’s simply providing a “guaranteed annual wage.” The difference is that our proposal here calls for the use of tax dollars to capitalize business enterprises (which the government won’t run). Instead of taking money from the productive economy by taxes and distributing it, a “shared market economy” will involve taking the tax money from the economy and then putting it into the enterprises via the mutual fund purchases of shares. This will help capitalize the very economy the taxes (and other income) were derived from; and it will be the return received by the mutual funds that will provide the income that is to be distributed. It is those enterprises (engaging in the competitive world market just as firms do now, and using extensive labor-saving technology) that will themselves provide the productivity for the distribution of income. The firms will be in no way dissimilar to enterprises today that enjoy large amounts of preferred stock and bond investment. Today’s firms see such investment as simply part of their capitalization and certainly don’t find it an objectionable feature.
Another disadvantage of having the government simply pay each person a guaranteed annual wage is that the people who are taxed to provide it will most likely believe that they are being victimized to support “an army of slackers.” This is because the ideological rationale that has been appropriate for a society based on work will remain in place. Nothing will have been institutionalized that asserts the rightful claim of the society as a whole to a substantial part of the economic product. A continued earn-and-tax system will lend itself to class conflict. This doesn’t rule out some taxation, as will be discussed in Chapter 18, to provide the money for the sharing of ownership; but the shared market economy will lead overall to a system that invests in business and then to the receipt of dividends by the distributing agency. There will not be a direct connection between taxation and distribution.
By no means do I suggest that the new circumstances will demand, or even be well served by, a total leveling of wealth and income as in George Bernard Shaw’s brand of socialism. A broad distribution of income and a market system will be able to exist together and will need each other. The market system will be able to exist only if, indeed, profit-seeking continues as a powerful motivation for enterprise and innovation.