CHAPTER 3
A REAL-MARKET ALTERNATIVE
Communism forgets that life is individual. Capitalism forgets that life is social, and the kingdom of brotherhood is found neither in the thesis of communism nor the antithesis of capitalism but in a higher synthesis…that combines the truths of both.
MARTIN LUTHER KING JR.
AMERICANS HAVE long been told that the only alternative to the rapacious excess of capitalism is the debilitating repression of communism. This sets up a false and dangerously self-limiting choice between two extremes, both of which failed because they created a concentration of unaccountable power that stifled liberty and creativity for all but the few at the top.
The alternative to both of these discredited experiments in centralized power is an economic system that roots power in people and communities of place and unleashes our innate human capacity for cooperation and creativity. We have a historic opportunity to bring such an economy into being. The key is the often-mentioned distinction between our existing Wall Street and Main Street economies.
WALL STREET VERSUS MAIN STREET
Wall Street and Main Street are names given to two economies with strikingly different priorities, values, and institutions. They are distinct but interconnected, and they are often in competition.
Wall Street
Wall Street refers to the institutions of big finance and the captive corporations that serve them. They may be located anywhere, not just on the famous street in New York City that has become a global symbol of capitalist excess.
Wall Street is a world of pure finance in the business of using money to make money by whatever means for people who have money. Any involvement in the production of real goods and services is purely an incidental byproduct. Maximizing financial return is the game. To that end, Wall Street institutions have perfected the arts of financial speculation, corporate-asset stripping, predatory lending, risk shifting, leveraging, and debt-pyramid creation. Successful players are rewarded with celebrity, extravagant perks, and vast financial fortunes.
Wall Street players justify their actions with the claim that they are creating wealth for the benefit of society, a convenient bit of self-delusion. We noted in the previous chapter, however, that money isn’t wealth. It is only an accounting chit, a number of value only because by social convention we are willing to accept it in return for things of real value.
Main Street
Main Street is the world of local businesses and working people engaged in producing real goods and services to provide a livelihood for themselves, their families, and their communities. Main Street is more varied in its priorities, values, and institutions. Like the diverse species of a healthy ecosystem, its enterprises take many forms, from sole proprietorships and family businesses to cooperatives and locally owned and locally rooted privately held corporations. Achieving a positive financial return is an essential condition of staying in business, but most Main Street businesses function within a framework of community values and interests that moderate the drive for profit.
I grew up in a small town in which my family had a successful retail music and appliance business. My dad took great pride in standing behind and servicing everything he sold. I recall the not infrequent experience of his answering the phone during dinner and asking Mother to keep his dinner warm as he got up to open the store for a customer with an urgent need. One, I remember, was from a local musician who had broken his guitar pick and needed a replacement for a job he was playing that night. At that time, a pick was probably no more than a 10-cent item.
I understood that business was a service to the community and that that was what businesspeople provided. Many Main Street business owners continue to this day to embrace a similar commitment to community service, including the twenty-one thousand members of the Business Alliance for Local Living Economies already engaged in building the New Economy. This commitment is an essential part of what distinguishes Main Street from Wall Street.
CORPORATIONS
So, what of corporations? Many of them produce beneficial goods and services that we need in our daily lives. Where do they fit between Wall Street and Main Street? The answer is, “It depends.”
The legal form of the modern publicly traded limited liability corporation was invented a bit more than four hundred years ago when the king of England issued a charter to the East India Company. He thereby granted a group of investors, including himself, an exclusive Crown-protected license to colonize the lands of Asia and expropriate their resources through trade and military force.
The corporate charter suits this purpose well: It creates the legal capacity to amass under unified management the power of virtually unlimited financial capital; moreover, the shareholders who benefit are exempted from liability for the consequences of management’s actions beyond the amount of their investment. It is an open invitation to abuse to which even saints are prone to succumb.
That said, there are incorporated businesses with identifiable responsible owners who live in the communities in which their businesses are located and who operate their corporations as responsible members of their community. These corporations are properly considered part of the Main Street economy.
Once a corporation sells its shares publicly through Wall Street exchanges or to Wall Street private equity investors, however, it becomes an agent of Wall Street. Whatever values it may have had before are, in all probability, subordinated to Wall Street interests and values. The production of goods and services becomes incidental to the primary business purpose of making money. As a onetime executive of the Odwalla corporation told me, “So long as we were privately owned by the founders, we were in the business of producing and marketing healthful fruit juice products. Once we went public, everything changed. From that event forward, we were in the business of making money.”
Notwithstanding the title of my first book on the global economy, When Corporations Rule the World, the real economic power in this country resides with Wall Street institutions that buy and sell major corporations as if they were mere commodities. Any chief executive officer of a Wall Street–traded corporation that puts social or environmental considerations ahead of financial return will soon find himself cast out through a revolt of institutional shareholders or a hostile takeover.
The term free market is a code word for an unregulated market that allows the rich to consume and monopolize resources for personal gain free from accountability for the broader social and environmental consequences. A free market rewards financial rogues and speculators who profit from governmental, social, and environmental subsidies, speculation, the abuse of monopoly power, and financial fraud, creating an open and often irresistible invitation to externalize costs and increase inequality.
Markets work best within the framework of a caring community. The stronger the relations of mutual trust and caring, the more the market becomes self-policing. The need for formal governmental oversight and intervention is minimal. An economy of powerful corporations governed by a culture of greed and a belief that it is their legal duty to maximize returns to shareholders is a quite different matter, and it is difficult for even the strongest of governments to control.
Visit a contemporary corporate headquarters and you see people, buildings, furnishings, and office equipment. By all appearances, the people are running things. An organizational chart will show clear lines of authority leading to a CEO who in turn reports to a board of directors. It is easy to think of a corporation as a community of people. That is, however, a misleading characterization, because the people are all employees of the corporation and paid to serve its financial interests. If the corporation is Wall Street owned, they are bound to serve Wall Street interests, and their employment is solely at Wall Street’s pleasure.
The publicly traded limited liability corporation is most accurately described as a pool of money with special legal rights and protections. Even the CEO and directors can be dismissed without notice or recourse. In theory, it is the shareholders whom management serves; however, because most shares are held in trust by various institutional investors, the real shareholders are generally invisible even to the corporate officers.
In effect, management is hired by money to nurture money’s growth and reproduction in disregard of all other considerations. The result is a global capitalist economy destructive of both life and the human soul.
THE MARKET ALTERNATIVE
Defenders of capitalist excess insist that capitalism is synonymous with markets and private ownership. If not entirely false, this claim is at best seriously misleading, and it obscures our ability to see an obvious nonrepressive alternative.
The theory of the market economy traces back to the eighteenth-century Scottish economist Adam Smith and the publication in 1776 of his Inquiry into the Nature and Causes of the Wealth of Nations. Considered by many to be the most influential economics book ever written, Smith’s seminal text articulates the powerful and wonderfully democratic ideal of a self-organizing economy that creates an equitable and socially optimal allocation of society’s productive resources through the interaction of small buyers and sellers making decisions based on their individual needs, interests, and abilities.
Market theory, as articulated by Smith and those who subsequently elaborated on his ideas, developed into an elegant and coherent intellectual construction grounded in carefully articulated assumptions regarding the conditions under which such self-organizing processes would indeed lead to socially optimal outcomes. Market fundamentalists, whose views are shaped more by ideology than by fact-based science, generally ignore the essential conditions of efficient market allocation. For example:
• Buyers and sellers must be too small to influence the market price.
• Income and ownership must be distributed equitably with no extremes of wealth or poverty.
• Complete information must be available to all participants, and there can be no trade secrets.
• Sellers must bear the full cost of the products they sell and incorporate it into the sale price.
• Investment capital must remain within national borders, and trade between countries must be balanced.
• Savings must be invested in the creation of productive capital rather than in speculative trading.
ADAM SMITH’S VISION
Adam Smith envisioned a world of local-market economies populated by small entrepreneurs, artisans, and family farmers with strong community roots, engaged in producing and exchanging goods and services to meet the needs of themselves and their neighbors. This was a vision of the Main Street economy of Smith’s time.
Contrary to popular misconception, Adam Smith was not the father of capitalism. He would have taken offense at the title, because the values of capitalism as we know it were not his values. He had a substantial antipathy toward corporate monopolies and those who use their wealth and power in ways that harm others. He believed that people have a natural and appropriate concern for the well-being of others and a duty not to do others harm. He also believed that government has a responsibility to restrain those who fail in that duty.
Although not a perfect match, a vital community-centered Main Street aligns with these principles surprisingly well. Wall Street does not. Wall Street abhors real markets and builds its business model around the systematic violation of these market principles.
Wall Street does, however, conform to the original definition of capitalism, which historians have traced to the mid-1800s, long after Adam Smith’s death. In its early use it referred to an economic and political regime in which the ownership and benefits of capital are appropriated by the few to the exclusion of the many who through their labor make capital productive.1 This is a near-perfect characterization of Wall Street.
CAPITALISM CLOAKED IN MARKET RHETORIC
Capitalism’s claim to the mantle of the market has no more substance than the claim of the rogue in the tale of “The Emperor’s New Clothes,” who declared that he had cloaked the ruler in a fine gown. In selectively culling bits and pieces of market theory to argue that the public interest is best served by giving globe-spanning megacorporations a license to maximize their profits without public restraint, capitalism has distorted market theory beyond recognition to legitimize an ideology without logical or empirical foundation in the service of a narrow class interest.
Table 3.1 provides an overview of some of the major differences between the Wall Street capitalist economy we have and the kind of Main Street market economy we need to encourage.
Table 3.1 Wall Street Capitalism versus Main Street Markets
Like cancer cells that attempt to hide from the body’s immune system by masking themselves as healthy cells, capitalism’s agents attempt to conceal themselves from society’s immune system by masquerading as agents of a healthy market economy. Capitalism has become so skilled in this deception that we now find our economic and political leaders committed to policies that serve the pathology at the expense of the healthy body. To restore health we must recognize the diseased cells for what they are and either surgically remove them or deprive them of access to the body’s nutrients.
Under a socialist system, government consolidates power unto itself. Under a capitalist model, government falls captive to corporate interests and facilitates the consolidation of corporate power. In a true market system, democratically accountable governments provide an appropriate framework of rules within which people, communities, entrepreneurs, and responsible investors self-organize in predominantly local markets to meet their economic needs in socially and environmentally responsible ways.
RULES MAKE THE DIFFERENCE
Capitalism — rule by big money — is what happens to a market economy that lacks appropriate rules. Economic power becomes increasingly concentrated and delinked from public accountability. The power holders rewrite the rules to secure for themselves the financial gains of their decisions while passing the costs to others. Focused on generating financial gains for the rich and powerful in disregard of real-world consequences, the economic system neglects the production of real wealth in favor of producing phantom wealth. A lack of market rules is the cause. The implementation of market rules is the antidote.
Free market ideologues will shout that government is restricting individual liberty. But liberty can be abused, particularly when combined with a massive concentration of unaccountable financial power. As Adam Smith himself acknowledged in The Theory of Moral Sentiments, an essential responsibility of government is to step in when required to constrain those who abuse their liberty in ways that harm others.
Proper market rules preclude speculation, the acquisition of monopoly power, and the destruction of real wealth to create phantom wealth. They support an economy that functions more like a healthy ecosystem than a cancer. They create a powerful bias in favor of Main Street and real wealth.
A true market economy absolutely needs government, not to direct every aspect of the economy but to set the framework of rules that provide a context within which the daily decision making of people and businesses balances individual and community interests. If market fundamentalists complain that such interference inhibits financial “innovation,” so be it. That is the intention. Most Wall Street financial innovations are nothing more than complex variations on the basic Ponzi scheme and should be illegal.
In the Wall Street economy, money is both means and end, and the primary product is phantom wealth — money disconnected from the production or possession of anything of real value. The Main Street economy is largely engaged in creating real wealth from real resources to meet real needs. Wall Street is very good at making rich people richer, but it has no concern for the health of people, community, or nature except as sources of short-term profit.
The difference between the Wall Street and Main Street economies is the difference between a capitalist economy and a true market economy. The former monopolizes resources under the central control of global corporations to maximize the profits of the already rich. The latter facilitates radically decentralized economic self-organization to optimize the use of local resources to meet local needs.
Capitalism is what happens to a market economy in the absence of clear market rules fairly and uniformly enforced by democratically accountable governments. If government doesn’t make and enforce the rules necessary to maintain fair and efficient market allocation, the market’s most powerful corporate players make their own rules to suit their financial advantage, and society pays the price.
Draw back the curtain, as the credit collapse has done, to reveal the inner workings of Wall Street capitalism, and it begins to look less like a legitimate business enterprise and more like a criminal syndicate engaged in counterfeiting, predatory lending, usury, tax evasion, fraud, and extortion. It may be legal, because Wall Street writes its own rules, but it should be illegal and treated accordingly. The nearest equivalent in nature is a cancer that drains the body’s energy but produces nothing useful in return.
You “fix” a criminal syndicate by shutting it down through the enforcement of laws that protect the public interest. You “fix” a cancer by removing it and rebuilding the healthy tissue. Main Street is the healthy tissue on which to rebuild the tissues of a healthy economy, but supporting its full development will require more than tinkering at the margins.