A More Democratic Form of Capitalism

Many people see the financial crisis as an example of a failure of capitalism in general. It is capitalism's very nature, they argue, to create boom and bust cycles and cause grossly unequal and unfair distributions of wealth. On the other side of the equation, you have people arguing that capitalism essentially doesn't exist in the modern world -- it's all corporatism as governments bend over backwards to give the biggest and most favored corporations extra advantages over smaller businesses, including bailouts. Both sides of critics would agree that modern economic system is not even close to ideal, as indeed do I. Sometimes, though, I wonder if a mistake is made by focusing too much on business and too little on the individual.

Who is the modern individual? In the United States, he tends to be a worker, a consumer, and a debtor. When he loses his job, he really has no personal safety net -- he has no savings to speak of to tap into and debts that still need to be paid regardless of whether or not he has income. He relies on unemployment payments from government unemployment insurance funds, bankruptcy to relieve his debts, and family and friends to help him stay afloat until he finds a new job. If he doesn't find a new job before his unemployment check runs out, he will likely have to rely on government benefits and charity. Thus, work is the center of his universe -- it may not be so extreme as, "If a man will not work, he shall not eat," but the consequences of being unemployed are dire indeed. Ultimately, the most disturbing aspect of the current recession to me is the notion endorsed by some economists of a "new normal" and permanently higher unemployment. Karl Marx would still understand the world of today: for all our technological advances and all our sophisticated machinery, we're still a world of workers and society is struggling to deal with the possibility of larger numbers of people not working less because they do not want to as because there is less need for their labor due to technology and outsourcing.

I wonder if a change in ideals is in order. Perhaps we need to stop idealizing work so much and instead idealize the concept of owning. We live in a world where even starting a business has become easier -- online businesses often require less startup capital than real world ones, for instance. It is also easier to run a "mini-business" online as you often don't have the same level of maintenance costs (for instance, you might store inventory in your closet instead of a rented warehouse) and may not need to commit as much time (for example, you don't have to wait all day behind a counter or answer the phone to fulfill orders...you just need to check your email or online storefront every so often). It has also never been easier to be a part owner of a publicly traded company by owning stock. Competition amongst discount brokers have driven fees way down which makes a tremendous difference for the investor without much money. The reason, of course, why owning tends to be less glorified is that starting a business or buying stock necessarily entails some risk -- you may, indeed, end up worse off for your investment than better off. Owning also tends to reward the patient, the creative, and the studious which are not qualities everyone has to the same degree. However, work also entails some risk: harsh working conditions claim the lives of workers each year, lead to many injuries, and sometimes cause long-term health catastrophes, for instance. Most importantly, though, work is risky because you may lose your job at any time. I think it is a necessity to have something to fall back on because it is very likely a worker will end up unemployed periodically and, if the "new normal" is to be believed, periods of extended unemployment may be only more common in the future.

Not all investments are equally risky, and it is certainly possible even for the layman to research public companies to see how deeply they are in debt and if they are making money. A few clicks on Google Finance is all it takes! It is unfortunate that "sexy" growth stocks like Apple are often the ones most promoted in the media -- I actually think it's wiser to seek out dividend paying stocks that will pay you an income as long as you own them. Many utility stocks, for instance, routinely yield 4 to 5 percent in dividends alone per year even now, and capital appreciation is also possible. They also often offer direct buy programs which enable you to entirely circumvent brokerage fees. While 401Ks and other retirement plans can offer something of a safety net if you have access to them, I tend to think workers should invest on their own as well -- you definitely will need money for retirement, at least if you live that long, but you will also need money during your periods of work and especially unemployment. Tax deferment is sometimes overrated in my view.

Many would argue that savings, because they are more reliable and often government-insured, make for a better personal safety net. Unfortunately, though, savings are quite poor at providing an income, especially when interest rates are as low as they are now. (Granted, when interest rates are low debtors also have fewer expenses, but since so many debtors have high interest debt these days that impact is less apparent.) For instance, I get a little over one percent return per year on my savings account, and I only get that much because I shop around for banks. I think it's important to have reliable money on hand and you should never put everything into a risky venture, but one percent is probably not going to keep you afloat unless you're very rich indeed. Inevitably, if unemployed, you'll have to dig deep into the principal and your return from your savings would continue to drop so your situation will only grow steadily worse over time. That's not even mentioning the hazard of inflation which can make your savings gradually worth less over time -- it's not entirely irrational to not save and to borrow heavily when you account for government monetary policy.

Having more owners would change the world. More small businesses would mean more competition for mega-corporations. Had there been more small car companies like Tesla Motors, I'm not so sure GM and Chrysler would have gotten that bailout after all. After those irresponsible giants had crashed to the ground, a bevy of new car companies might have emerged to employ the newly unemployed auto workers and engineers. OK, that's not such a great example because starting a car company requires a huge amount of investment...but at least it's topical. Still, widespread competition in every industry is the best prescription for avoiding bailouts. Having more individual stock owners would shift the balance of financial power a little further away from huge financial institutions (who are currently the main owners of stock). Individuals who trade actively or own dividend paying stocks will have an income apart from their work and savings, enabling them to avoid taking on so much debt and giving them something to fall back on when they lose their jobs.

I know there are those who would say that there is simply no way that the average person is cut out to be an owner of a small business or capable of managing a portfolio of stocks. That's something of a self-fulfilling prophecy -- people are petrified of the risks they don't know (while failing to see the risks all around them, like that of accumulating too much debt or relying too much on a job) so when they do take a chance on something new they tend to panic and lose everything. Average people are capable of many things, however, and receive much less credit than they deserve. It seems to be generally accepted that most people can learn to read and write. If they go very far at all into the educational system, they'll also learn something of algebra. Outside of school, most of them will work at various jobs and have children. Owning a business or a stock is a serious pursuit, but it is a lot easier than raising children in my view. So I firmly do believe that a person who is willing to put the time in to learn can be a successful owner or part owner. Buying stocks randomly or starting a business that sells products only you yourself would be interested in is indeed dangerous, but I doubt you would do either thing if you researched a little before you acted.