Where I Am: History and Perspective on American Capitalism
By Bill Martin
Capitalism arrived in the future United States with the European colonists. It has the power to generate wealth, infrastructure and competitive economic dynamics between nations. It depends on money, labor, natural resources and consumers of goods and services. The old sentence “You have to have money to earn money “ applies.
Capitalism can often be more about self-interest than altruism. However, there are forces that I will explain here that can lock it in to some extent and effectively fend off some of the worst acts or policies of its adherents.
Businesses of all kinds and sizes participate in capitalism. The oldest and best funded businesses are corporations; they are not linked to human lives, preserving legal and regulatory longevity. Short-term citizens can only buy goods and services with cash. If there isn’t, they can’t afford to build businesses, buy houses, or buy vehicles. For that, they need loans; prove that they can repay.
Firms large enough to be incorporated under capitalism can raise funds for operations without bank loans if they wish. They can work with investment banks to create and sell shares of their company on a public stock exchange. This would mean that their shareholders then hold a defined share. They can also sell bonds of varying maturities to investors at fixed interest rates for each $ 1,000 bond. These are âleasedâ capital. Bonds have a first call on earnings before stocks; they constitute a set of fixed interest payments except early repayment by the issuer.
Common stocks are not required to pay dividends, and if they don’t, those stocks are worth more unless sold. (A bigger pie divided by a fixed percentage of shares outstanding results in an increase in value per share.)
Guardrails and controlsâ
Federal and state governments have a variety of regulations that affect businesses and corporations. You may have noticed how many companies are registered (and licensed) in Delaware. Looking further ahead, you may find that the state of Connecticut is particularly attractive to the insurance industry.
Federal SEC (Securities and Exchange Commission) controls are focused on banking, investment banking, stock issuance, brokerage sales, and trading. These rules imply a fiduciary responsibility for participants, which means (in theory, at least) that they have a duty to behave responsibly in the treatment of those with whom they do business. The story includes massive violations with subsequent lawsuits. Insider trading caught Ivan Boesky and massive investment fraud sent the late Bernie Madoff to life in prison.
After the Federal Trade Commission removed tobacco advertising from television screens in 1972, the industry focused on other remaining sites to maintain sales. While adult smoking rates have declined dramatically, Big Tobacco’s specialty campaigns targeted young people with “Joe Camel” and other characters, while adding a variety of chemicals unrelated to tobacco to accelerate addiction. For the first time, the federal government succeeded in suing the tobacco giants for disinformation campaigns that masked their foreknowledge of nicotine addiction. Surviving family members also began to successfully sue these businesses for the premature deaths of their smokers.
Regulatory failure was also seen in the 1985 savings and loan scandal which crippled the economy and credit markets for some time, and the mortgage financing collapse of 2008 resulting in a long recession. Some of the preventive measures against the recurrence of these events have not yet been implemented by Congress.
When a company (or a single industry group) has behaved in a way that is not appreciated by some or by many, opponents may boycott. This is a concerted effort to avoid purchasing this company’s products as a punishment or a corrective influence. Deaths from adulteration of unmanageable over-the-counter drugs led to the boycott of some products, which quickly produced safer packaging that would reveal the adulteration.
There is another goal of the boycott. It has to do with public policy and a famous case was about civil rights. Rosa Parks, a black woman, refused to sit in the back of a municipal bus in Montgomery, Alabama. She was arrested and detained, after which the black population of that city stopped using the city’s bus transportation. The 381-day boycott action damaged the city’s finances and produced a district and Supreme Court ruling that segregation in municipal transportation was illegal.
More recent financial action to achieve better regulatory or policy goals involves divestment. This is sought when the actions of the target are contrary to the civic interests of the citizens. The most recent example is that of fossil fuels and related mining and extraction activities. After years of continuing pro-industry publicity in the form of disinformation, sectors of the public are attempting to sell the major holders of company shares in these companies. Usually, this is sought from large retirement funds or university endowments with significant holdings in these industries.
No matter where you stand on the issue of global warming, divestment is a bit of a conundrum. Investments are made to generate returns, and fossils have been good assets to hold. Now are you going to throw them out of your investment account? Actions like this drive down stock prices and force industries to borrow more at a higher cost. This phenomenon was more common a few years ago against the nuclear power industry. It is now hunting down fossil giants and may become more common in defense industries as people care less about climate change and perpetual war. There are mutual funds that will not invest in such stocks. They are called âsocially responsibleâ funds.
Peace is good for business and for investors, and an expansion of non-fossil âgreenâ activities opens up an entirely new field for employment and corporate profits. Ask the auto industry. In a very short time, they adopted electric vehicles. Class 8 on-road electric trucks powering refrigerated trailers are already supplying supermarkets in Southern California. A number of small electric planes are entering service and Airbus intends to introduce prototype hydrogen jets by 2025.
Against decades of efforts by some companies to keep things static, other companies are grabbing a greener future with both hands, betting they will be able to please and profit from the public. . It’s interesting that these new ventures are using the same capitalist system to keep these celebrants of the status quo in the rearview mirror.