E Capitalism Works, Ravenous Capitalism Doesn’t

For more than a century, capitalism has proven to be successful in expanding the efficient manufacture of goods and agricultural products, increasing jobs and incomes, promoting technological innovation, decreasing poverty and improving the general welfare of humans globally. By contrast, socialism and communism with its centrally planned economy and collectivism have historically produced misery, war, need and poverty through oppressive totalitarian governments.

Super hedge fund manager Ray Dalio, the president of Bridgewater Associates, the very successful and largest hedge fund in America, recently released a thoughtful and timely report stating that “capitalism is broken” - pointing to, among other things, the gross income disparity between high and low earners. Ray Dalio’s judgment of broken capitalism relates to his observation that the vast majority of wages going to the top 5% wage earners does not benefit the overall economy, destabilizes society and is destructive to capitalism.  The fact that a true-blue capitalist wrote the article should alert industrialists, globalists, bankers and all capitalists that perhaps “capitalism with American characteristics” has veered off its previously successful course. Capitalism does work; but ravenous capitalism is indeed self-destructive. The bounty of capitalism must be shared not only with its owners or investors, but also with its other “significant partners” – the nation’s workers.

Democracy and capitalism have expanded in the 20th century largely due to America’s successful example and its persistent replacement of socialist or left-wing rulers in countries around the globe, installing democratic governments and promoting market concepts.  Communism during this same time period has withered to the point of extinction, while socialism surprisingly appears to have grown significantly among democratic and capitalist nations. 

Part of the problem in understanding the ebb and flow of these economic systems is related to the changing definition of words.  For example, communism was the end point of socialism with all the means of production owned by the centrally controlled totalitarian state.  Today hardly anyone in the world would propose that the socialism of the day will end in such communism. So the definition of these words and the systems themselves have changed, and they keep evolving today.  For a more comprehensive view of capitalism and socialism see: Subversion and Constructive Synthesis of Capitalism and Socialism.

President Trump, at his 2019 State of the Union message, stated that “America would never become a socialist nation”.  That of course depends on the definition of this word. When President Roosevelt created the Social Security System and large national infrastructure programs such as building a national water dam and electric generation system, and started welfare programs - by a strict definition of the word of that time America was already on its way to becoming a socialist country.  President Trump, and most people today, have a different understanding of socialism. However, it is clear that never before has socialism had so much support from our younger generation, and never before have there been so many convinced socialists in Congress. In this context President Trump’s comments are sounding an important alarm similar to that provided by Paul Revere’s ride at the time of America’s revolution.

This article highlights the reasons why “capitalism with American characteristics” is in trouble, and why ravenous capitalism is self-destructive.  An approach is suggested which can return capitalism to its healthier days – an approach which does not penalize companies nor government. A less ravenous and more humane capitalism would increase the well-being of our citizens, reduce socialist demands, and build a stronger, more secure America.

Corporate profits

One effective way to measure the success of capitalism is to track the rise of corporate profits over a period of time.  The following table shows after tax profits for corporations filing with Federal Reserve Economic Data base.

What we can see from the preceding graph is that with the exception of a dramatic decline in earnings in the 2007-2009 period, and some periods of relatively flat earnings (1995-2001, and 2012-2018) that corporate profits have grown steadfastly over time.

Corporate earnings over 2012-2018 period hovered around $1.8 trillion annually.

Dividends to shareholders

A measure of a corporations comfort level with respect to its continuing earnings power, and its ability to have necessary capital for future operations is determined by the amount its directors are willing to pay to shareholders as dividends.  A young, faster-growing company may pay no dividends to shareholders at all, since its capital can be effectively used in building its business. By contrast, a more mature company with all the production capacity needed already in place will pay out a significant portion of its earnings to shareholders in the form of a cash dividend.

In the marketplace the stock of a younger company will appreciate even without paying any dividends because it is growing faster and expanding its market.  As a company matures and slows its growth, its stock price appreciation will slow, but the payment of increasing dividends adds to the total return of the investor to make an attractive long-term investment.

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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and ...

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Alpha Stockman 9 months ago Member's comment

Some eloquent points and some thoughtful potential solutions. A lot to take in...

Flat Broke 9 months ago Member's comment

Fascinating manifesto.