Creating a Quality Economy, Part 1

batman.gifby Mark Pash, with Brad Parker —

The economic philosophy of the Progressive Democratic Party is designed to advance human commerce for the betterment of all, while protecting the business environment from itself and the government. Commerce is not perfect and is vulnerable to both human nature and the major flaws of capitalism.

The government has to counter the flaws of capitalism, without hindering the market place, and provide a level playing field to insure competition as it facilitates the favorable elements of growth. Economies need checks and balances for successful operations just like the government. Progressive economic principles are the best way to achieve this balance between dynamic fair markets and community interests. Progressive Economic Understanding is the pathway to future financial success for all. “We are all in this together.”

In order to better understand the potential of Progressive Economic Principles, we first need to examine the three fundamental flaws of Capitalism. They include:

• Inadequate Recirculation of Money
• Failure to Create Quality Customers
• Lack of Long-Term Planning

THE THREE FLAWS OF CAPITALISM

The First Flaw: Inadequate Recirculation of Money
In a free enterprise environment, there is a continual, natural flow of capital to the powerful; the highly educated and already wealthy by various means, both legal and illegal or by shear luck. This natural concentration of wealth continually reduces both the number of businesses and ample individual consumers, eventually hurting commerce and society. All studies, computer models, research and statistics in the past and present validate this scenario.

Concentrated wealth, promoted by this flaw of capitalism, creates a system of, “The Rich get Richer” for both individuals and businesses. This natural bias to the already wealthy reduces competition and the number of adequate consumers. The antitrust laws were established to counter this monopolistic tendency in business enterprises. The fiscal system of taxing the rich and redistribution back to the many was created to solve this problem on an individual basis.

Adam Smith stated: “capitalists left to their own devices would rather collude than compete.” This means the natural goal of a commercial enterprise is to attain monopoly status, control or own all or most of their market. (The healthcare industry, medical insurance and pharmaceutical companies are prime modern day examples) This coincides well with the natural goals of many individuals to become as rich as possible. Both Republicans and Democrats have recognized this flaw. In 1890, the Republican Party passed the Sherman Antitrust Act, which was enforced by Republican President, Theodore “Teddy” Roosevelt. Years later, the Democratic Party started the Keynes fiscal policy of redistribution of income and wealth under Franklin Roosevelt.

This is why it is very important to have an adequate antitrust policy and enforcement. The more competition the better! Competition creates more employment, which creates more customers. It rewards efficiency, with profits and with losses, and makes it more difficult for individuals and businesses to gain monopolistic control of the marketplace. Diffusing power and distributing wealth are essential to creating a healthy business environment. If we cannot have this multi-firm free market competition, then we have to regulate the monopolies and oligopolies, including prices, to stimulate more competition.

Frankly, I think the word “redistribution” is the wrong word to describe this policy. It should be called “recirculation”. The vast majority of government spending including military is allocated domestically. It is not hoarded so that its recipients can live on its return. It is recirculated through the economy. These monies collected by taxes are spread to more individuals creating better consumers. These consumers are able to spend more in private enterprises, which create wealth for certain capitalists and to some extent for their employees. Unfortunately, this system can be thwarted to achieve the aims of the few rather than the many.

The resistance to the proven Keynesian fiscal philosophy of redistribution persists in the current conservative industrial and political leadership as they resist most types of government spending except military. By not believing in Progressive Economic Principles, they hinder the creation and improvement of effective recirculation programs. They may be politically expedient in supporting certain types of these spending programs, of which Social Security and Medicare are the largest, but by not believing in and in fact hindering effective recirculation, they put capitalistic societies in danger from economic depression-recession or outright revolution.

The Second Flaw: Failure to Create Quality Customers
In most competitive business environments, there is a conflict between managing for a profitable business and paying adequate wages to create a quality consumer. Owners want to pay employees as low as possible to increase their profits. This results in the creation of inadequate customers. To compensate for this effect, the government’s domestic spending agenda helps under-paid workers by providing such programs as education, medical, and retirement benefits etc. that they cannot afford to purchase. Perversely, it is usually these same conservative business owners who oppose these benefits! Labor unions, labor laws, minimum wages and labor regulations offer assistance in overcoming this major problem in our world today. However, quality customers can only be created by paying wages high enough to sustain and enhance every worker’s ability to purchase quality goods and services. Therefore, we should develop standards for a quality customer minimum wage instead of the present understanding and application of just a minimum wage.

There is no such thing as a competitive labor market, not with billions of people in poverty and low cost slave labor. These people do not make good customers. This is a major global problem. The challenge is running a business – microeconomics – with a customer base drawn from a fully employed and adequately compensated work force. There should not be any significant competition within any industry based on hourly wages, for the same job within a geographical region. Competition should be based on many other business factors including labor utilization. Competition for labor, based solely on low wages, reduces the number of customers and their ability to buy more goods and services.

There is a myth that wages should be left to the free market mechanism. This natural inclination of a business owner-manager is to either minimize his labor force or pay less for labor so he can make more profit. Corporate downsizing and offshore flight to cheap labor markets provides classic examples of this decision-making. Granted, these are correct business decisions for increasing profit. But, if all businesses in the economy implemented these policies, their sales will retreat drastically because their customers would not be well paid enough to buy their goods and services. This was basically the cause of the great depression in the 1930’s and the many other severe economic conditions that preceded it.

The world’s production systems can produce enough for everyone – supply – but the demand is not there because the people do not make enough to buy it. When mass production is accompanied by mass consumption, a more evenly spread distribution of wealth occurs. Since wealth is tied to both production and consumption, the economy thrives.

Therefore, businesses should not compete based on the payroll cost of individual workers. They should compete on the many other factors of business such as, labor utilization, marketing, operational efficiencies, management, innovation and quality. Henry Ford was the first to get this right, by almost doubling the daily wages of his workers, so they could buy his Model-T. The economists and businessmen of the day thought this was going to be an economic disaster. They were obviously wrong.

The argument is that the price of goods will substantially increase if wages are raised. The labor cost component is not the only component in the pricing mechanism. A reasonable increase in wages (fringe benefits) does not increase prices at the same rate. It is usually much smaller. Also, wages are deductible so any increases are partially paid by reduced taxation. Therefore, prices can go up somewhat but customer demand goes up also, creating more employment as well as a better economic and community environment. There are rising wages in the current capitalistic system but not enough to create an adequate diverse consumer base.

What currently hides this flaw – creating the quality customer – is consumer debt – credit cards, equity lines of credit and the necessity for working spouses. The government has helped to abate this problem with substantial government employment. The great depression was caused when the public had no access to credit when the Fed tightened monetary policy because their wages could not sustain the economy.

As capitalism gets more efficient it generally requires less labor to produce all the needed goods and services. Of course, this means less customer purchasing power – demand. Thus far, capitalism in the United States has solved some of this problem through innovation and the creation of new goods and services, some of which did not exist a few years ago. But, successful capitalism still might mean a larger government involvement both on a fiscal and monetary basis. In the end, creating quality customers through higher wages is paramount to keeping up demand for goods and services and completes the recirculation cycle.

The Third Flaw: Lack of Long-Term Planning
There is the obsession with immediate – short-term – maximization of profits – “The Quick Buck.” Private capital and management are constantly expecting relatively quick and high rates of return. Government capital is more long-term and not profit oriented, so it works more for the benefit of society, including business. We see this clearly in the investments in infrastructure, education, research and other necessary projects. Government regulations and tax policies should always encourage more long range planning in the private sector.

An excellent example of encouraging long-term planning in the private sector is tax policy on dividends. They should be taxed at the same rate to individuals as wages are, with a small exclusion for lower income earners. However, they should be deductible to the corporations, the same as interest on their debt. This would encourage more equity capital and dividend payouts instead of accumulation. Thus, having the tremendous effect of trying to maintain the dividend resulting in better long-range policies than short-term profits for current stock trading. Generally a business will make substantially more money over time because it survives longer with appropriate long rage plans and operations.

Pollution is another notable example. Does it pay to maximize short-term profits by disregarding appropriate pollution controls resulting in costly clean ups, fines and possible extinction, not to mention killing your customers or making them sick so they have to spend more on healthcare instead of your companies goods and services? No, it does not. Pollution controls greatly enhance the long-term benefits not only to humans but also to all businesses – especially the sectors they regulate.

Remember – the total of long-term profits will always be greater than the sum of all short-term profits added together! Long-term planning yielding long-term profits for both business and the community are the most sustainable economic model over time.

Summary of the Three Flaws of Capitalism
Government funded programs, such as education, unemployment compensation, wage-protecting tariffs and laws, and minimum wages are a necessity. In the general global economic debates, especially after the fall of communism and the unsuccessful socialistic efforts, we hear very little of the flaws of capitalism – free market systems. But, like all human endeavors, these flaws definitely exist and it is important for public and private institutions alike to help overcome them if we want to expand our economic future on this planet.

by Mark Pash, with Brad Parker

Read Creating a Quality Economy, Part 1.
Read Creating a Quality Economy, Part 2.
Read Creating a Quality Economy, Part 3.

Reprinted with permission from Economics for Democrats.

Brad Parker is an award winning artist, songwriter, producer and musician. He has recorded, toured and produced hits in North America, Europe and Asia. Parker owns Indie label Riozen records and is a co-founder of “muzlink.com”. Brad is a prolific political writer and speaker as well. Parker is very involved with Democratic political organizations including: President, Valley Democrats United, Vice President, Progressive Democrats of Los Angeles, Platform Committee of the California Democratic Party and Delegate, CDP Central Committee from the 42nd Assembly District.

Mark Pash has been in the financial industry over 35 years. He received his BS and Masters in Business Administration from UCLA and USC respectively. He is a Certified Financial Planner from the College of Financial Planning. He served on Senator John Edwards Committee of Economic Advisors.

Articles by Brad Parker:

Published by the LA Progressive on July 30, 2008
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About Brad Parker

Brad Parker is an award winning artist, songwriter, producer and musician. He has recorded, toured and produced hits in North America, Europe and Asia. Parker owns Indie label Riozen records and is a co-founder of "www.muzlink.com". Brad is a prolific political writer and speaker as well. Parker is very involved with Democratic political organizations including: President, Valley Democrats United, Progressive Democrats of Los Angeles and Delegate ~ CDP Central Committee from the 42nd Assembly District. His website is: www.riozen.com. His new book is: Left Turn Only - Dispatches From The Progressive Underground (available on Amazon & Kindle)