Have We Reached The End of Capitalism, or Just its Next Phase – State Capitalism?

       The resignation of General Motors CEO Richard Wagoner – handed a pink slip embossed with the Presidential Seal -- marks a major change in the relationship between “private” enterprise and the Federal Government.  If all of the previous regulations placed on business, large and small, were like zoning laws, the new way of doing things is eminent domain.

            Just as local governments have held the power to decide “we know better what to do with your property” and take real estate for “highest and best use,” now Treasury Secretary Timothy Geithner is asking for much the same power over major corporations.

            Take one dime of Federal funds, whether a bailout or just a contract for goods and services, and the Feds are now your HR Department, dictating who your employees will be, or not be, how much they will be paid and how they will travel.

            Conservative commentators have been identifying these signs as the “end of capitalism.”   But pure capitalism, where the owners of the business are both in control and reap the rewards has long vanished.  Perhaps if sufficient corporate power had been in the hands of stockholders and not just the management class, we would not be in the current slump – a situation that will be made even worse as stockholders begin to see their already meager dividend checks cut back or discontinued altogether.  This, on top of monumental losses in the stock market value of their securities.

            But we are probably not witnessing the outright end of capitalism.  Instead, the philosophy is rapidly entering its next phase – “State Capitalism.”

            In his seminal study of American business history, The Visible Hand, Alfred D. Chandler, Jr. identifies three phases that capitalism has progressed through – “Family or Entrepreneurial Capitalism,” “Financial Capitalism,” and “Managerial Capitalism.”

            In Family or Entrepreneurial Capitalism, as the name suggests, businesses are dominated by the founder or family of the founder.  In Financial Capitalism, the firm is dominated by representatives of banks and other financial institutions.  In Managerial Capitalism, career executives have almost total control, with directors representing ownership interests taking a decided back seat.

            As we progressed through the past century, Chandler suggests, Managerial Capitalism replaced both Family and Financial Capitalism.  For the most part, actual ownership of capital, whether concentrated in one person or family, or spread out among thousands of shareholders, has taken a diminished role to the managerial revolution in American business.

            Family or Entrepreneurial Capitalism still thrives among the thousands of small to medium businesses in the country.  These are the businesses still contributing the bulk of American jobs.  But few examples of large corporations still utilizing this framework still exist – S.C. Johnson and Mars, Inc. being among these few.  Even in Silicon Valley, the innovators usually surrender control of their brainchildren to venture capitalists.

             For the most part, the days of Henry Ford and Howard Hughes are gone.  In recent months, several members of the Rockefeller family got together and attempted to make some changes in the corporate governance of Exxon-Mobil (corporate descendent of John D. Rockefeller’s Standard Oil Company) but while they still owned a large block of stock, in the end it was not enough and even the Rockefellers could not muster enough votes at the annual meeting.

            By contrast, J.P. Morgan didn’t invent or sell anything – he was perhaps the prime example of the Financial Capitalist, using his own money (along with that of other trusts he controlled) to buy, sell, and conglomerate major businesses in his day such as U.S. Steel and the New York Central Railroad without having day-to-day involvement in the business.  While often criticized as “robber barons”, and to be sure many of the Financial Capitalists such as Jay Gould were out and out crooks, they possessed immense power.  J.P. Morgan was able to stem the tide of the Panic of 1907 by shrewd financial manipulations and the help of other Financial Capitalists.  Individual Morgans have largely disappeared from the scene – Warren Buffet and his Berkshire-Hathaway Corporation being a major exception today.

            But while the creative sparks from Fords and Rockefellers started major corporations on their way, the dominant corporate structure evolved into Managerial Capitalism.  William Durant built General Motors, but he could not run it.  Alfred P. Sloan saved GM by creating an organization that kept the enterprise from collapsing. Throughout the era of Managerial Capitalism, Chandler observes that administrative structures were developed that, “had a permanence beyond that of any individual or group or individuals that worked in them.  Men came and went.  The institution and its offices remained.”

            While it may appear that this fourth phase of capitalism -- “State Capitalism” is springing up from the financial meltdown of late 2008 and the subsequent enactment of ESSA – the Emergency Economic Stabililization Act of 2008 (“Bailout Part I”) the movement in that direction has been going on for sometime.  The first indication was the broad use of the term “stakeholder.”  Control of firms by their owners – SHAREholders – has been giving way to a command control where everyone with any connection – neighbors, customers, regulators, unions, special interest groups, all became elevated to “stakeholders” with heightened degrees of say-so.

            The meltdown and subsequent bailouts of 2008 and 2009 are significantly accelerating this move away from the traditions of all three of the preceding phases of Capitalism toward this new model of State Capitalism.   Central to this shift is the excoriation of the current management class – Wagoner will not be the last CEO to feel the imprint of Barrack Obama’s Gucci loafers on his posterior. (Perhaps the CEO-in-Chief wears an American made Allan Edmonds or SAS shoe, but somehow that is doubtful.)  In the era of the newly emerging State Capitalism, Barney Frank and Chris Dodd envision themselves as the new J.P. Morgans with the power to singlehandly straighten out the mess. 

            To those now in power, the transition to State Capitalism is preferable to outright Socialism for several reasons.  First is accountability.  A full press move to Socialism, as was accomplished in Great Britain after World War II, would require a full governmental takeover of both assets AND responsibility for key sectors of our economy.  Managers and employees would instantly become government workers.  Even more important, the Administration and its “Progressive” allies would lose Big Business as a whipping boy.  Under State Capitalism, the government can still point fingers at corporate behavior it disapproves of, wait for negative public opinion to develop (much as it did with the AIG bonuses) and then straighten out those “rich guys” through the use of intimidation or new regulations.

            Unprecedented authority with almost no responsibility will be the identifying characteristic of this new State Capitalism.  If a government-imposed measure should work, Congressmen and bureaucrats will be lining up for the credit.  If it flops, Washington will simply have another CEO walk the plank.

            To be sure, there are many reasons to criticize today’s crop of overindulgent, overpaid and over-important corporate CEO’s.  And there were steps that should rightly have been taken by shareholders 20 years ago. Some serious housecleaning, salary and perk pruning and regulation can still be imposed, but by the OWNERS of these corporations, not by the government.  And it should be done today, before another Fortune 500 firm turns a new issue of Class B voting stock over to the Treasury Department in exchange for bailout money to keep doing what they have always been doing.

            To their credit, Conservatives, in lockstep with Chamber-of-Commerce Republicans have railed against unnecessary regulation.  But the end result of both the Reagan Revolution and the Contract for America has been unchecked corporate excesses that in part led us to the current mess. 

            Rather than the eventual massive bailouts of Wall Streeters, the mortgage crisis could have been averted years ago – possibly as late as the summer of 2008 -- by reasonable and limited regulation.  Just the re-application of old fashioned usury laws would have curtailed the massive increase in monthly mortgage payments on adjustable rate loans and thus would have put the brakes on runaway foreclosure rates. 

            If the deceptive and dangerous 2-28 mortgage (promoted by Freddie Mac and Fannie Mae) with its build-in interest rate quadruplers had just been outlawed, some measure of housing affordability could have been preserved and the foreclosure tsunami would have never been set off. 

            But with little to hold it back now, the current economic-political situation is rapidly pushing us into this new era of State Capitalism and much of American industry will be soon operated along the lines of Amtrak.  We can only hope that State Capitalism will be so unsuccessful that it does not take a firm foothold and that its tenure will be brief.

            For now, all there is left to do is to kick the rest of the CEO’s off their private jets and gear up to bail out Gulfstream tomorrow.