PROGRESSIVE ECONOMIC PRINCIPLES:
Creating a Quality Economy
By Mark Pash, CFP
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.
Capitalism does significantly raise the
standard of living but not for all and not
enough for many. Therefore, it is up to
government to take a more active role in the
economy in order to overcome these flaws
with as little hindrance as possible. In
other words, one of the major missions of a
federal government has to be macroeconomic
well being. But, the vigorous policies of
government can also promote private
solutions to these flaws. Private
philanthropic and labor union measures can
be encouraged, as can pension programs,
profit sharing and equity sharing plans, job
training, child care and medical insurance.
For some reason, many do not believe that
these flaws exist. All they have to do is
look at the economic record prior to the
extensive gov’t involvement starting in the
mid 1930s: the panics of 1837, 1857, 1873,
1893 and 1907; the Banking Crisis of 1884;
the recessions of 1892-6 and 1921; the
severe depression from 1873 to 1879 and the
Great Depression of the 1930s. The record
after this period of the modern industrial
age is much less volatile with the average
population living substantially better lives
because steps were taken by the government
to correct the flaws of capitalism.
Although we will be discussing these flaws,
and other areas of how to improve our
capitalistic system, it might seem to be an
overly negative analysis of capitalism.
Therefore, I want to impress on you the
enormous success of our system, which
provides the tax dollars and wealth to fund
our government. There is a necessity not to
hinder capitalism but to enhance it thru
effective government policies.
Continued...