Capitalism and democracy have enjoyed a remarkably successful partnership, each supporting the other when needed. The successive generations of prosperity that this partnership has yielded, though, have wrought an unintended byproduct: an alarming lack of interest in either institution.
Many, if not most, Americans seem to believe that capitalism and democracy have reached some sort of critical momentum, that both will simply move forward through time essentially unchanged by internal stress or external assault.
A new book challenges that view, and suggests instead that capitalism has already changed – and not for the better.
“The Battle for the Soul of Capitalism” is in one sense not a new book at all, and its author, John Bogle, is one of those rare financial writers who would take that as a compliment. It is an updated, pointed, well-argued restatement of an idea now over 80 years old, by someone with indisputable credibility on Wall Street.
Bogle is the founder of the first index fund, Vanguard, which has since grown into the Vanguard Group, a family of investment funds with assets of over $700 billion. He writes that capitalism has experienced a pathological mutation from a system run by owners to one controlled by managers – with disastrous effects.
He is correct, of course, but it is a change that occurred even before the 1920s. Thorstein Veblen wrote about this in 1923 in his essay “Absentee Ownership and Business Enterprise.” He pointed out that owners – stockholders – had little to say about a company’s activities. Managers, who controlled the enterprise, had their own goals and agendas, which rarely coincided with those of the owners.
At the time, no one paid much attention to Veblen’s concerns about how capitalism was changing. Investors were focused on making a quick buck in the soaring stock market, and the same idea was taking hold in the general public. It was very much like the stock market bubble of the 1990s, without air conditioning, cell phones or rap music.
The public and political reaction to the collapse of the stock market in 2000 was very similar to what happened after the 1929 crash. We suddenly realized that corporate management was capable of boundless duplicity and excessive self-interest, and we looked to government to straighten things out and preserve market capitalism. In both cases, the role of speculation as a catalyst for the mess was given very little attention.
That is why Bogle’s book deserves our attention. He, like Veblen, recognized that when speculative stock ownership replaces long-term investment, it creates a structural change in corporations and in free-market capitalism itself. He writes that speculation – what he calls the “rent-a-stock” culture – not only encourages a self-interested management, but also hollows out the market itself.
Bogle describes the mutual fund industry, which he knows intimately, as something that is operated primarily for the benefit of fund managers – and he has the data to back this up. A more important point that he makes about corporate management’s corruption is that it isn’t “just a few bad apples.” He makes a strong case for a causal relationship between management malfeasance and financial markets hollowed out by speculation.
Whether people will pay any more attention to Bogle than they did to Veblen is an open question. Veblen, although famous for the phrases and ideas he originated – “conspicuous consumption,” “captains of industry,” “industrial sabotage” – had a credibility problem among his academic peers. Some of this came from his irreverent approach to institutions – he once threatened to subtitle his book on American higher education “A Study in Total Depravity” – and some from his lack of restraint in the face of his apparently irresistible appeal to faculty wives.
Credibility issues aside, Veblen was telling us something we didn’t want to hear about capitalism, corporations and markets, and that, at bottom, was why he wasn’t taken seriously. Bogle himself, when testifying before the U.S. Senate in November 2003, noted this characteristic when he tried to explain why the financial industry never understands the need for reform. He quoted Demosthenes, saying, “Nothing is easier than self-deceit. For what each man wishes, that he also believes to be true.”
It is not likely, then, that we will pay much attention to the problems that Bogle points out. And we are not likely to gain much more than we already have from changes in the legal and regulatory environments.
Our main hope, it seems, is if some policy-makers read Bogle’s book and realize that while we cannot eliminate speculation in the stock market, we can make it more expensive – and long-term investment more attractive – by changing the tax code. It’s worth a try.
James McCusker is a Bothell economist, educator and consultant. He also writes “Business 101” monthly for the Snohomish County Business Journal.