21st Century Capitalism…Adam Smith Would Be Appalled!

One of the key concepts associated with capitalism is “free markets.”  But in recent times, the 21st Century Market has malignantly taken on a life of its own that is destroying individual freedoms.  Adam Smith, the 18th century prodigy credited with being the father of modern capitalistic theory, would be appalled. While we refer to the Market like a person or a thing, it should be the name given to the place where the process of buying and selling occurs. The place could be anywhere. It could be at a local merchant, on the Internet or in a real estate office. For thousands of years, a market was just a place where the process of buying and selling occurred between customers and merchants.  How has the location where the simple process of buying and selling occurs, evolved into society’s key guiding principle?  Perhaps there is no other topic that the world’s governments spend more time on than economics, and their goal of achieving a strong economy continues to be ever more defined as having a strong Market.  However the Market should be viewed as an economic process, subordinated to and guided by higher principles and values of society.  These values include fairness, honesty and responsibility to others to achieve the higher goals of increasing individual freedom to pursue personal happiness.  This inversion of achievement priorities between society’s higher principles and its operational processes such as economics reveals civilization has lost sense of its higher purpose to exist and if not addressed, contains the seeds of eventual collapse.

Our philosophical opposition to interfering with an individual’s right to engage in the “free market,” compounds the problem. We believe that everyone should be free to participate in the Market. But the Market of the 21st Century is not the same market of free market capitalism where buying and selling occurs between people such as consumers and producers, but it is the virtual place of computers where individuals become investors buying and selling financial instruments such as bonds, equities and many other more exotic financial products based on receiving expected returns.  What these investors are seeking is making the most money with their money.  But without a sense of fairness, honesty and responsibility to others, the pursuit of maximum profit and greed takes over as the sole purpose and motivating force of the 21st Century Market.  This manmade Market where investors try to make more money off of someone else has become the primary guiding principle of modern 21st century society.  While most will claim that it is a high human achievement that capital markets have become the backbone of modern society where even the smallest day trader can invest in it, it really demonstrates the de-evolution of humankind and marks the behavior of a primitive species.

We pretend that by everyone being free to maximize their own self-interest, without consideration of the consequences on our mutual interests, is the best way to ensure advancement of our economy and civilization.  The beneficial group effect on society of everyone pursuing their own self interest is the “invisible hand” of capitalism as first described by Adam Smith.  Smith believed that every worker or business owner being free to maximize profits produced the greatest value for not only themselves, but for society in general, even though benefiting others was not the intention.  This is logical, but over 200 years ago during his time, if a business failed to provide good service, everyone learned about it in the small communities and neighborhoods that made up local economies. There was another “invisible hand” at work protecting consumers.  Word spread quickly among local consumers and the detrimental effect on the business would be appropriate.  There was no need for government regulation to stop abuses.

But today in our global world of the 21st Century Market, where the provider of services is separated from the purchaser by many degrees, organizations or individuals can purchase stocks in nanoseconds and sell a few seconds later.  Someone could make a fortune manipulating a stock or currency price hurting people in a community on the other side of the world without them ever knowing how it happened or who did it.   In Smith’s time, those that were wealthy enough to invest, did not do it through a computer, but through personal contact with the owner or the entrepreneur.  The 21st Century Market, however, is not a place where buying and selling occurs between business owners and consumers, but where investors buy and sell financial products totally removed from the actual business function where value is added.  And it can be easily manipulated like the peak oil price of 2008 or the “flash crash” of 2010.  This is not the market that Adam Smith was speaking of.  He was speaking of a flourishing market of individuals free to pursue their occupation and enterprise of their choosing to maximize adding value for themselves and their community.

The Market today is about extracting value from those people who actually perform the service of value to society.  Sometimes it is not even that, but pure speculation and repetitive selling of financial products to create the false image of financial wealth being “created” without any real value being behind it.  The financial industry that manages this process has slowly increased in size and now represents one of the largest segments of Gross Domestic Product or output in developed countries, but itself has not added any intrinsic value to society, but provides a service that manipulates, directs and extracts value from those that do.

The result of all of this is that the beneficial effect of the “invisible hand” of Adam Smith is really becoming invisible in modern society.  Without higher principles to guide the “invisible hand” effects on the economic processes of the free market, this outcome was inevitable.  It should be obvious that government can’t steer a car with an invisible hand let alone a nation’s economy using our current system.  It must be steered by higher principles otherwise it will be steered by individuals and corporations who are the economic winners more interested in attaining more money and power.  Adam Smith’s concept of maximizing one’s value to increase profits is different than the goal of having more than one needs, regardless of the cost to others.  He believed society was successful economically when every person was able to meet their basic needs, not amass huge sums of money beyond his wildest imagination.  A society that looses sight of its purpose, that encourages individualism without consideration of or responsibility to others for the common good of all, has lost its way.  We become less of a civilization and more like a divided classes of people separated by levels of wealth.

Of course it can be argued that there have been many positives to society to hands off economic policies that first permitted free market and free enterprise.  After all, it was what made America the most powerful nation on earth, but originally there was a sense of responsibility to the union and each other that made the accomplishments possible.  The poor, the suppressed and the rejected from all over the world came to America, remembering what it was like to live under aristocracies and the importance of  people to self govern themselves for the betterment of all.  There is not an outpost or colony in the early settlement of America that would have survived if everyone acted in their own self interest.  They worked together to survive where each person contributed as best they could to support the collective effort.  As society evolved and became successful, these higher principles have been forgotten.

While our system of free markets and free enterprise has allowed individuals such as the Walton family to build Wal-Mart into the world’s largest corporation, but to what end?  By working out the inefficiencies of having many small local merchants in the same town, Wal-Mart has been able to reduce local retail employment by up to 40 percent (see Institute for Local Self-Reliance www.ilsr.org).  Just try to start a shoe store, a clothing store, a drug store, a grocery store or many other businesses today against corporate giants like Wal-Mart.

Small business owners and wage earners, jostled by the real “invisible hand” of corporate monopolies controlling the economy and government, become frustrated and eventually defeated in the name of free enterprise competition operating under the protection of the claim – “It’s a free market” which means – “My corporation should be free to do whatever it wants.”  The small business owner does not stand a chance to fairly compete in this “Free Market.”

While there are no laws prohibiting anyone from trying to start a locally owned business, legal authority alone is a poor definition of free enterprise. It ignores the insurmountable odds of succeeding against a massive corporation.  This cycle of monopoly leads to a loss of choice and freedom of what you can buy and who you can buy it form.  Even Adam Smith worried about the threat of corporations dominating industries and governments inappropriately interfering with markets to thwart small business and suppress wages of workers. Today it is obvious his fears were justified; however, even he did not foresee the eventual dominance of the financial industry among corporations.

In summary, we are rapidly losing freedom of choice, most importantly choice of enterprises and occupations, and now even products as monopolies streamline their product lines.  Our once thriving free market system continues to contract dominated by fewer and fewer companies.   The need for government regulation has increased trying to compensate for the lack of values, but this has been met with greater resistance from the wealthy corporate forces that manipulate public opinion trying to maintain status quo.

As a measure of current public opinion, the American Pledge of Allegiance has become a bunch of meaningless words rather than a meaningful and passionate pledge of allegiance to all fellow members of the republic to ensure liberty and justice for all.  Without saying it based on observable current events, the current pledge would be the allegiance to 21st Century Capitalism ruled by the multinational corporations of the world where its everyone for themselves.  As a result, America is losing its leadership in the world.  It is slowly losing what it has worked for and is now beginning to be viewed as being the source of much of the world’s problems rather than being the guiding force for good and individual freedom.  Having let go of its core values and higher guiding principles to let greed and out of control economic processes lead the way, in the end, the financial need for government has only grown larger, ecological sustainability is now seriously threatened, and the gap between the wealthy and the poor has increased.   America and humanity can and must do better.

Without simultaneously considering both mutual interest and self interests, our loss of freedom and our democracy is inevitable. When mentioned that humanity can do better, it was not about band-aids of new government regulation. It was about the need for the world to first develop new principles to guide the future evolution of humankind, and then develop a new economic system in alignment with those principles.  It is time to move to a new level to build upon what Adam Smith started nearly 250 years ago.  Building upon capitalism’s original principles of free markets and free enterprise, humanity can develop a more advanced economic system that works better for the world by creating more economic and personal freedom rather than reducing it.

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