At present, individual Saudi Arabians (in a centralized monarchy) can buy stock in productive facilities in other countries, and they can purchase gold, yachts, Rolls Royces, jewels, art and other presumptive stores of value. The government can buy guns and planes and port facilities. But Saudi Arabia itself can only become a rich nation if it can transform the streams of income from oil into capital goods at home, with a yield for the future. Material resources become durable wealth only when mixed with other resources in profitable combinations. One problem of the Saudis is that such combinations are extremely perishable; factories do not age or travel well. In addition, in a politically unstable land it is difficult to evoke the human attitudes the commitments and loyalties on which long-term yields rely. There is a constant temptation to take the oil profits and run to Switzerland and Wall Street.
From the air an industrial complex in New Jersey looks much like one in Iran, and a nationalized factory scarcely differs from a private one. The workers and managers under socialism resemble their Western peers closely enough to give rise to theories of convergence the notion that the two systems are becoming more similar as the years pass by. But for all the recent decline in productivity growth in some Western nations, socialism and capitalism are not converging at all in their ability to provide food and shelter and higher living standards for their people or to develop new industry and technology for the future. On the contrary, in these vital areas the two systems are rapidly diverging as any cursory comparison of conditions on the two sides of the iron curtain will demonstrate. The US alone produces half the worlds food exports and 40 percent of its wealth, while socialist countries still look to the West for sustenance and technological advances. The differences between the two sides come not from natural resources or industrial plant, but from ideas and attitudes.
Work indeed is the root of wealth, even of the genius that mostly resides in sweat. But without a conception of goals and purposes, well-paid workers consume or waste all that they earn. Pop singers rocking and rolling in money, rich basketball stars that symbolize wealth to millions, often end up deep in debt with nothing sold to show for their efforts, while the poorest families can often succeed in saving enough to launch profitable businesses. The old adages on the importance of thrift are true, not only because they signify a quantitative rise in investable funds, but also because they betoken imagination and purpose, which make wealth. Few businesses begin with bank loans, and small businesses almost never do. Instead they capitalize labor.
In a country like the US where immigrants arrive in droves, the entrepreneurial spirit thrives. Money has no hatred or love, it is a means to provide. So while many of native Americans waste their time arguing about the injustice of American capitalism, immigrants arrive daily to take their shot and most succeed.
British protestants (WASPS) were passed in per capita earnings after WWII by Irish, Italians, Germans, Poles, Jews, and Asians. What has happened since 1964 was a vast expansion of the welfare rolls that halted in its tracks an ongoing improvement in the lives of the poor, particularly black and left behind a wreckage of broken lives and families worse than the aftermath of slavery. Intact black families are doing better than ever; the condition of poor blacks has radically worsened.
On ferry street, in the middle of Newark, where unemployment was at 20 percent, Cubans and Portuguese with no government aid or bank loans created a bustling retail district of bakeries and furniture stores. In Florida, 300,000 Cubans found work at 93% rate where 16% unemployment existed before.
The failure of state subsidizing and individual investment is disturbing. Subsidizing companies by the government rarely makes them profitable. One entrepreneur with energy, resolution, and charisma could turn 400,000 dollars into a small fortune for himself and a bonanza for the economy, accomplishing more than any number of committee-bound foundations, while a government agency usually requires at least 400,000 dollars to so much as open an office. This is what happened when Peter Sprague an entrepreneur took 400 Gs and invested in a chicken manure business in Iran. After seven years, he began making a profit. Eventually, he invested in a semiconductor business which grew from a company of 300 to 34,000. He also saved Aston-Martin in the early 80s.
Faith and imagination are the most important capital goods in the American economy, that wealth is a product less of money than of mind. 80% of those people who were poor in 1969 escaped poverty within two years, only to be replaced in the distributions by others too young, too old, too improvident, or too beset with children to manage a positive balance in their asset accounts.
Many of the unincorporated businesses that have gained some 500 billion dollars in net value since World War II (six times more than all the biggest corporations combined) were started in households of zero assets according to the usual accounts. The conception of a huge and negotiable gap between poverty and wealth is a myth. There are many immigrants who pass up scions of wealth on their way down. Capitalism breeds new wealth. Poverty is less a state of income than a state of mind and that the government dole hurts those that are reliant on it.
As for the rich who are vilified by almost anyone non-rich, find themselves on a slippery slope. The magic of compound interest has met its match in compound inflation and taxes. These two forces hit hardest at both the assets and earnings of the rich, destroying about a tenth of their income whenever the price level rises 2 percent or more. Even such families as Melons and Rockefellers while remaining wealthy, are in steady decline, diffusing their assets among scores of descendants, dissipating it in collapsing securities or falling companies at home and abroad, incarcerating it in foundations, and selling off or donating to nonprofit institutions, or even to government, some of their principal holdings of land and personal property.
In future years the members of such families will remain well off, but they will not command the heights of the system or constitute a significant concentration of wealth in a multi-trillion-dollar economy. In America, one can say with assurance, the scions of the rich only rarely themselves get richer, though they are often replaced by yet more successful families from lower echelons of income. Fears of a hereditary plutocracy are as groundless as hopes for a withering state.
Within capitalism, all riches must finally fall into the gap between thoughts and things. To be negotiable, an asset must afford an income stream that is expected to continue. The expectation may shift as swiftly as thought, but things, alas, are all too solid and slow to change. The galleries of pop art paintings, the railroad lines that grid Americas rural villages, the factories that made the giant computers of the sixties or the best computers of last year, the warehouses that contain them, all the once bustling canals, remaindered towers of best-sellers, cornered markets of rubber trees, all the mighty textile mills of Massachusetts and ironworks of Pennsylvania, the spectral waterwheels and ghost farms of New England, all the great printing presses and linotype machines and the machine tools that shaped them-the images abound of the evanescence of value in the most ostensibly massive and enduring physical forms. When facts or fashion change, the most imposing machines of production often must be sold at well below cost and used in far inferior ways.
In general, the more liquid wealth is, the closer it is to money, the less likely it is to grow fast, the more vulnerable it is to the changing money supplies. Savings accounts, after inflation and taxes, have lost money for decades. The less liquid an asset the more likely are large returns or losses. The least liquid and most promising of all are to build and own a company. If it goes public in the stock market, the owners can win paper fortunes beyond belief, but they can sell only 1.5% of their shares every six months (unless they find a buyer for the entire firm). In a partial sense, a rich man resembles a gambler betting against the house. The laws of probability declare that his chances to hold or enlarge his fortune depend on the relationship between the size of his fortune and the amount of money commanded by the house. The rule of gamblers ruin dictates that his ultimate collapse is 90% certain if his opposition has ten times more wealth than he does and the game lasts for more than 900 plays. If he has only 1% as much as his opposition, his ruin is 99 percent certain within just 50 plays.
According to those who sponsor strong centralization, the economy is a zero-sum game where every person must fight for his piece of the pie. If free enterprise were pure chance, and a zero-sum game like gambling (in which one mans gain is necessarily anothers loss), very early ruin would be assured. Enterprise is only partly chance, so the businessman has a much better opportunity to preserve his winnings than a pure gambler. But rich families face over time a series of fortuities that are sure to bring them down rather rapidly. As the money is passed along, the laws of probability gain in influence and the capabilities of the managers tend to decline. In general, the great fortunes are certain to rise and fall more in accord with the laws of probability and entropy, than with those of compound interest.
This process is the secret of capitalist ferment and creativity. New ideas gain resources and ride to the top while old wealth withers. The chief threat to this system is taxation with rates so progressive-graduated so steeply to capture increasing portions of larger incomes-that the rich refuse to risk their money. Wealth is withdrawn from productive uses, hoarded in gold or collectibles, or put in tax shelters (businesses of little economic value except in relation to the tax laws). The rich still lose their money, but they no longer contribute to the economy. The movement of elites, up and down, becomes more sluggish and the performance of the system less dynamic.
It is only individuals who can be original. Institutions shy away from unproven or unfashionable ideas. Therefore, they cannot afford to create new knowledge. It is the rich who by risking their wealth ultimately lose it, and save the economy. In the still booming year of 1970, some 90% of the gross incomes of millionaires came from businesses and partnerships and stocks; the businesses and partnership losses were 40% as large as the gains. In 1978, the 250,000 millionaires were still at it-though to a lesser degree- investing half their money in stocks, some 20 percent in private businesses, and only 14 percent in government bonds and other supposedly safe securities. That is the function of the rich: fostering opportunities for the classes below them in the continuing drama of the creation of wealth and progress.
It is the middle class who is demonstrably devastated by divorce and separation; they leave their jobs, income plummets, health deteriorates; they drink and philander; their children behave badly in school. But the poor and their children are assumed to be relatively lower income and plague of family breakdowns; at least any resulting lower income and employment levels are said to be due to discrimination, and the behavior of the children is regarded to be little influenced by the absence of fathers. In essence, the middle class shits just like the poor.
Immigrants in the past earned money first by working hard; their children got the education. The rising average incomes of previous groups signify not the smooth progress of hundreds of thousands of civil service or bureaucratic careers, but the rapid business and professional success of a relative few, who brought their families along and inspired others to follow. Poor people tend to rise up rapidly and will be damaged by a policy of redistribution that will always hit new and unsheltered income and wealth much harder than the elaborately concealed and fortified winnings of the established rich. The poor benefit from a dynamic economy full of unpredictable capital gains (they have few capital losses!) more than from a stratified system governed by educational and other credentials that the rich can buy. Capital gains taxes are the worse! Married men work harder because they have a family to take care of. A married man is spurred by the claims of family to channel his otherwise disruptive male aggressions into his performance as a provider for a wife and children. Civilized society is dependent upon the submission of the short-term sexuality of young men to the extended maternal horizons of women.
It is the familial anarchy among the concentrated poor of the inner city, in which flamboyant and impulsive youths rather than responsible men provide the themes of aspiration. The result is that male sexual rhythms tend to prevail, and boys are brought up without authoritative fathers in the home to instill in them the values of responsible paternity.
Big companies typically start slowly as they make their initial investments in a new product, and then enter a period of very rapid growth as markets are developed and productive methods are perfected. Finally they reach a stage of routine mass production. In any economy, only a relatively small number of large companies ever arrive at this final phase, looming over the national and world economies. These firms have found such efficient ways to make their product that few competitors can arise. Invariably they dominate their fields, which tend to old markets for relatively routine products. Their great efficiency derives from many years of making the same thing and incrementally improving it and perfecting the means of producing and selling it.
Even when a breakthrough is made at a large corporation, the new item is usually launched commercially by smaller businesses, often started by breakaway teams of engineers and managers from the parent firm. Just as none of the carriage makers and buggy whip producers could create a salable automobile and the gaslight and candle businesses neglected the promise of electricity; just as new companies arose to dominate each of the new phases of aircraft and air-engine development; just as Kodak failed to pioneer the instant camera and the slide rule people at Esser succumbed without response to the hand-held calculator; just as IBM dragged behind other companies like Dell in adopting major innovations, and Ford and General Motors could not be expected to jeopardize their established plant and equipment by radical changes in technology until other companies had proven them out.
Large companies play a vital role in both the national and world economies. Large corporations both consolidate and rationalize the gains of others and act to countervail, the powers of other large firms, and even the government itself.
The plummet of one large company takes hundreds of small companies to counteract but they will. In the early 1980s the big firms up to that point, GM and AT & T, were failing but in its place eventually came new firms like Microsoft, Dell, and Intel. Government must allow the marketplace room for smaller firms to grow.
Throughout history, the one class that seems to be the downtrodden will rise in the centuries to come. Even the WASP was beaten down by Romans, Danes, Frenchman, and other invaders. Liberal rich, instead of redistributing their own money discharge their sense of guilty unease by assuming postures of moral hauteur expressed in demands for a general redistribution of wealth. They support various policies that chiefly inhibit the emergence of new wealth without significantly threatening their own.
The problem of integrating the races and classes in America can be summed up in one principle: the more successful a society is in achieving equal economic opportunity, or so-called meritocracy, the more separate tend to be its economic classes. Integration and equal opportunity are inherently conflicting goals. There may have been more commingling of the races in Southern slave society and more association of different classes in medieval feudal England than there is in contemporary America.
Behavior of the poor should never be copied. For the upper classes to accept and pander to lower-class behavior is to betray the lower class and assign them to permanent poverty, erode the requirements of growth and opportunity, and foster processes of cultural and economic deterioration. Only people who have already made it can afford the self-indulgent styles of lower-class life. Decent housing is an effect of middle-class values, not a cause. The housing of the poor can only be made decent by selling it to the non-poor by gentrification.
What prevails in the US and in every developed country is the desire for economically homogenous communities, where there is no fear of being robbed, mugged, or balefully resented. There is no alternative to assimilation in modern society.
The war against the rich thus continues in the worlds wealthiest country. It is a campaign now led and inspired by the declining rich, to arouse the currently poor against the insurgent successful business classes. By their communicative skills and social refinements, the defecting upper class can exert influence and mobilize support far beyond their own numbers. They can dominate the media and the foundations, the universities and the government, all the secure but ultimately enriching havens for those who refuse to enter the real arena of upwardly mobility-the businesses that are necessarily the prime source of wealth in still capitalist America. The victims, though, of the war against wealth, even they are inveigled to join its ranks, are always and inevitably the poor, the ones who still need a mobile society. The declining rich of all ethnic groups are happy to stay put near the top, administering ideological benefits for those below and adopting the fashionable image of a progressive new class to disguise the reality of the old class in decline.
The gold behind the dollar did not constitute its worth any more than an insurance policy confers essential value on a cargo, or a house. The worth of the dollar always springs from the productivity of the economy-the goods for which the money could be exchanged; the worth of a house drives from the shelter it affords.
The health of a capitalist system depends on settling a balance between its insurance features and its risks, between solidarity and competition, savings and investment.
The ultimate strength and crucial weakness of both capitalism and democracy are their reliance on individual creativity and courage, leadership and morality, intuition and faith. Capital can grow no better without cooperation and security than it can without the spurs of risk and rivalry. In striking a balance, moreover, leaders must understand that risk is finally inevitable in a tumultuous world. Government can displace risk-by insuring against its effects on some citizens-but cannot finally escape it. If the insurer state attempts to absorb all risks of individuals and businesses-of unemployment, inflation, foreign competition, waning demand, accident, and disability-it will find itself overloaded with larger perils and responsibilities that it can well manage. The insurer state, like Lloyds of London, can overreach itself. The fact that, unlike Lloyds, it can print money to pay its bills can only delay a day of reckoning. The near bankrupt government may even be tempted to consolidate its dangers in war-the one risk that the state can manage far better than business. However, the entrepreneurial ventures of Napoleon ill-behoove the modern ruler.
There are many caveats that occur in capitalism naturally (inflation) and artificially, meaning government intrusion (taxes and tariffs). Inflation is the belief that ones buying power can exceed ones supplying power. If money, which is the instrument of demand, exceeds its value than money becomes nothing more than scraps of paper. Even if the money is convertible to gold, they will be worth very little if the moral fabric of production and exchange develops. In a collapsed economy, where trust everywhere fails, a man might trade an ounce of gold for a pound of corn.
The result of all this activity by both the public and private sectors-shifting, diffusing, equalizing, concealing, shuffling, smoothing, evading, relegating, and collectivizing the real risks and costs of economic change-is to desensitize the economy. It no longer responds so well to the bad news of scarcity and disequilibrium-the high prices that signal new opportunities-and no longer provides so dependably the good news of creativity, invention, and entrepreneurship.
Another cancer to capitalism is welfare. Every democratic society should make certain that its citizens dont starve but welfare is often exploited by its customers and the bureaucrats who give other peoples money to them. Much evidence however, indicates the opposite, that the programs have surprisingly little beneficial effect, but they do have a dramatic negative impact on motivation and self-reliance. In recent decades, the problem of moral hazard has emerged in an even more far-reaching way. The welfare state has been displacing not only private families, charities, and schools, but also private savings and insurance. The diastolic process at the heart of capitalism, whereby the system pulls in the savings that sustain it, has been faltering seriously: savings as a proportion of the GNP dropped to under 4 percent in late 1979, a thirty-year low; and over a five-year period in the late seventies US rates of personal savings stood at about one-forth the Japanese level of 24.9 percent, only somewhat more than one-third the French rate, and half the rate of even Britain. A main reason is social security; low savings are a moral hazard of excessive retirement benefits compared, for example, to those in Japan.
Welfare families carefully calculate their benefits and deliberately choose to break up, that teenaged girls forgo contraception in the assurance of welfare, or that welfare mothers reject tenders of marriage consciously in order to stay on the dole. All these things may happen; but in the more usual pattern, welfare, by far the largest economic influence in the ghetto, exerts a constant, seductive, erosive pressure on the marriages and work habits of the poor, and over the years, in poor communities, it fosters a durable welfare culture. Necessity is the mother of invention and upward mobility; welfare continuously mutes and misrepresents the necessities of life that prompted previous generations of poor people to escape poverty through the invariable routes of work, family, and faith.
Overcoming poverty requires work, but where children cant work, payments to nurture and support the next generation represents a social policy with its heart in the right place.
An equal rights effort-even an affirmative action program-was feasible when concentrated on the 10 percent of the American people with real grievances. But affirmative action that potentially involves more than half the work force is necessarily an exercise in futility regardless of whether thousands of women and lawyers are gratified. The victims of this growing mockery are black men who might have benefited from a disciplined program but are now forced to join an undignified queue with such improbable victims as Yale coeds molested by their tutors, ex-addicts denied reemployment, assistant professors at Smith rejected for tenure, and telephone operators who discover years later, that what they had always wanted was to climb a pole.
This is only the beginning, however, of the negative impact of centralized-government programs on blacks. Government agencies make far more diligent efforts to recruit blacks than whites, visiting black campuses some twenty times more often on a proportionate rate. The black leadership is increasingly orientated toward Washington as the source of all progress, toward discrimination as the root of all evil, and toward secure billets in bureaucracy and away from the risk-taking and enterprise that is the source of most wealth.
Government employment, where it has become a kind of religion of numbers in which faith in testing devices can completely eclipse works. No matter how well you do on the job, how badly you do-nearly-you cannot be moved out if your score is OK. In general only the numbers count.
What education for employment is required can be given selectively to motivated workers, who learn rapidly for some clear purpose. As Piore, Thurow, and others often point out themselves, most skills in the US economy are learned on the job and well under half require the knowledge entailed in a high-school diploma.
The influence of credentialism, like the influence of the racism myth, reaches beyond its actual application in the job. To tell black dropouts, who are reading and computing at the fifth-grade level, that you cant get a job without a high school diploma is as destructive as telling them that they cannot get ahead because of the racist white establishment. Both claims are essentially false, but both, too, are effective in reinforcing the blandishments of the welfare culture and the seductions of the street. HEW spreads millions to propagate these myths. Especially noxious is the anti-dropout campaign-TV ads artfully aimed towards blacks-that graphically communicate the hopelessness of life without school credentials.
There is no point in denying that the job market has failed to work well for some groups of blacks in the US. Inner-city teenagers are now famous victims and offenders, with soaring rates of unemployment, illegitimacy, and crime. But it is perhaps more revealing to consider the fate of a previous generation of successful black family men who were in their early thirties in 1957. This group of blacks had already acquired good jobs in the primary sector and were ranked among the top third of all American earners. Since the 1950s they have not committed crimes or otherwise attracted sociologists, but they comprise a group of men, presumably victims of segregation, who had shown great ability in their work and thus could be expected to respond well to the elimination of racial barriers.
The success of any economy relies on the freedom permitted by the government. An example in the US is the post-Civil War South where racism reached preposterous levels. However, the difference between those areas where tolerance of different races was accepted triumphed over those areas which were embedded in racial intolerance. Such was an example with Atlanta vs. Birmingham: incalculable gains to the nation accrued from the civil-rights effort that brought the energies of blacks more fully into the economy and transformed the South, with cities such as Atlanta that welcomed the change, growing twice as fast as cities such as Birmingham that resisted it.
The crucial goal of all antipoverty policy must be to lift the incomes of males providing for families and to release the current poor from honeyed snares of government jobs and subsidies.
Meanwhile, the prevailing research on employment depicted most unsubsidized jobs as bad for health and family. According to the socialist litany, farm workers are woefully exploited; industrial workers are poisoned; secretaries are sent for coffee and Danish; assembly-line workers are made to perform repetitive tasks; telephone operators are denied the opportunity to climb poles. Technicians in high-technology companies destroy the jobs of others. Workers in energy companies cause cancer and traffic jams. In fact, the only employment generally acceptable in scholarly circles is work which does not produce anything. Never mind that manufactures of bologna, unleaded gasoline, and screwdrivers, grain farmers and real estate salespeople actually do more for their fellow human beings than any number of bureaucrats and teachers of sociologythe new class members, their status fixed and enriched by tax exemptions, their tenures and civil-service protections firmly emplaced, manage still to perpetuate the fiction that they are somehow more devoted to the public interest than the drivers of eighteen wheel tractor trailers.
Unemployment compensation like all government insurance programs is full of moral hazards; the average family receiving it now has an annual income well above the national level. Economists and sociologists who have no idea how the system works will tell you that unemployment benefits, which grow steadily as inflation pushes workers into higher tax brackets, are not a major cause of unemployment. But any worker knows better. For this middle-class welfare system, moreover, you dont have to break up your family. The worker gets the money. The problem is that the program does not apply to most of the jobs that are held by the poor-the relatively short-term clerical, agricultural, and manual realm associated with much of Americas hard-core unemployment. An intelligent social policy would substantially reduce the unemployment-compensation benefit level and extend the system to all jobs, thus restricting the blight of welfare. But American politicians imagine that is generous to destroy poor peoples families and middle-class work habits.