The Fundamental Question


By: Guest Authors

By: Fred S. Fraenkel

The fundamental question crystallized for me last Thursday morning. Arianna Huffington and Eliot Spitzer were having a conversation on CNBC. The hubris and strength of conviction exhibited by two people who have no claim to moral authority was stunning. On her website the Queen of Braggadocio had a front page self authored article entitled, “Out of the Senate and into the Squawk Box, self-promoting that she had testified at the Senate the day before and today was guest hosting on CNBC. However, putting aside my distaste for the personalities, their conversation did focus me on the fundamental question of this era. They both were ranting and raving about the lack of regulation of the banks. They both were demonizing bankers and investment managers in an outrageous manner. Most bankers go to work and do their jobs and love their country and their families. The administration and its tools are making financiers scapegoats in an extreme manner not seen since Nazi Germany. What is the agenda? The agenda is quite clear. They want to move the country on a path to state directed capitalism.

Huffington, Spitzer and later Elizabeth Warren, the Chairperson of Congressional oversight, all laid out a carefully rehearsed story of how the only way we can remove the boom bust nature of cycles is to layer in more benevolent regulatory regimes. That’s it!!! That identifies the fundamental question?

Do we want to remove the boom bust nature of cycles? Can we remove the boom bust nature of cycles? What would be the cost of removing the boom bust nature of cycles.? This group all, through ignorance, concluded that it is obvious that we don’t want cycles. They believe it is evil that things get overdone at the end of a cycle. They believe the cost associated with overheating is recessions and pain. What they are ignorant of is the cost associated with not having cycles. Let’s set aside the nature of cycles in capitalism for a moment and first explore whether state directed capitalism might be better.

In 1979 Phil Donahue interviewed Milton Friedman and challenged him on the flaws of capitalism. (see Beacon AM Perspective from a Wise Old Owl, March 12, 2009) Milton Friedman read him the riot act and the discourse is still instructive today:

Donahue: When you see around the globe the mal distribution of wealth the desperate plight of millions of people in underdeveloped countries, when you see so few haves and so many have nots when you see the greed and the concentration of power……did you ever have a moment of doubt about capitalism, and whether greed is good idea to run on?

Friedman: Well first of all tell me is there some society you know of that doesn’t run on greed? You think Russia doesn’t run on greed? You think China doesn’t run on greed? What is greed? Of course none of us are greedy …it’s only the other guy. The world runs on individuals pursuing their separate interest. The great achievements of civilization have not come from government bureaus. Einstein did not construct his theory on orders from a bureaucrat. Henry Ford did not revolutionize the automobile industry that way. The only cases where the masses have escaped from the type of grinding poverty you’re talking about, the only cases in recorded history, is where they have had capitalism and largely free trade. If you want to know where the masses are the worst off it’s in exactly the kind of societies that depart from that. On that the record of history is absolutely crystal clear. There is no alternative way so far discovered for improving the lot of the ordinary people that can hold a candle to the productive activities that are unleashed by a free enterprise system.

Donahue: But it seems that capitalism rewards not virtue but the ability to manipulate the system.

Friedman: And what system rewards virtue? Do you think the Communist Commissar rewards virtue? Do you think a Hitler rewards virtue? Excuse me and pardon me, do you think American Presidents reward virtue? Do they choose their appointees on the basis of the virtue of the people appointed or on the basis of their political clout? Is it really true that political self-interest more noble somehow than economic self interest? You know I think you are taking a lot of things for granted, and tell me just where in the world do you find these angels who are going to organize society for us. I don’t even trust you to do that!!

It is absolutely amazing that an explanation of that caliber can come out of a man’s mouth unrehearsed!

The decades of the 80’s and 90’s that followed this explanation were punctuated with the ascension of companies like Intel, Microsoft, Bed Bath, Amgen, Amazon, and Google. Our population has derived huge benefit from cellular telephony, email, DVDs and video on demand, organic food, and most importantly improvement s in healthcare that has led to an explosion in life expectancy. So it is even more amazing that some liberals are willing to consider throwing away a system that has served us well throughout the 233 year history of our country because we believe that the last eight years didn’t turn out as expected.

Also since 1979, Russia has abandoned communism in favor of Oligarchic Capitalism. China abandoned communism in favor of state directed capitalism. In fact the only Communist country from that time period that is still in place is Cuba. Why did these countries take on a different form of capitalism than the one they emulated in the United States? This is because free market entrepreneurial capitalism requires the government to largely cede control to the people. The Fundamental Question now is: Are things bad enough that We The People want to relinquish control back to the government?

I would argue things are not bad at all. The Cost of Capitalism as explained by Robert Barbera in his recent book is boom bust cycles. Things go very well for a period of time and as people become more and more comfortable with the cycle they are in they take more and more risk and exhibit more and more greed until extremes are reached and the cycle ends. This is the natural course of business cycles in free market capitalism. Can government play a role in abrogating the extent to which the extremes run their course? Yes! Is it government’s job to eliminate the cycles? No!!!!!!!

The cost of eliminating the cycles and government assuming the role of the allocator of capital is nothing less than the extermination of entrepreneurial spirit, innovation and yes, increasing standard of living for all citizens. There are many players, who may or may not have good motives, who don’t understand the nature of the economic institutions they are toying with. If we go down the path of the government grabbing power and trying to eliminate business cycles we will destroy the productive capacity of our economy and gut the country of its will to do better.

It doesn’t matter if this is done through scapegoating bankers and financiers. It doesn’t matter if this is done by demonizing managements who make to much money. It doesn’t matter if this is done by rallying the majority of the country by explaining to them that they have been wronged. The result will be the same. The United States will take a huge step backward in its mission of delivering the best standard of living to the vast majority of its citizens.

The only question will be when we will realize this. The Democrats have effectively labeled the Republicans, “The Party of No”. This means any unexplained objection to the lurch toward more government control under way will be explained away as obstructionist. The Republicans may or may not be smart enough to pick up the mantle of defending entrepreneurial free market capitalism. If they don’t, voters won’t realize something really bad has happened to the country until it has happened.

Of course there is also the possibility that some Democrats will find a move away from free markets repugnant. Unfortunately, when they weigh their beliefs against the political price of going against a sitting popular Democratic President the odds are they will remain silent.

President Obama may truly believe that government seizing control of the allocation of capital and regulating business is the best path to the most people having the best life. I’m sure he was taught this in his earlier career pursuits. The evidence as cited by Milton Friedman is that throughout history there is no case of this being true. Not only is political self-interest no nobler than economic self-interest, in its current iteration It comes with the risk of disturbing economic self-interest

The risk the current administration runs is no less than that of removing initiative and a desire to better oneself from our economy. Instead of demonizing bankers and managements and financiers, President Obama would do well to look to his hero, Abraham Lincoln, for guidance on some of the benefits Americans have realized in 233 years of entrepreneurial free market capitalism. Lincoln said, “Property is the fruit of labor…property is desirable…is a positive good in the world. That some should be rich shows that others may become rich, and hence is just encouragement to industry and enterprise.”



Fred S. Fraenkel
Vice Chairman and Chairman of Investment Policy Beacon Trust Company

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