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Week of 12.26.08

What's Next for Capitalism?

NOW on PBS asked some of America's leading business and economic thinkers to weigh in on the future of the free market given the current state of our economy. Choose one of the essayists below or scroll down to read them all.

Read James K. Galbraith
Read David Rothkopf
Read Robert A.G. Monks

James K. Galbraith is a professor of economics and government at the University of Texas Lyndon B. Johnson School of Public Affairs. Galbraith is the author of "The Predator State: How Conservatives Abandoned the Free Market and Why Liberalism Should Too."

"Once a generation," a leading congressman said to me back in 1981, "we have to buy back the capital stock."

I didn't imagine that moment would come. But it's here. Credit has frozen. The investment banks have disappeared. The banks, the stock market, the industrial corporations are in crisis. Sales are falling very fast. Output is down. Unemployment is up, but we've only seen the beginning of that.

"Team Bush took the cop off the beat."
As in March of 1933, the money changers have fled. Financial regulation failed, because it was made to fail; Team Bush took the cop off the beat. The wells of trust, which support financial life, were poisoned. For this reason, recovery will not come soon. Certainly the bubble economy, driven by easy credit, is finished for now.

That being so, the new administration faces a vast challenge. Millions of families fear foreclosure; this must be stopped. The states and thousands of cities and towns face revenue losses and service cuts; those funds must be replaced. The auto producers need a loan and a plan; their workers and many others need protection for pensions and health care. A new credit channel —providing capital funds to states, cities and towns for infrastructure and to companies for energy transformation —must be dug.

These are the problems we must deal with now. What's next for capitalism? Our success or failure will determine that.

David Rothkopf is a visiting scholar at the Carnegie Endowment for International Peace, specializing in U.S. foreign policy and economic strategy. He served as the Deputy Undersecretary of Commerce for International Trade during the administration of Bill Clinton.

The genius of all great systems is their ability to reinvent themselves, to adapt and adjust to changing environments. This ability not just to evolve is one of the central characteristics of capitalism. Even in its darkest moments—perhaps especially in its darkest moments—it tears down that which does not work and creates incentives for people and companies to find new solutions, ideas, alliances, technologies that will work better. That's the reason why those whose response to the current crisis is to announce the end of capitalism are so misguided. Capitalism will survive. But it will not, and should not, survive unchanged.

"Capitalism will survive. But it will not, and should not, survive unchanged."
We went too far toward what the French called "hyper-capitalism" of creating markets that lack the kind of regulatory mechanisms and social shock-absorbers that virtually all markets have had since the dawn of time. The idea of the completely free market is an abstraction and a practical impossibility. Since the earliest days of capitalism the rights of market actors have been constrained to protect the public good whether it was by laws enjoining dangerous behaviors or by requiring the a portion of profits go to the state to provide essential services. In our recent past we not only ideologically tried to push back too far against those mechanisms that protect the public interest with regard to markets but a number of revolutions made those mechanisms that did exist far less effective.

Globalization put many corporate activities beyond the reach of national governments. New financial instruments grew so complicated even sophisticated regulators couldn't understand them. New technologies added speed and volatility to degrees that made it impossible for regulators to keep up. And that's only the story in financial markets. In other global markets the challenges have been similarly great.

"We need to remember that capitalism is an amoral system and that a society without a moral basis is unsustainable."
Now, in order to compensate for these failures, we are going to enter an era in which regulation is resurgent both at the national level and at the global level. New institutions will have to be created to ensure that global markets serve the greater good and disruptions within those markets do not produce unacceptable collateral damage to society. This is hardly the end of capitalism. Rather it is simply the beginning of 21st Century global capitalism. It may be different from that to which we have been accustomed for some time, but it will also be perhaps the single most important force defining the global era because it will link nations and define necessary changes with a speed and force beyond the capabilities of any other global system (including government). That can be a good thing, often will be, but we need to remember that capitalism is an amoral system and that a society without a moral basis is unsustainable. That must come, at least in part, from government. In the century ahead, it must come in part from international as well as traditional national mechanisms. Finding the balance between these new and historic forces will be one of the great challenges of the decades ahead.

Robert A.G. Monks, is a shareholder activist and writes widely about the issue of corporate governance.

We have traditional polar alternatives in America -- on the one hand, the wonderful optimism of Ronald Reagan (and Alan Greenspan) that the unfettered market will operate magically (often Adam Smith's "invisible hand" is misunderstood) to produce the optimal result; on the other we have the well intentioned efforts of reformers to create an ideal regulatory system, notwithstanding decades of proof that such operates largely as a tax and does not produce the desired result.

There is a Third Way. The ultimate beneficiaries of the corporate system are the owners -- the stockholders. They have been allowed to profit from corporate profits without being required to commit any resources to the monitoring of their operation. A majority of the ownership of publicly traded American corporations now rests in trustees, the scope of whose responsibility is defined under existing federal laws, as, for example, the Investment Company Act of 1940 and the Employees' Retirement Income Security Act of 1974. No new taxes, no new laws, no new agencies are required -- all that is needed is Executive Branch commitment to the simple proposition that the involvement of informed owners in the governance of corporations is the national policy and the effective enforcement of laws by executive branch agencies.

That said, the Attorney General should assure that the Department of Labor for employee benefit plans, the Securities and Exchange Commission for mutual funds, and the various bank regulatory agencies for bank trusts spaciously apply existing laws requiring fiduciary oversight of portfolio companies. This simple executive decision will have the consequence of placing responsibility for future corporate functioning on those most appropriately concerned with ultimate value. Enforcement of responsible corporate governance can be effected -- and should be effected -- within the framework of the corporate constituency. Government should monitor the results, but primary responsibility should be placed on shareholders.

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