Recent events have begun to reveal certain problems with the structure of our economy, problems that many of us have been aware of for some time, but many have been struggling to clearly articulate. What I mean by this, is that while there is near universal agreement as to what the problem is, there is no clear explanation of its source, or how the problem may be addressed. The problem itself is rather simple to grasp, and one where there is agreement, at least in form, between even the most radical adherents of either liberalism or conservatism.
The problem is that our economy has, and is becoming ever more controlled by a vanishingly small minority of our population, a minority that has at best a questionable claim to legitimacy of having such pervasive power. Below, I will attempt to articulate a cause of the rise of oligarchic capitalism. I shall leave the suggestion for solutions to this problem to you, my astute readers who have the patience to suffer through my often pedantic and overly wordy prose.
Democracy, as an appellation, is usually referred to forms of government, as opposed to tyrannies, oligarchies, or the like. Here, I wish to expand the use of that term to include any system or institution where the results its activity are evaluated by and sensitive to the needs and desires of all the people who participate in it or who it effects. The focus on results, and not the process, is important. The effects of the activities of government are the creation and enforcement of laws. Governments are democratic to just the extent that there are mechanisms in place for its citizens to evaluate the laws that are written, and how those laws are enforced. Typically, these mechanisms are elections.
Capitalism, as a form economic organization, has long been considered the economic system of democracies. This, for the very simple reason that it is fundamentally grounded on the idea of free exchange of goods and services (thus making it responsive to the people it effects) and based on the immutable laws of Supply and Demand. Indeed, it is hard to imagine another form of economic organization that would be more democratic. Centralized economies governed by democratic governments suffer from the problems plagued by democratic governments in general. They are slow to respond to rapidly changing situations on the ground. While this is not a great problem in traditional matters of criminal or civil law, domestic subsidy or foreign affairs, it is nearly insurmountable when it comes to organizing the distribution, supply and price of needed, or even merely wanted goods, and becomes more so as the size of the economy grows. Opportunity costs mount for every second a decision is put off, and it can take a democratically elected committee months or years to come to a consensus. Barter economies, while democratic, lack the freedom required by participants to "defer satisfaction" for a trade. If you raise chickens while your neighbor grows potatoes, you may trade a chicken for a few pounds of potatoes. But if your neighbor needs a chicken, and you're well stocked up on potatoes and don't want to take on any more for fear they'll spoil, without any capital that can serve as a store for value, you'll both miss out on the advantage that can come from trading.
But while capitalism has historically been identified as the democratic economy, it no longer is. As has already been noted, a democratic system is one whose results are responsive to the needs and desires of the people who participate in it, or who it effects. The results of an economy are the goods and services that are offered for sale, their prices, and the breadth and depth of the market in terms of the number of people who have access to that market and the diversity of products within that market, respectively. The people who participate in or are effected by the economy are the producers (including distributors, marketers and retailers), consumers, and financiers, as well as those who suffer (or benefit) from the side effects of such activity, such as pollution. For the purposes of this exposition, those effected by the externalities of economic activity can be absorbed into one of the other three classes, since in nearly every case, they will be at least consumers of goods, and will often be involved in production and finance as well, where their interests in the effects of such externalities can be represented.
A democratic economy would thus balance the interests of these three classes of people. If finance were excluded, or if its activity could be assured to be completely rational, the accepted laws of capitalism would be sufficient to guarantee a fully democratic economy, even if consumers and producers were themselves completely irrational and capricious in their desires and their ways of bringing products to market. (This, of course, assumes a well functioning government capable of detecting and eliminating fraud. Irrationality here does not include immorality, but rather, imprudence.) Producers who insist on bringing a product to market in ways that are completely unprofitable, especially when compared to their competitors, will quickly find themselves priced out of existence. The desires of consumers are typically not characterized as either rational or irrational, and indeed, there is no purely economic means of evaluating their market choices in this way. To claim that a consumer is irrational for desiring, say, cigarettes requires an appeal to extra-economic facts about health and biology. Consumers can be capricious in the sense that there is no rule that can or should be defined that explains or predicts their market choices. In a free market system where finance can be factored out, producers are free to be irrational, and consumers are free to be capricious, and the system itself is sensitive to and accommodating of these freedoms.
Unfortunately for the prospects of a democratic economy, finance cannot be factored out. Time was the ruling adage of business was that the customer was King. But with the rise of the importance of finance to the ability to form and operate a business at all, and the new and disturbing innovation of the financing of consumption, finance now rules the roost. Finance, for the purposes of our discussion, is a loan, usually unsecured, with varying options for repayment, and always for profit, in order to facilitate some economic activity. Direct investment, including the purchase of stock (ownership) in a company is included in this definition under the following justification. When one purchases a new stock, one gives some of their money over to the business which they use to facilitate their productive activity. In a publicly traded company, one is free to sell that stock for the going price, which they would only rationally do if that price was greater than, or at least equal to their original purchase price. If effect, they have loaned that business the money, in return for a promise to repay by some other person. If no other person is willing to buy that stock, then the original investor has lost the money they used to buy the stock in the first place, no different than if they had loaned that money to a relative, who then ducked out of town to avoid repayment.
Finance now rules the roost because of the need for business to take loans to both start and continue to operate. Daily expenses may at times (especially around payday) exceed the ability of business to pay, though they may be easily capable of paying their obligations if given sufficient time. Finance thus greases the wheels of business. No longer do they have to have large sums of capital on reserve to pay for lean times, or unexpected expenses. But since capital makes doing business so much easier, it also confer a relatively greater comparative advantage to those business that can secure financing. In other words, rather than customers deciding which business succeeds or fails by voting with their pocketbooks, investors and banks make that decision before any consumer can so much as open their wallet. Skeptical investors can kill a business idea before the first product is sold by preferring to invest in established or less risky competitors.
Even this need not be an insurmountable problem. By itself, it merely has the effect of moderating speculative businesses, preferring a more secure marketplace to one filled with turmoil and innovation. But finance is not decided by some algorithm that measures risk against reward. Indeed, no such algorithm exists, for future events are always uncertain. Finance decisions are made by people, and by very few people at that. While it is true that the vast majority of money invested in businesses in this country comes from the savings and pensions of those who earn less than $250,000 a year, that money is rarely controlled by those people. Rather, it is controlled by hedge fund managers, large brokerage houses, and banks. And these controllers, far from being democratic representatives of those whose decisions they effect, are largely self-selecting. Furthermore, given their control of vast sums of money, they are able to build obscene wealth for themselves, even when they can do nothing but lose the money of those whose wealth they are supposed to be properly investing.
Financing of consumption is particularly troubling because consumption, by itself, is not a profit-generating activity. Unless that finance is used to reduce consumption or increase income, there is no way for the investor to recoup his loan or make any sort of profit on it. Generally, an increase in the amount of money one has available to buy stuff with does not result in a decrease in the amount, or value, of stuff bought, and by itself, decreases the incentive to increase income. After all, why go work harder or longer to make more money when someone is willing to continually loan you money? While the financing of business has a long history and accepted place, the financing of consumption, even of big ticket items like houses and cars, is relatively new. Cars, of course, are only about 100 years old, but houses, for most of their history, have been communally built, paid for by taxes to the ruling lord or king, if they were paid for at all.
But where financing goes from troubling to disastrous is when it begins to finance itself. The ability to loan money for the purpose of making further loans threatens a dangerous regress, and as we have continually seen throughout history, when we humans have an opportunity to lose our heads, we generally waste little time in doing so. Since our money is backed now by loans, rather than any particular physical commodity, the financing of finance greatly expands the supply of money. This exacerbates the need businesses and consumers have for loans by inflating prices, and gives financiers virtually unlimited power in determining beforehand which business succeed and which fail, and which consumers can afford to make their desired purchases, and which cannot. As the saying goes, absolute power corrupts absolutely. Who can deny that, given such power, those who make financing decisions would not act, continually, to improve their own personal welfare and the welfare of their class of economic actors generally, even to the detriment of all others? And since we are talking about human beings here, who can deny that they would not have prejudices and biases both for and against certain forms of business and certain classes of consumers, prejudices they would be almost certain to prop up using their vast power? The questions before us now are difficult. Is it possible to remove this power from this minority of economic actors? What would replace our current system of financing businesses and consumers? How can we ensure that the new system is appropriately democratic, and prevent future similar imbalances from occurring?