Jay B Gaskill

In Ayn Rand’s[i] famous novel, Atlas Shrugged, there is a capitalist strike, i.e., a concerted work stoppage by a number of key movers and shakers of industry.  The book is really an extended thought experiment in which the sudden absence of productive, creative managers, entrepreneurs and inventors brilliantly limns the core flaw in Marx’s labour theory of value.  When the creative and organizational contributions of the “capitalists” are suddenly subtracted, the economic engine stalls, and workers lose jobs.

As the Italian revolutionary nationalist, Garibaldi reportedly observed, “The more things change, the more they stay the same.”  I submit that the current economic stall is the slow-motion version of Atlas Shrugged. I’ll develop that argument in more detail, but first, allow a brief sketch of some relevant background.

Karl Marx invented the term “capitalist”.  It was used as an intentionally crude caricature of a much more complicated reality.  At the time Marx’s first volume of Das Kapital was published[ii], the USA was struggling with nascent capitalism in the immediate aftermath of the Civil War; the British were still practicing Imperial mercantilism; and the rest of Europe had so entangled politics and commerce that what we call “free enterprise” was mostly confined to micro zones inhabited by unregulated street merchants, often dealing in barter.

In the mercantilist model, key sectors of the “private” economy are actually “chartered” monopolies (think of the colonial English East India Company) and all trade is a highly controlled instrument of nationalist or imperial policy. Barter capitalism is as old as the street merchants of Byzantium.

I believe that modern crony capitalism is the direct successor of mercantilism.

At the time of Marx’s Das Kapital, truly free markets were very rare, and the accumulation of wealth was almost always the result of a political partnership with the ruling elites of the day and place.  Stage One communism switched out royal elites for party bosses and substituted party apparatchiks for company executives.  This was a recipe for stagnation and poverty, beautifully captured in the widely quoted aphorism of one Polish communist worker who lamented, “They pretend to pay us and we pretend to work.”

When Stage One communism failed, both Russia and China adopted neo-mercantilist models.  Russia is now practicing a gangsta version of mercantilism while China is attempting to invent Stage Two communism by using a mix of wild-west capitalism, police state executions and mercantilist trade policies.  To describe the Chinese experiment as unstable is an understatement.

Meantime, Western Europe and England experimented with Marxism-Lite (renamed as “social democracy” or Fabian socialism and its variants) while tolerating a small, beleaguered private sector.

In Europe, China, Russia, and in the post-depression era USA, capitalists have been tolerated by the predominantly leftish elites as a source of wealth to be exploited for public purposes.  The ambivalence of the American left towards capitalist figures like the late Steve Jobs is emblematic of the dynamics attendant the American brand of crony capitalism[iii].

Honest-to-goodness free-market capitalists still operate best on the margins – i.e., in the less regulated cracks that appear in the world’s vast overlapping web of regulations and restrictions, much like their street-vendor cousins.  But thanks to the communication and transportation revolution, the “cracks” themselves have rapidly and radically expanded to include the entire world-wide commercial web.

Compare California and Italy.  Both have severely overspent their limited tax-based income on pensions, social services and other constituent-friendly programs.  Both face a reckoning.  Neither can reasonably expect a bailout.  Both are actively seeking new tax revenue sources.  California experimented in the 1990’s with extra top bracket to its state income tax, but reversed course based on anecdotal evidence that the targeted earners were fleeing the state to friendlier tax environments.  Italy has briefly flirted with a similar tax increase but has balked because of a similar belief that high earners would leave the country.  Actual personal behavior is complicated because other factors affect net personal incomes and constrain movement.  But businesses are notoriously sensitive to tax changes that affect net returns, especially those enterprises with high volume and low per unit profit margins.  Over time, entire populations do relocate themselves to increase net income.

This is one of several ways that free movement constrains sovereign behavior. Short of reinstituting slavery or serfdom, all sovereigns in the modern world face the same four elemental problems: (1) people who are unable to retain their earnings eventually vote with their feet; (2) expropriating their left-behind assets virtually guarantees they will not return as long as a hungry sovereign waits for them; (3) government puppet institutions, whether nominally “private” or overtly public, do not often fare well in a competitive environment; (4) the world economy has generated a very competitive environment.  Among the many lessons of the four enumerated problems that have not yet been absorbed by the first world governments are these: (a) the fruits of constructive freedom cannot forever be bottled or contained; (b) undisciplined parasites eventually bleed out the host.

Of course, investments do not follow exactly the same escape patterns as some portable taxpayers have – especially when investors find themselves trapped by political exploitation in mid-enterprise.  A key difference is that investments, especially startup investments, can adjust their positions in time as well as in space.  Location, location, location is part of the picture to be sure.  Stable, Western-style democracies with mature legal, banking and financial systems are greatly preferred locations by investors, and other factors like proximity to customers, talent, affordable work forces and shipping are strong location considerations as well.  But timing is almost everything where investment decisions are finally made.

At the present time there are trillions of private investment dollars (actual and equivalent, domestic and foreign) that remain effectively parked (think of grounded aircraft in bad weather), quite possibly more than the current US administration has caused the federal government to borrow over the last three years.

If is as if we are witnessing an Atlas Shrugged style capital strike.  But no conspiracy was needed.  The operators of aircraft and ships don’t need to hatch a conspiracy to sit out a storm, nor do capitalists need to form a cabal to hold back taking investment risks when profit-making conditions have been rendered unfavorable by political interference in the marketplace.

Granted, not all of the parked trillions are poised to invest in the USA.  But when and if the time is once again is ripe for it, an investment surge will be available turn around the American economy, propel sustainable growth, restore robust employment and repair the depleted government fisc.  That is the good news.  The sobering news is that major changes in the US political, regulatory and investment climate must first take place and be perceived by the larger investment community as sufficiently stable for any such economic turnaround to take hold.  Short term political adjustments produce bubbles.  The US needs something better this time.

The volatile stock markets should not be confused with the parked investment money.  Much of it that money is tied up is real assets like energy and commodity reserves.  Such money is not readily risked, especially when the financial system itself is overleveraged and potentially subject to a further brutal correction.

Last year there was a private meeting in Beijing between an important American entrepreneur and a very important Chinese official.  Both must remain unnamed here[iv].  The American was complaining about business conditions in the US at the time, and mentioned our president by name in that context.  The Chinese official wryly cracked, “How do you like life under communism?”

Even if the current occupant of 1600 Pennsylvania Avenue were to experience a second term, Clintonesque triangulation, an authentic shift-to-the center epiphany, it just will not be quite enough, because our current president’s credibility has been squandered, possibly irrevocably so.

The other good news in all this is that the USA is sitting on massive unexploited energy reserves[v] and has a huge unrealized agricultural production potential.  These are real, not paper assets.

A new team in the White House may or may not succeed in healing a wounded economy in the short term, but there is no realistic way forward without a real change in leadership.  We can kvetch and pontificate about Ms. Rand’s “selfish” philosophy, but her critique of Karl Marx and his latter day disciples was spot on. Creative genius and entrepreneurial risk takers are not propelled by selfless altruism, but the cumulative fruits of their constructive activities have lifted the lives of countless millions of the so-called 99 percent.


Copyright © 2011 by Jay B Gaskill, Attorney at Law

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End Notes

[i] Ayn Rand is the pen name for the daughter of a commercial family whose property was confiscated by the Soviets. Alisa Zinov’yevna Rosenbaum escaped to the USA, eventually changing her name to Ayn Rand.  In her breakout novel, The Fountainhead, the nexus between creative freedom and intellectual property was explicit, and in Atlas Shrugged, the underlying links between artistic innovation, invention and commercial freedom were central to the storyline.  Her philosophical writings, loosely grouped under the rubric, Objectivism, have been scathingly dismissed by the left as amoral.  But Ms. Rand’s passion for creative freedom as a moral imperative was a specific commitment that transcended “mere” greed and belied the parodic attempts to marginalize an original, serious ethic, sharply relevant to the modern human condition.

[ii] Volume 1 was published in 1867, followed after Marx’s death in 1885 by Volume 2 (from KM’s notes assembled and amplified by Fredrick Engels). The first English translation appeared in 1887. At that time, outside of the USA, there were few examples of free market “capitalism” anywhere in the world.

[iii] Isaacson’s brilliant biography demonstrates that the late Steve Jobs was definitely not a crony-capitalist.  His special cachet among liberals is attributable to his lifestyle affinity and strong identification with the anti-corporate creative sub-culture.  But Steve Jobs was a classic entrepreneurial capitalist in the purest sense who displayed in his passionate devotion to the perfection of his craft and products a distinct thematic kinship with Ms. Rand’s fictional architect hero of The Fountainhead, Howard Roark.

[iv] One degree of separation separates me from this conversation.

[v] For a quick and heartening review, read Hoover scholar Victor Davis Hanson’s article, “Oil Rich America?”

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