Postscript to the National Conventions: “You Didn’t Build That” and the History of American Capitalism

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5 Responses

  1. A.J. Sutter says:

    I sympathize, but I suspect the political realities will win out over nuance. Another nuance: “capitalism” has become a misleadingly monolithic term — it includes both the economy of goods and services and the financial economy. Only between 1% and 3% of the value of annual sales on equity markets around the world represents new capital to issuers; the other 97%-99% represents, essentially, gambling proceeds changing hands between investors. The value of annual trades on the NYSE plus NASDAQ has exceeded US GDP every year since 1997 — even including the years since the Lehman Shock; and the value of global equity trades has been between 95% and 105% of global GDP during recent years as well. Add in bonds, commodities, derivatives, forex, etc., and you get a financial economy many times bigger than that of goods and services. This is possible because capital gains aren’t included in GDP.

    Nor is there any necessary connection between stock price and operating results in the real economy. E.g., Apple had a $6.6 billion profit in the quarter ending in September 2011, along with sharp rises in both profits and revenue over a year previously — but the stock price went down 7% on the announcement, because profits were below analysts’ expectations.

    The benefits of this sort of capitalism aren’t shared widely. Over 90% of capital gains go to the wealthiest 10% of taxpayers, with 49% of all capital gains going to the wealthiest 0.1%. And those folks don’t necessarily buy American: Alan Greenspan proposed there is a “wealth effect” on GDP caused by a rising stock market, as tycoons spend more in the real economy, but GDP statistics don’t bear this out.

    The upshot is that one can be a “capitalist” without having anything constructive to do with the real economy of goods and services. Do you think either party will call attention to this development anytime soon? Especially when Goldman Sachs provides our Cabinet with temps?

  2. PrometheeFeu says:

    The role of the government in the stabilization of money and credit has historically been very negative. The legal environment in which banking operated prior to the Great Depression was just downright de-stabilizing preventing diversification and forcing the holding of very poor assets. (state and local bonds)

    I’m not sure which specific laws and regulations you are referring to when you speak of “to adopt laws that favored economic development and capital accumulation”. But some of it, far from being the government helping capitalistic expansion was simply the government refraining from hindering capitalistic expansion. Not exactly the same thing.

    When it comes to the corporate form, the vast majority of it could simply be embodied in contracts. In effect, a corporation would have to append to every contract it signed a gigantic appendix detailing limited liability. Not always practical, so the corporate form is helpful, but not as much as people think.

  3. Maxine Eichner says:

    Certainly the government adopting laws that favored economic development and capital accumulation is not the same thing as the government refraining from hindering capitalistic expansion. When I claimed the latter, I meant the latter. Beyond taking action to secure the nation’s transportation infrastructure, and approving over 200 state-chartered banks, Congress passed tariffs to protect domestic manufacturing from competition from cheap British imports. Federal and local governments used takings of private property to further economic development. The creation of the independent treasury, with all its problems, helped stabilize the chaotic banking system that was developing in states.

    The contention that the corporate form does little more than could be embodied in contracts assumes, among other things, a contract law that tilts heavily in favor of the enforcement of contracts. This, of course, isn’t some natural feature of U.S. law, but rather a shift made by our pro-business courts in the nineteenth century as they modified the common law’s enforcement of equity and fair value in contracts, in favor of a policy of enforcement of contracts and “caveat emptor.” Further, some critical part of the advantages of the corporate form comes from the protection it yields against state action, which also emerged as doctrine from pro-business courts in the nineteenth century, and which could not be embodied in private contracts. In the wake of the Citizens United decision, the advantages this yields for corporations should be clear.
    Max Eichner

  4. A.J. Sutter says:

    Nice rebuttal to the contracts argument about corporations, a favorite of libertarians embarrassed by their reliance on government largesse. Some other points overlooked in that argument are that (i) companies wouldn’t necessarily be able to get away with simply tacking on an appendix to every contract, since some exceptions might be negotiated or even become customary, and more importantly, (ii) such appendices wouldn’t limit tort liability as to plaintiffs not in contractual privity with the company, while the corporate form does.

  5. PrometheeFeu says:

    @Maxine Eichner:

    Approving bank charters is not an affirmative action by the government that favors economic development. It’s just the government not denying businesses the right to provide financial services. Tariffs against cheap imports have generally been harmful to economic development. Takings weaken property rights which has long been accepted as a barrier to economic development.

    @AJ Sutter:

    You’re quite correct that a corporation might not be able to append its corporate form to every contract. In practice this happens today. If you are starting a business, it is unlikely you will be able to get a loan in the name of the business alone. You will probably have to personally pledge your personal assets.

    Even when it comes to torts, the “corporation” could contract with its employees and agents agreeing to reimburse them if they lose a torts lawsuit. Of course, that would not be of any help if the corporation ran out of money. So as I easily granted, you cannot reproduce the whole of the corporate form through contracts, but you can get a big chunk of it.