Trust, Democracy, and Capitalism

One business page, Sunday NYTimes. Two articles. Two distinct visions of our future.

Andrew Sorkin’s “A Growing Aversion to Ticker Symbols” describes the seeming tsunami of private equity money creating a shadow economy, engulfing publicly traded stocks, escaping the scrutiny of Sarbanes Oxley and the SEC, and enabling CEO compensation even greater than we’ve seen in public companies:

As one buyout king put it over drinks… “If one of my C.E.O.’s made $100 million, I’d say that’s great because it means that we probably just made $2 billion.”

Licensed greed, free of oversight.

Or not?

In the same article, John Thain, the New York Stock Exchange’s CEO, reminds us that much of the big money in private equity lies in taking the companies back public again.

Viewed this way, private equity is simply the vehicle du jour for creating efficiency in the financial and asset markets. Take the old company out of circulation for a bit, do a turn in drydock, clean up the turbines, a new coat of paint, voila—new company. A public service.

Au contraire, says Ben Stein in "The Hard Rain That’s Falling on Capitalism. A writer and literate comedian, he has standing as an economist. He came by it honestly; his father was chairman of the Council of Economic Advisors under the Nixon and Ford administrations.

Capitalism values people as individuals according to contract…not according to the status of our birth. This in itself is a miracle.

This miracle has been vibrant in the lives of hundreds of millions of Americans who have gone from nothing to something, thanks to the dynamics of capitalism. They have seen their pay rise and they have been able to convert their sweat and toil and creativity into capital by saving and investing in the stock market and becoming capitalists themselves — myself.

The system of capitalism is wide open. If you have an idea, you can turn it into capital.

But… in capitalism, the most fundamental building block is trust.

When I see what the top dogs at all too many corporations are now doing to that trust, I feel queasy. Outrageous — yes, obscene — pay. Greedy backdating of stock options, which in my opinion is straight-up theft. Managers buying assets from their trustors, the stockholders, at pennies on the dollar, then forestalling competing bids with lockups and insane breakup fees.

These misdeeds and many, many more are hammer blows at the granite foundation of trust we built in the 1940s and ’50s. How long democratic capitalism can survive these blows before it gives in and gives birth to revolution or to an out-and-out aristocracy, I am not sure.

Stein’s not alone. Professor Bruce Scott, of Harvard Business School, is in the final stages of a forthcoming book tentatively titled Capitalism and Democracy in a New World. He enthralled senior audiences at Harvard Business School’s reunion last fall. A great number of seasoned MBAs, it turns out, share Stein’s sense that something is rotten in the State of Business.

Scott suggests we have succumbed to an exceedingly narrow application of the democratic concept of freedom—economic freedom. Capitalism, he suggests, is strangling democracy. Scott points to the same social tensions Stein mentions—the accelerating gap in wealth across the world.

Financial fine-tuning for fitness is salutary. A nation of laws is a wonderful thing. But a nation whose laws of financial fine-tuning are opaque, written by those with a bias toward more concentration of wealth, and even then brazenly violated, is not a nation whose capitalist system is any longer built on trust.

If capitalism’s best effort at an ethical pronouncement is, “hey, it wasn’t illegal,” then Stein is an optimist.

We can do better.