Marilyn M. Barnewall
August 16, 2009
While attending a business lunch in Chicago years ago, my brother, Bob, heard Keith Funston, head of the New York Stock Exchange from 1951-67, say: "The 8th wonder of the world is the American economic system. The 9th wonder of the world is American ignorance of that system."
Why is it that people with no understanding of how capitalism works think they understand how to create jobs and solve the economic problems of America and the rest of the world?
For example, why has the price of gold – though it is one of the few investments that would have made you wealthier for having purchased it pre-2001 – been repressed? Same question re silver. Or, what caused the stock market to go from bull to bear – then back to bull? Why is deflation the Fed’s primary concern? How will the sinking value of the U.S. dollar impact all of us?
If given the factual answer to these questions, will you really understand them? Not if you do not understand how the system of free enterprise works.
For example, what is the purpose of wealth? That is pretty basic. Making possible the opportunity to build wealth throughout an entire population is a primary objective of capitalism.
There is a purpose for everything – even wealth. It is a natural purpose. Interestingly, it is well defined in the Holy Bible, Matthew 26:26.
The parable of the Talents tells of a man who goes on a journey. He calls his servants to him and gives one five talents. To another he gives two talents and to another, one talent. From what I can determine, a talent was (in those days) the equivalent of an ounce of gold. So, unto each servant was given the equivalent of several hundred or thousand dollars to hold for their master.
Upon the man’s return, he calls his servants to him to ask for the return of his money.
The first servant invested wisely and returns the original five talents plus five more. He doubled his master’s investment. So too did the second servant… he returned two talents plus two more.
The third man tells his master “And I was afraid and went and hid your talent in the ground. Look, there you have what is yours.”
In verse 28, the wealthy man says, “…take the talent from him and give it to him who has ten talents. For to everyone who has, more will be given, and he will have abundance; but from him who does not have, even what he has will be taken away.”
And that explains the basic philosophy of capitalism. We are to use existing wealth to create new wealth. With new wealth, new jobs are created. Creating new wealth is quite different from managing it. I would encourage people not to confuse the words “wealth” and “profit.” For an explanation of the difference, see my NewsWithView article: The Difference Between Wealth and Profit.
Wealth in a capitalist society has two purposes: 1) To create new wealth (and the jobs that go with it); and, 2) To support the existing economic, social and political systems from which current wealth derives. Today’s jobs are dependent upon this second reason. Tomorrow’s jobs are dependent upon the first.
There are two groups of dynamic, wealthy people. Each supports one or the other of wealth’s purposes. One group – we’ll call it “A” – has money today and invests it in today’s jobs. Their wealth supports those who work in jobs at big companies. They invest in the economy via the stock, bond, commodities, futures, and precious metals markets.
Jobs exist at big companies because people with money invest in that company’s stock. It is one of the reasons the wealthy must not be excluded from tax breaks. Their stock investments provide jobs.
The other group – “B” – will have money tomorrow. Bill Gates before the technology revolution is a good example of this group. What they invest today is time, energy and a lot of discipline required to achieve their dreams. Their “wealth” supports tomorrow’s economy.
For example, until members of group B moved technology onto center stage, we were an economy driven by industry and manufacturing – which was supported by group A. That changed in 1964. That was the first year more people were employed by service, information and technology companies than by industry and manufacturing firms.
Today millions of Americans are employed because of the dreams of those who saw the potential of technology. Without Group B, those jobs would not be there.
Our economy was once driven by agriculture. Henry Ford and a lot of entrepreneurs and inventors from Group B introduced us to the (at the time) miracles of manufacturing and industry. The Model T and the factory production lines that emerged to make it available to consumers created millions of new jobs.
Nowhere is a law of nature more abused than the one pertaining to wealth. Group A pays too little attention to economic progress for future generations. Group B is so focused on the future it gives too little support to the existing economy.
No economy survives without balanced support given to both groups. One of the major problems with today’s economy is that too much support is given to Group A (which is cutting jobs) and too little is given to Group B (which creates jobs).
It is all but impossible for entrepreneurs to start new businesses that create jobs when they must pay for costly environmental impact studies and OSHA requirements. Increased taxes that impact per employee costs – from health insurance to unemployment insurance – create a no new jobs environment.
Another of nature’s laws is at work here. It is this: Two opposing forces of equal strength, left unfettered, create balance by fighting for their positions.
Government intervention via regulatory controls does not leave the marketplace unfettered. Am I saying companies should be allowed to offer no job benefits to employees? Doesn’t that just increase the medically uninsured problem? It probably does. The questions we must ask, then, are these: Does it improve things to create jobs with no medical insurance? Or, is it better to have no job? Do lack of a job, money and food added to lack of medical insurance create a better – or a worse – situation for people?
So, aside from new jobs created by Group B, how does all of this impact Americans?
How many billions of dollars has the U.S. government, the Bank of International Settlements (BIS) the World Bank, and the International Monetary Fund (IMF) spent trying to establish democracies in third world nations? How much will we end up spending to establish a democracy in Iraq, for example? And, how successful will it be?
Third world nations can prosper under free enterprise and democracy. For that to happen, however, Group A needs to understand the important contribution made by Group B – and, vice-versa.
New business startup risks are understood and taken by Group B, not Group A. Remember, Group A is made up of people who work for large companies. Their hot button is security, not risk management.
To build and grow a capitalist economy requires the risk management capabilities of Group B. Too often, members of Group A think all it takes is money. Based on performance, they seem to believe that to create democracy and capitalism in poor countries you just build several big office buildings and get a few Fortune 500 companies to move in and hire people.
That’s not the way a capitalist marketplace works.
No one understands wealth management better than Group A. No one understands wealth creation better than Group B.
When implementing free enterprise and democracy in third world nations, wealth creation must precede wealth management. Until wealth is created, there is nothing to manage. Thus, Group B should have primary responsibility for helping implement a system of capitalism anywhere. I would say with equal (or perhaps more) fervor relative to the current American economy, until wealth is created, there is nothing to manage. That’s Group B’s area of expertise. Government jobs come from Group A and they eat tax dollars, they do not create them. Borrowing money to solve economic problems eats available dollars that could otherwise be utilized by wealth creators to start new businesses in the private sector. This is basically a simple concept. Why do bureaucrats have so much difficulty understanding it?
To my knowledge, independent business owners have been totally excluded from the process of nation building. As a result, wealth creation strategies have not been given sufficient priority when trying to implement new, independent economies around the world.
Just as it required the risk management skills of Group B to build a nation called America, the same is required in Haiti, Bosnia, Russia, Afghanistan and Iraq. The same is required for China and India. In the Middle East, for example, people have been raised in a tribal environment. Tribal environments often squelch competition and competition is the basis of a healthy free enterprise. It creates a problem.
We need to remember that America as we know it today did not spring from the womb complete with multi-national companies. Risk management is an acquired, not an inherited skill. Our system of free enterprise evolved over time. So, too, did the personalities capable of creating, managing and running it. Those personalities belong to Group A, not Group B.
The point is, risk tolerance sufficiently strong to build a capitalist republic results from attitude. To create broad-based wealth as seen in America, the learning of risk management skills is a must. It must start small and grow big… just as it did in America.
It takes time to develop the confidence required of free people who make risk-based decisions daily. It takes a lot of time when the people who live in the nation being converted to free enterprise have no risk-management skills. Those entrepreneurial skills foreigners think come so naturally to Americans are carefully honed by a competitive marketplace, not dictators, tyrants or oligarchs.
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To help others, it appears we need to remember our own history. It’s not Fortune 500 companies and internationalists that build capitalism and free enterprise, stupid. It’s the attitude.
© 2009 Marilyn M. Barnewall - All Rights Reserved
Marilyn Barnewall received her graduate degree in Banking from the University of Colorado Graduate School of Business in 1978. She has authored seven non-fiction books about banking, two are listed at Oxford and Cambridge University libraries in Great Britain. Her current book, When the Swan’s Neck Breaks, details the banking problems she foresaw in 2006. Of the 24 predictions made in the book, 22 have happened. It is fiction but readers refer to it as docu-fiction.
Barnewall was named one of America's top 100 businesswomen in the book, What It Takes (Dolphin/Doubleday; Gardenswartz and Roe) and was one of the founders of the Committee of 200, the official organization of America's top 200 businesswomen. She can be found in Who's:Who in America (2005-08), Who's Who of American Women (2006-08), Who's Who in Finance and Business (2006-08), and Who's Who in the World (2008).