Capitalism, Democracy, and Decline

I think the reason we have the problems we are having with our economy now, and the reason these problems have been experienced by much of the developed world at the same time, is our reliance on the Free Market.

We have preached the virtues of the free market to other nations for decades, and they have listened.

We have shown them the prosperity and dynamism that comes with a free market economy.

We have displayed the goods and goodies we can buy because of our use of this economic system.

And we thought the only downside is the necessity to look out for the poor, since this a democratic capitalist system does not automatically provide for them.

But that is not the only danger.

The larger risk, the one that has come to very bad realization now, comes from another aspect of this system.

As long as there are free markets, and capitalist systems, in which companies sell stock to finance their growth and reward their stockholders, there will be the types of difficulties we are now experiencing.

Stockholders demand increases in revenues and profits every quarter.

This is achievable for smaller growing companies and less mature industries, as they expand to fill the demand of the market they serve, and compete with one another for the ability to gather more sales.

This is achievable for mature companies and industries as well, through incremental innovation, introduction of new products or services, and stiff competition.

But there will always be companies and industries that have reached a point at which they have filled all the need, they have in effect saturated their market.

This happened recently with home mortgage providers.

About a decade ago or so, several large and still growing companies that provide mortgages found their growth slowing as they had nearly saturated the American market for their products.

They needed to keep revenues and profits growing as fast as they had on their way up, but there did not seem to be a way to do so.

They could get incremental increases by competing harder with the other major companies selling the same mortgages.

Or, they could find a way to sell to a part of the market that was thought not to exist.

People who could not show good credit or down payments were always previously thought to not be a market for a mortgage, because they would not have the same ability or maybe the same incentive to pay back the loan.

But these people represented a huge untapped market for mortgage providers.

So the major companies providing mortgages started to loosen lending standards, to see what would happen if they began to lend to some of this part of the market.

They found that the losses were a little higher, and they realized they could simply price their loans higher to make up for those losses.

Then these same companies realized they could get more money to make more loans and be more competitive if they could sell more of the loans they did make, and sell them faster. (After the loans were made, good ones were sold to investors giving the mortgage companies more cash to make more loans.)

Wall Street immediately stepped in to offer a way to pool all mortgages in giant groups, even the ones made to borrowers with low credit scores and little or no downpayment.

When these mortgages were bundled into huge packages, others on Wall Street figured out ways to sell of parts of them, with some investors buying some parts of the payments coming from the borrowers, some buying other parts of the payments, others buying bets on how much or little those payments would be in the future, and still others buying complex wagers on how these investments would perform as compared to other investments, and on and on.

In a capitalist, free market, as part of a democracy, public companies have developed an imperative to constantly grow revenues and profits every quarter.

Companies have nearly lost the quaint idea of long term, steady growth.

And none of these companies think it is even conceivable to aim for revenues that hold steady, or flat.

That is truly unthinkable.

You cannot find a publicly traded company that would even consider keeping revenues steady, and profits steady, even if revenues and profits were at an exceptional amount.

And it would be extremely difficult to find a smaller, privately held company that would consider it either.

The requirement to constantly grow revenues and profits necessarily will continue to cause (among some companies in some industries) the behavior that eventually then causes these dire economic problems.

It doesn't mean we should limit growth, we should simply be aware of what it can do to us.

Because financial growth is the imperative, we will continue to see both new and old ways in which growth at any cost ends up costing us all.