AMERICAN CAPITALISM: MOVING BEYOND BLIND FAITH — PART 1

RAT LAB REVISITED

Remember rat lab, the hands-on portion of basic college psychology courses?   It was there we learned that random positive reinforcement is a powerful tool for shaping behavior.  A rat, a lever, pellets of food.  If no pellets ever appeared, the rat gave up pushing the lever.  No reward here.  If pellets always appeared, then suddenly stopped, the rat gave up pushing the lever.  No more rewards here.  But if pellets only sometimes appeared, the rat went on pushing that lever, over and over and over again.  Always the possibility of a reward here!

Human beings are not rats, but rat lab is all about human behavior.  Given the possibility of reward, no matter how improbable, we, too, tend to hang in there.  We keep the faith, even when facts give rise to serious doubt. 

One would think the stock market, for instance, runs on money.  Or, perhaps, greed.  Both play their roles, but neither could keep the process going without faith, faith locked in by random positive reinforcement.  Keep the rats in mind while we move on to bears:  According to Standard and Poor data, there have been no fewer than ten bear markets – a drop of 20% or more — in the United States since the 1930s.  They’ve bottomed out for an average of sixteen months before edging upward again, with stocks on average losing 31% of their value at their lowest point. The worst collapse remains the 1929–1932 decline of 83%; the next highest were 49% in 2000–2002 and 48% in 1973.

What happens on Wall Street soon hits Main Street.  Given what might be called, at best, a very mixed performance over the years on the part of free market capitalism, why would those times spent “on the brink,” not rile Americans sufficiently to call our entire system into question? 

Because we cling to our faith in that system.  We believe, and when the going gets tough, we believe harder.   The tenets of our credo are as old as our country.  They endure because, historically, events have supported them often enough to convince us they’re true.  Always the possibility of a reward here!  They’re grounded in fundamental principles presented by Scottish philosopher Adam Smith in his classic work, The Wealth of Nations, published the same year the colonies broke away from the mother country.  

Smith argued that supply and demand as determined by consumer sovereignty set prices that accurately measured the value of goods and services.  He hypothesized the existence of an Invisible Hand (not to be confused with a Divine Hand) that transformed into the common good economic activity driven by self-interest.  He saw free markets as efficient, stable, and self-correcting.  If the economy got out of sync in one period, it would regain its natural equilibrium in the next.

Commercial transactions, he argued, also fostered improvements in moral behavior by rewarding positive personal traits such as reliability, discipline, helpfulness, and friendliness towards one’s fellow citizens.  Free trade created better human beings. 

Smith’s ideas were well received in the 1770s because they accorded with colonial objections to mercantilism, with its the government-imposed regulations and taxes attributed by American rebels to the tyrant George III.  Smith’s assault on the mercantilist faith gave traction to an alternate set of economic beliefs for the new nation.

Individual sovereignty also resonated with the famous sentiment in the preamble to the Declaration of Independence about the rights to “life, liberty, and the pursuit of happiness.”  Material well-being (happiness) was best left to the individual to define and obtain.  

The system’s reverential status has endured because it’s been credited with providing equal opportunities for those willing to work hard enough to pull themselves up by their own bootstraps.  Rags-to-riches stories are a recurring theme of America’s economic mythology.  At first, rags-to-middle-class-comfort provided happy ending enough; later, middle-class-to-staggering-wealth-and-power became the ideal.  In the 19^th century, former Unitarian minister Horatio Alger created inspiring tales of the rise of impoverished male children—bootblacks and newsboys, often the sons of widows—who overcame their plight by dint of discipline, honesty, and clean living and ultimately entered the world of middle class respectability.

Not all such stories are fictional.  Examples in the real world continue to provide the random positive reinforcement needed to maintain our faith.  Currently, we admire the ascent of a money-strapped, single mother’s son to a Harvard education and the Presidency of our country.

But examples can be, and in this case definitely are, the exception rather than the rule.  Actual rags-to-riches success in our country has been rare, though social mobility has not.  Yet, the best way to get rich in America – or anywhere else – is to luck into one or more wealthy parents.  Our highest-born offspring inherit and spend the biggest nest eggs. They go to the right schools, where they meet others just like them and forge bright futures together. For those not born to money, the next-best alternative is to marry it.

Chances are not good that money will simply come along, not in huge amounts, no matter how hard we work.  Though Americans rank high among those believing in the ability to get ahead, the facts say otherwise.  A 2011 report by the Organization of Economic Cooperation and Development placed the U.S.tenth in social mobility among industrialized countries. The report noted that a nation’s inequality of wealth impacts its citizens’ ability to improve their lot; the greater the inequality, the greater the difficulty.  Brookings Institution economist Isabel Sawhill agrees and adds, “Inequality in one generation may mean less opportunity for the next generation to get ahead and thus, still more inequality in the future.” 

Let’s look a little closer at those Horatio Alger stories:  Luck as much as pluck determines the hero’s fate, and often shows up in the guise of a benevolent benefactor who happens into the life of the boy in need and jump-starts him on the path to success.

It does happen.  Now and then.   Former Republican presidential candidate Herman Cain recounted in his 2011 biography his own Horatio Alger story of how his father told him to keep his nose to the grindstone and to work hard. He followed that advice and rose to become CEO at Godfather Pizza. Okay, but it didn’t hurt that his dad was a chauffeur to the CEO at Coca Cola who was willing to pay for his services in stock shares, and that his father’s connections helped young Cain land a job with Coke after graduate school, where, with help from a mentor (that all-too-rare benevolent stranger), he was introduced to other business opportunities.

There is a dark side to the American Dream, but it’s usually left out of the mythology.  Andrew Carnegie’s autobiography, The Gospel of Wealth, tells of a Scottish bobbin boy who came to these shores with just the clothes on his back and became a multimillionaire in the iron and steel industry through hard work and bold ideas.

Carnegie attributes his ascent to superior energy and ability, characteristics that paralleled the Social Darwinian world of nature in which the fittest members of the species predominated. He and his fellow captains of industry perceived themselves as visionaries who stepped into a disorganized economy, restored order and rationality, and provided American consumers the best products and services at the lowest costs: labor-saving devices, more and better food, creature comforts, and parks and theaters.

Carnegie was adamant that he did not amass wealth for its own sake, or to pass on to his heirs. “The man who died rich,” he said, “died disgraced.”  The duty of the rich man, while still living, was to use his fortune for projects that advanced the good of the community, in his case, the funding of public libraries.  Much appreciated!  Really!

But missing from Carnegie’s story are the arduous, dangerous, twelve hour days, six days a week, put in by steel workers in his plants; injuries and deaths from industrial accidents; and strikes in response to wage cuts and longer hours. In 1892, acting in collusion with Henry Frick, chairman of his Homestead Steel Plant seven miles southeast of Pittsburgh, Carnegie went after the Amalgamated Association of Iron and Steel Workers that had bargained better wages and work rules for the plant’s employees.  In response, wage cuts were demanded in a year of record profits. A twelve foot high fence with search light platforms and storage spaces for high powered water hoses was built, and 300 Pinkerton detectives were deployed in anticipation of a strike. When the strike came, bloody clashes left three Pinkertons and seven workers dead. 

The union?  That died, too.

In 1900, Carnegie earned $23 million compared to the average working man’s wage of $500, and he lived in a 64-room mansion inNew York that took two tons of coal to heat on a typical winter’s day.

Faith in our economic system remains impervious to conflicting evidence, or frontal assault.  Most of the time, those below envy, but do not resent those on top.   Failure to reach the pinnacle is attributed not to lack of opportunity, but to insufficient talent, unwillingness to make the requisite sacrifices, not daring to take bold risks, laziness, and a lack of lucky breaks.

As long as it occasionally does happen, hope springs eternal among those below that they will eventually join those on top.  On top, not one rung up from the current level or even somewhere in the middle.  While the American Dream has traditionally been measured by home ownership, of late, it is mansion ownership, and the lifestyle of the rich and famous that goes with it: ostentatious displays of luxury goods, tax breaks and shelters, celebrity.  A purgatory in which ownership of a Lexus or Mercedes Benz (bought on credit) is a possibility for middle class “millionaires in waiting” makes failure to ascend endurable, even if it lasts forever.  Always the possibility of a reward here!

Trouble arises only when long-term adverse conditions limit the consolation prize to a pre-owned Chevy Aveo.  The American Dream is dead!   No, the American Dream continues to be exactly what it’s always been:  a dream.  Yet, given our prevailing myths and those random glimpses of hope, our faith revives it over and over and over again. 

American economic reality is something else entirely – rougher going than we like to think, but not an evil thing.  Bear in mind that the transparency of our system remains very high compared to most non-capitalist settings, where goods are scarce and the economic infrastructure is all but dysfunctional.  The watchdog agency Transparency International’s Global Corruption Barometer always ranks the United Statesamong the very best in its country by country listings.  In those countries ranked lower, nepotism, bribery, and under-the-table transactions accompany virtually all basic economic transactions.  By contrast, while connections here can help in getting a job, education, merit, and ability also matter.

So does clear-sighted understanding of how our system works, where it fails, and how it might serve us better.   The sad truth for those rats endlessly tapping their fickle levers is that the random reward, if it does come, may be too small and too late.  This is a case where it’s imperative not to keep the faith.  Rats can’t assess the situation, figure that out, and make a better choice.  We can.

 To be continued . . .

 SOME SOURCES AND RESOURCES

Benjamin Friedman, The Moral Consequences of Economic Growth (2005)

Robert Reich, Supercapitalism:  The Transformation of Business, Democracy, and Everyday Life (2007)

Tim Harford, The Undercover Economist (2005)

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