Today, some of the leading capitalists in the nation are located on Wall Street. Sadly, it is the protesters outside who are literally on the street who embody the ideal rewards and responsibilities of capitalism, not the financiers who occupy the buildings.
This is the first in a short series of articles that explores the nature of a well-functioning capitalist system and how this system is now applied to the occupants of the buildings on Wall Street and those who are, quite literally, on The Street.
Capitalism is not an abstract ideal. It is as real as any market or currency. And it is the organizing principle that has, for over two centuries, powered the strength and resilience of America.
As we think about capitalism, it’s also useful to make an important distinction: It’s not what you say, it’s what you do. You may espouse capitalist ideals, but if you oppose responsibility, dishonor contracts, oppose competition, and embrace government subsidies, you are not a practicing capitalist.
For capitalism to work, there are several fundamental requirements: accountability, equal justice under the law, a clearly articulated purpose (and accompanying cost) for government subsidies of a specialized class of citizens, competition, and a relationship between the creation of profits and the creation of real wealth for the larger society.
Many of the protestors in New York City and around the country are jobless college graduates. The majority in all likelihood financed their education through federally subsidized student loans. A central characteristic of today’s generation of student loans is that, unlike most debts, they cannot automatically be discharged in bankruptcy. As a consequence, they are one of the few expenses in our society for which an individual is likely to be accountable throughout his life. As a nation, we teach our most promising youth, from the age of 18 on, the importance of accountability. We use the federal government to subsidize an investment in human capital. In return, the beneficiaries enter into a lifetime of responsibility and accountability. It is a sacred contract. It is arguably one of the best, and potentially harshest, lessons of accountability associated with capitalism in our society today.
Now, let’s contrast this high accountability with the behavior that occurred in our financial sector. When our largest financial firms created havoc in the U.S. economy through undisputed greed, mismanagement, and extreme risk, some important things happened. First, the government bailed the companies out without demanding any substantial change in behavior, and then the individuals responsible were not held accountable through civil or criminal law. As a result, the people who brought the nation close to the brink of economic collapse and caused untold pain and suffering — which continues to this day — returned after a brief hiatus to record levels of compensation. Individuals who earned tens of millions of dollars continue to earn these extraordinary sums. They have never been called to account for their deeds.
Can this be right? What about the many civil settlements negotiated by the federal government and the SEC? I would argue that, in light of the extraordinary profits these firms and individuals generate, such settlements are now viewed as a “cost of doing business.” They appear to have almost no impact on the behavior or attitude of the nation’s financiers.
Now let’s contrast the kids on the street with the employees of The Street. The kids are accountable for their debts. They know it, and they simply want jobs so they can fulfill their civic responsibilities. In contrast, the occupants of the building on Wall Street act as if the rules of accountability — which are central to a viable system of capitalism — apply to everyone except them. Instead, many of the Wall Street elite have developed a dangerous sense of entitlement.
I would argue that in a true, competitive capitalist society, the idea of entitlement is anathema to all participants. It suggests that rewards are disbursed because of who people are, as opposed to the tangible wealth they create for the nation.
It’s worth noting that old timers on Wall Street may still remember that until 1970 the New York Stock exchange mandated that investment banks be organized as some of the most accountable businesses in existence. Prior to going public, in the late 20th century Wall Street firms were organized as old-fashioned partnerships. The central idea of these partnerships was that every partner was fully liable for all of the debts incurred by the firm. If the partnership could not meet its obligations, the partners were required to meet these obligations with their own funds until they were personally bankrupt as well. It was a self-policing system that provided high incentives for investment banks to manage the risks they undertook. When every partner is liable, each has the highest possible incentive to ensure that the firm is not exposed to potential default. If they fail in this responsibility, both the firm and the individual partners can be wiped out. This rule was meant to avoid precisely what happened in the financial crisis.
Now these same publicly held financial institutions have been bailed out by the government and the high-paid executives are apparently immune — both with respect to their pay, their sources of employment, and their personal funds — from any day of reckoning.
The philosopher John Rawls is widely recognized for his theories of justice. In one exercise, his “veil of ignorance,” he suggests that if you are faced with a decision you should pretend you don’t know what kind of participant in the process you will be, so that “everyone is impartially situated as equals.” Since you are blind to your own interests, you are likely to develop the fairest answer. (I have found this to be the perfect exercise for sharing desserts. I cut the cake and then let each individual choose a piece. Since I don’t know what piece I will end up with, my cutting is far more likely to divide the pieces equally.)
Now let’s apply a variant of Rawls’s ideas to the situation on Wall Street today. You are a visitor from a foreign country or an alien world with no knowledge of Wall Street or capitalism. Then the principles of capitalism are explained to you and you are asked to identify the capitalists in this confrontation: the people in the buildings or the people congregating on the street. Which would you choose?
Bruce Judson is Entrepreneur-in-Residence at the Yale Entrepreneurial Institute and a former Senior Faculty Fellow at the Yale School of Management.