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Monday, February 13, 2012

Monetizing human misery

Wealth based on human misery cannot last. It cannot create a system that will last. Basing a financial system on monetizing human misery places a cap on economic productivity. Slavery as practiced by America before the civil war was the monetization of human misery. There are revisionist history books claiming the American civil war was because of wealth differences between the south and the north, these histories miss the point. The wealth of the south was based on slavery (human misery) and because of that the south was limited and smaller than the north’s wealth and potential. Others claim state’s rights, what state’s right is that? The state’s right to legalize slavery, monetizing human misery. The South had less wealth because it was built on human misery, the institution of slavery placed a cap on the maximum wealth that could be created.
Another example is the medieval system of feudalism was based on monetizing human misery. The few lived in great wealth and the many lived in great misery. Pillaged by their leaders, life was short and brutal for the mass of the population. A system with little potential, little advancement and little growth, for generation after generation nothing changed. Thomas Malthus described the feudal system and the limits of this system in An Essay on the Principle of Population, about the same time Thomas Hobbs coined the phrase “solitary, poor, nasty, brutish and short” to describe life in Europe under feudalism. The writings of these two describe the 10,000 years of human economic history from the beginnings of agriculture to the start of capitalism. Initially capitalism continued the practice of monetizing human misery, this lead to the observations and predictions of Karl Marx. Fortunately Karl Marx got it wrong. What all of them missed is that one possible form of capitalism allows the gains to be widely shared and this collective improvement produces better results for the rich, the middle and the poor. It is more profitable for the rich to take a little of a lot than to take all of very little, and very little is what is produced when the economic basis is human misery.
We have learned and for an example from the twenty first century, the current state of the art for industrial engineering is based on improving work through efforts by the worker, allowing the individual worker to improve their personal well being. The term of art is Lean Six Sigma. Using this approach a $40 per hour employee in one of the advanced economies can produce lower cost, higher quality products than a $1 a day forced laborer. Allowing the worker to participate in the monetary gains vastly improves the total monetary gains. Henry Ford understood this and changed industry, today’s Private Equity investors do not understand this. The Private Equity (PE) investor, previously known as the Leveraged Buy-Out (LBO) investor is based on monetizing human misery. The business plan is simple, buy it, strip it, dump it. Private Equity cannot build anything that will last. The PE investor reaps great personal wealth and leaves behind zombie companies, unemployment, wrecked pension funds, and more private and public debt. The beneficiaries of the LBO practices have plenty of money to mount a public relations program, their victims do not. They point to the few private equity investors that assume risk, work hard and do create. This is like saying that some illness is good for you.
The LBO folks talk of “Creative Destruction”. Originally used by Karl Marx “Creative Destruction” was updated in the 1950s by Joseph Schumpeter to an economic theory that describes economic innovation. An example of Schumpeter’s “Creative Destruction” is Apple, Steve Jobs created the IPod which destroyed the walkman. In the process Mr. Jobs created more jobs, a larger market and greater wealth. For the private equity investors the “Creative Destruction” of Karl Marx is the best description. What has private equity used their vast money to accomplish? They used it to hire lobbyist and reduce their personal tax rates. They use their wealth to buy legislation making their risk-free high-return business practices legally protected and shifting all the risk to tax payers. We now have an economic system busy destroying itself, and as a tax payer I’m getting the bill.
The extremely short-term activities of private equity are destructive to capitalism and society. They are not clearing markets, creating general wealth, and building strong companies, correcting market inefficiencies or creating new technologies or productivity advances. The business model contains no risk to the private equity investor while creating high risk for tax payers and banks. A small group of individuals with the power to control our entire government, the local government, the state government and the federal government for their short-term narrow interest. People who answer to no one, that are unaccountable and above the law. If there is a law that threatens them, they have it changed. There is no balance of power between citizen, corporations and government. The citizen has been stripped of all power and left with no representation. This is a system that will collapse, creating social and economic chaos which can force a great leader to emerge. The other possibility is a populist demagogue that would destroy what little is left. So far America has been blessed to find the historical leader when most needed, a Lincoln or an FDR. Both of which were widely hated during their Presidencies, men of great compassion and unprecedented political skill.
Can our current political system identify such an individual? The evidence is not encouraging. I don’t see any attempts to change the system to produce better electoral options for voters. The problem seems to be that the people who could change the system are happy and satisfied with the current system.

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