BOOK REVIEW: How Capitalism Will Save Us

Robert Bartley, the late great editorial page editor at the Wall Street Journal was known to say that his page was one of the few that actually sold newspapers. The same could be said about Fact and Comment, the page within Forbes magazine authored by its chairman, Steve Forbes.

Taking nothing away from a magazine that has long been a fabulous celebration of capitalism, it's safe to say that the economic commentary offered up by Mr. Forbes (author's note: Forbes Inc. is an investor in RealClearMarkets) in each issue has sold quite a few magazines over the years. Particularly among younger writers who claim an affinity for Classical or Supply-Side thinking, Forbes's wise fingerprints can be found everywhere.

And for the many who see Fact and Comment as a bi-weekly lesson in economics, they'll be glad to know that Steve Forbes has recently published a book with Elizabeth Ames titled How Capitalism Will Save Us. If you're a fan of Fact and Comment, this book is for you.

Though they began writing Capitalism before the 2008 financial meltdown, Forbes and Ames made sure to address the crisis throughout, and without shying away from their pre-meltdown thesis that "No system has been as effective as capitalism in turning scarcity into abundance." So true, but so often unspoken, particularly during times of economic uncertainty largely caused (as they regularly note) by governments sadly placing barriers between work and reward.

Indeed, rather than accept the conventional wisdom of today which suggests that in 2008 free markets failed us, they remind us that "History's most devastating economic upheavals have never been caused by the normal cycles of free market; they have been caused by catastrophic distortions that occur when government doesn't allow markets to work." The distortions they list that caused the crisis are many, including unfortunate dollar policy, interest-rate targeting that ignored the natural rate that would be set by markets, subsidy of home ownership by government-sponsored entities of the Fannie Mae/Freddie Mac variety, etc.

As the authors make plain, the financial crisis that was, did not have to be. Behind every economic calamity one can find governmental mischief, and there Forbes and Ames do an excellent job of revealing the miscreants.

And for those merely interested in the myriad issues that comprise what is today's economic debate, Capitalism will surely serve as an excellent resource. From globalization to anti-trust to corporate downsizing to CEO pay to currency policy, the authors explain all those subjects in ways that will appeal to a broad audience; an audience that will finish the book armed with logic and stats that should turn future debates with anti-capitalists into routs.

Amid the rise of globalization over the last thirty years - a period when millions of jobs either disappeared or went overseas - the authors remind us that 40 million net new jobs were created, that "overall personal incomes have increased from $2 trillion to $12 trillion", and that the net worth of American households has surged from $7.1 trillion to $51.5 trillion. So much for the breathy stats from the commentariat about how Americans don't save, not to mention the notion that the expansion of the world's division of labor has made us economically worse off.

Considering anti-trust laws allegedly meant to protect consumers and companies from corporations that become too powerful, Forbes and Ames remind readers that the "experts" in our midst "too often assume fixed conditions - which is why they are so often wrong." In truth, today's corporate behemoth is all too often tomorrow's forgotten company.

GM comes to mind, and as the authors point out, of the 500 firms on the Forbes 500 list of top companies in 1983, only 202 were part of the team picture twenty years later. They explain this happy phenomenon as a function of today's successful companies frequently perfecting what they're good at, all the while failing to anticipate the "next big thing." At one time Bill Gates, CEO of alleged anti-trust miscreant Microsoft, dismissed the Internet as faddish. Google is the big name in the Internet space now, but if it's true that history repeats itself, there's a start-up in the making that will in time knock it off of its lofty perch.

Layoffs are always painful, but as Forbes and Ames reveal through IBM's modern story, the media tend to pay lots of attention to corporate downsizing without chronicling eventual corporate upsizing. Sure enough, former IBM CEO Louis Gerstner quickly laid off 60,000 employees upon arrival in the early ‘90s. Less spoken of, but happily noted by the authors, is that by the time he retired from Big Blue in 2002, Gerstner had overseen the hiring of 65,000 new employees. Taking nothing away from the brutal nature of head-count reductions, often they foretell big hiring increases as renewed productivity attracts job-creating investment.

CEO pay is a hot issue today, with much of the commentary suggesting that company heads don't earn their salaries. Forbes and Ames see things differently, and remind us that "Just as there are few people who have the skills and talent of a top baseball player like Alex Rodriguez", there are "probably even fewer people who can run companies like IBM or P&G and do successfully."

So while some may decry Oracle CEO Larry Ellison's 2008 bonus of $71 million, the authors helpfully explain why the company's actual shareholders weren't as bothered. Indeed, $100 invested in Oracle in 1990 would be worth $4,000 today. Ellison's $71 million pay package in '08? It worked out to two cents per share. As they found through Ellison's immense success, the "benefits that good CEOs can deliver are enormous and far exceed the dollar value of their compensation." Some readers might point to Bob Nardelli's $210 million exit package from Home Depot after an unsuccessful stint there, but there the authors note that "Almost all of his $210 million severance package was what Nardelli would have received had he stayed at GE."

For those who wonder why the most advanced nation in the world periodically suffers economic crises, Capitalism helpfully explains the underlying cause, and it's a dollar that floats in value without definition. The authors liken the dollar's ever-changing price to a government that would regularly redefine "the number of minutes in an hour." If the government were to suddenly decree that "an hour is seventy instead of sixty minutes", the end result for your workweek would be that it's "been devalued by about 15 percent."

Just as a "floating minute" would create chaos at work and all manner of spoiled dinners, Forbes and Ames assert that "Currency fluctuations are a deadly dampener" because "they increase uncertainty, making investments even less attractive." When money has no definition, investment mistakes are inevitable; the rush to housing and subsequent housing crisis this decade but one example of the disarray and malinvestment wrought by an absence of monetary policy.

Their solution is to return to a gold standard whereby the dollar's value would be tied to the most stable commodity on earth. As for the absurd objection made by economists about gold restraining growth, the authors bat it away with ease in noting that "this thinking is based on the illusion that a central bank can create more prosperity by running off more dollars." To paraphrase a long ago observation made by the late Jude Wanniski, it's the quality of money that matters, not the quantity. Gold is the answer.

Of course with all books, there are going to be a few disagreements. Forbes and Ames seek a resumption of the "uptick rule" which says short sales on shares can only be made after the share price has ticked upward. The problem there is that to ban short sellers of any kind is to ban buyers in a time of need. Regarding mark-to-market accounting, the authors believe it loomed large in the 2008 crisis, whereas the view here is that mark-to-market merely revealed stupendous errors on the part of some, but not all banks. As for mark-to-market forcing banks to account for assets too conservatively, it seems the bigger factor there was another major government mistake, Sarbanes-Oxley.

Regarding the dollar, while currency agreement is broad, their suggestion that low interest rates set by the Fed drove its value down is perhaps belied by the over 50% rise in the price of gold amid 425 basis points of hikes from 2004-2006. More appealing here is their other argument that a weak dollar was the policy of the Bush administration, markets complied, and property rallied this decade (to the economy's detriment) much as it did in the ‘70s when the Fed funds rate was skyrocketing, but the dollar in decline thanks to the Nixon/Ford/Carter administrations' acceptance of a weak greenback.

The authors are also a bit more sanguine about the bank bailouts of recent vintage. While their arguments in favor were compelling due to the federal government's certain role in the carnage, the simple truth is that not all financial institutions made egregious errors, and it's always a mistake to excuse non-economic activity. Indeed, as they note in the book about railroads overtaking canals as a form of transport, it's essential to let the bankrupt die so that bad ideas are not perpetuated.

Whatever the quibbles, they are very minor within a book that is a must read not just for those who believe in capitalism, but for those who are skeptical. This is especially true now with many wondering how wealth is created. How Capitalism Will Save Us provides the answers, but to offer a sneak peek, Forbes and Ames lay it out quite nicely: wealth is produced when "individuals seek to meet their own needs by meeting the needs of others." So true, but rarely noted.