The economy, sports, a steam engine, and the tragedy of the commons

Nothing can outperform a democracy coupled with a well regulated, genuinely competitive free market economy. Each word in the preceding statement matters for it to be true. When Karl Marx was promoting communism, and when Hitler was promoting fascism, both thought capitalism was dead and could never survive. They wrongly believed it would be replaced by communism, socialism or fascism. While they were aware of the vulnerabilities of capitalism, they failed to understand that certain changes could be made to make it work, and to turn it into the most powerful and dynamic economic engine in history. Understanding and continuing to implement these changes is essential to protect our system, because very few of us want the alternatives of socialism, communism or fascism.

Two analogies are powerful in illustrating the problem and the lessons: a steam engine and a theory of sports. Also illuminating is the story of the tragedy of the commons.

A steam engine that is well regulated and well maintained can perform an enormous amount of constructive work for a very long time. However, if we remove the governor the deregulated steam engine will immediately and rapidly accelerate to the point of self destruction. It will fail catastrophically, leaving behind a useless pile of twisted junk. The same is true for a capitalist economy, where if unregulated, it will endure wildly destructive boom and bust cycles and engage in destructive excesses. Yet, we are asked by some to drink their ideological cool-aide calling for removal of governance, unregulated free markets, and low to no taxes. When we fall victim to this radical thinking, remove the regulators, overly privatize and tie the hands of governance, the economy quickly engages in wild speculative excesses, fails to self regulate, and self destructs, leaving us with a pile of economic junk.

For competitive sports to work, for fans to want to watch, and for players to want to play there are certain essentials. The playing fields must be level. All the teams must agree to play by the same sets of rules. Those rules must be fairly, strictly and vigorously enforced by officials who can do their jobs without undue influence or hindrance. The teams must be reasonably evenly matched, with no one team so powerful that it can dominate and manipulate the game. Remove all this based on self control, self policing, and letting the market place sort it all out, and the result is an all out war, won by the biggest and nastiest, with little opportunity for success by most fans and most players. When we regulate business and the economy with proper anti-trust enforcement, effective regulation, protection from predatory and anti-competitive monopolistic tendencies, then this well regulated free market economy works well. Like in sports, take the level field, the rules, the officials, the balanced teams away, and we get utter chaos and failure.

Most of us have been taught about the "tragedy of the commons." This is the situation that occurs where a pasture is held in common, and a group of sheepherders share its use and benefits, but no one is responsible for, motivated to, or can afford to care for it. Absent proper governance, taxes and fees, and enforcement of that governance, each sheepherder is motivated to put as many sheep on it as possible, resulting in the utter destruction of the pasture, to the detriment of all. Except in the smallest of clans, with wise leadership and discipline, self regulation fails. This illustrates why we need effective governance to protect our commons and our common interests.

We have found a very effective balance of the principals illustrated above. It always requires attention and fine tuning. We've grown to have certain contempt for the lessons and practices above that have been the keys to growing the most powerful economy in the history of the world, with the biggest and wealthiest middle class, and professional class ever. We have done what Marx and Hitler said could not be done.

To summarize the lessons we've learned about making capitalism work:

We learned how to effectively regulate the free market to protect citizens from the ruthless excesses that otherwise destroy it.

We learned to harness its power to our national common good through a taxation and regulatory system.

We learned that certain common responsibilities are best undertaken by government. Roads, airways, defense, education, international affairs, trade regulation, uniformity of law, to give some examples.

We learned how to put laws and regulations in place to set the rules of the game, to prevent and curb ruthlessness, recklessness and conspiracies that destroy and remove the opportunities for enterprise and ingenuity.

We learned how to slow down the economy, shave off the excessive peaks, and moderate inflation when the economy tries to over accelerate by taxing and saving a surplus, and reducing government infrastructure and enterprises.

We learned that by doing the above, we are able to speed the economy up during those times when it wants to slow down too much, by spending that surplus in order to create demand and create jobs. This reduces the depth and duration of the slow down.

We learned to strike an effective balance between the private and public sectors that has created the strongest middle class in the history of the planet.

So, when we do these things my opening statement is true, but when we don't, we jeopardize the entire system.

Failing to think about the above, 8 years ago we elected ideologically zealous leaders committed to attacking and undoing the very policies that are essential to our system functioning well. We embarked on a road that undermines our democratic free market system. Predictably our economy has suffered the same dreadful fate as the deregulated steam engine.

So here we are, again left to relearn these same painful lessons, painstakingly put the controls and governance back in place, and pick up the wreckage. The perpetrators point elsewhere. None voluntarily take responsibility for their actions or the consequences of listening to them. Some pretend not to have been a part of it, and attempt to change their positions as effortlessly as changing a shirt.

The economy is complex, but not that complex. These principals are not beyond the grasp of ordinary citizens. We need to think for ourselves. We need to question what we are told and decide whether it is true and supported by facts and history, or just ideological emotional rhetoric. When it is the latter we need to reject it as the useless nonsense it is. We must insist that the economy be managed based on sound economic principal’s not ideological zealotry.

Let's not turn our backs on these well learned lessons, and be forced to suffer the catastrophic consequences and painfully learn them again. Let's develop the courage, wisdom, and confidence to understand and act in our own best interest.

So, instead of ideological, emotional slogans, here are fact based arguments.

Fact: John McCain was one of the Keating 5. The Keating 5 were Senators and Representatives who directly helped bring about the S&L crises by removing regulation and by interfering with regulators of the S&L's. After extensive hearings McCain and the other 4 were formally censured for their behavior. McCain's actions amounted to deregulating the steam engine, helping destroy it. Did he learn from this anything about the essential lessons of making capitalism work?

Fact: John McCain returned to promoting a zealous ideological deregulation agenda with the Bush administration. He again participated in undermining one of these vital lessons about making capitalism work, resulting in the current economic distress, for the same reasons.

Fact: John McCain supported and continues to support tax cuts on the very rich. When this was first done, it ignored one of the essential lessons learned about making capitalism work, by failing to tax to slow the boom and create a surplus and lower inflationary risks. This would have generated the rainy day surpluses we need today for this economic downturn.

Fact: McCain advocates cutting government spending at the Federal and State levels if he takes office despite the fact that we are now in a serious recession. He couples this with keeping taxes high on the middle class while extending the tax cut for the rich. How does this make our system work? This will worsen, not help us achieve one of the vital lessons to make capitalism work, which is the importance of deficit spending during a recession. Failing to do so is the formula to drive the economy from recession into depression.

Fact: McCain claims he will create jobs by cutting taxes for the rich. Pouring the Nation’s precious capital into tax cuts for the rich and into creation of bank equity for their balance sheets does not create any jobs. The lessons we’ve learned about making capitalism work include the need for financially healthy middle and professional classes. It is precisely their demand for goods and services that creates market opportunities, prompts businesses to react to meet that demand, and motivates businesses to obtain and employ capital in order to put people to work meeting those demands. Banks already have plenty of funds available right now, and at a very low cost. They are making very few loans, and those are at very high rates. Banks are afraid of losses and they understand the real economic risks in the economy right now. They are not going to make loans until they see signs that reliable market demand exists so their borrowers can expect to repay the loans. So all this money poured in at the top of the economy can do little to create jobs or solve these problems. A viable solution must directly address job creation and protection in ways that put people to work. Their incomes will create the essential demand for goods and services in the marketplace that businesses will go after, and those opportunities is what will get banks to lend at a reasonable pace with good rates. This illustrates why public sector spending is vital to soften a downturn, because that spending directly creates good paying jobs when nothing else will do so. It keeps people working and paying their debts and their bills. It creates demand that causes the economy to spiral upwards instead of spiraling downward. Direct job creation by the government ended the Great Depression, not pumping money into banks. McCain's policy is precisely backwards, violates these principals of what makes capitalism work and it will decrease jobs.

When one thinks through how our economy really works, how jobs are really created, and what we know we must do to responsibly manage the economy and protect its vulnerabilities Obama is the candidate pointing to economic policies that take us in the right direction. It is ironic that it is the supposed advocates of free market capitalism who continue to advocate policies that are counterproductive and destructive to a well regulated, free market capitalistic system.

Paul Eisenberg
Copyright 2008