Capitalism Comes in Many Flavors? It Just Ain't So!

Article excerpt

In a recent Washington Post op-ed ("Identity Crisis for American Capitalism," May 26, 71feur4), Steven Pearlstein presents a taxonomy of the various species of capitalism, arguing that it, "like ice cream, comes in many flavors. These different capitalisms can be combined, in the same way chocolate and coffee produce mocha."

In so doing, though, he greatly exaggerates the difference between these flavors. Pearlstein 's first major variant of modern capitalism - robber-baron capitalism - was characterized by the large-scale economic power of big business. It was succeeded by the managerial capitalism of the New Deal and post-WWII era: "Competition tended to be gentlemanly and the power of big business was held in check by the federal government (big government) and unions (big labor)."

The "State capitalism" of the European social democracies and Japan is just a more extreme variant of American managerial capitalism.

As American managerial capitalism led to stagnation and decay, it was replaced in recent decades by three competing models: the "entrepreneurial capitalism" of Silicon Valley, the "shareholder capitalism" of Gordon Gekko, and the "worker capitalism" of employeeowned and profit-sharing firms.

Pearlstein's schema strongly implies that the main distinction between robber-baron and managerial capitalism was the latter's increased restraint on the power of big business by government and organized labor, as opposed to the relative "laissez faire" of the nineteenth century. Although this is a popular view of the robberbaron era, it doesn't hold much water. The capitalism of the Gilded Age was a virtual creature of the State, with land grants and other railroad subsidies serving as the indispensable prerequisites for a single national market, and the national corporate economy being cartelized among industrial giants with the aid of patent pooling and tariffs.

And à la J. K. Galbraith, the relationship between big business, government, and labor was characterized less by checks and balances than by collusion or cooperation. General Electric president Gerard Swope and the wing of big business he represented arguably had more to do with the form taken by FDR's New Deal than did the CIO's John L. Lewis. Managerial capitalism was not so much an external constraint imposed on big business, as a recognition by big business itself that Stateenforced cartels and enforcement of labor discipline by domesticated unions were the best ways to guarantee stable profits in the long run.

As for so-called "shareholder capitalism," in actual fact it is just as managerial as the classic managerial capitalism of Adolf Berle and Gardiner Means, authors of the influential 1932 book The Modem Corporation and Private Property. Shareholder ownership, let alone control, is - to put it bluntly - a myth. The theory, as set forth by thinkers like Michael Jensen some 30 years ago, was that large bonuses and stock options would "align management incentives" with shareholder interests, and that hostile takeovers would enable shareholders to punish underperforming management.

But in practice "shareholder capitalism" is geared to the interests of management in an even more shortterm and vulgar way than the managerial version. The much-vaunted "market for corporate control," to the extent it existed at all, was mainly a phenomenon ol the first few years after the introduction of hostile takeovers. Management - inevitably, given its inside control over corporate bylaws - gamed the rules to protect itself from the threat of hostile takeover. …