I must admit that this article by George Soros, originally published in the Atlantic Monthly, now republished online by Free Republic, is thought provoking. The Capitalist Threat discusses the danger that unregulated Capitalism could offer to our society. Even though I do not agree with all of his statements, nor do I accept all the conclusions he makes, I still see potential risks to America from many sources.

Wealth Accumulation

Out of the article, there is one I want to expound upon: "...perfection is unattainable. Wealth does accumulate in the hands of its owners, and if there is no mechanism for redistribution, the inequities can become intolerable."

If you think about it, this makes a lot of sense. As so many financially successful people demonstrate, having money makes it easier to accumulate more money. It does not guarantee it, but it certainly helps. Usually, this is not a problem because we only live for so many years, and those talented enough to amass huge fortunes fade into history as their heirs prove less adept or less willing to work to accumulate additional wealth. The powerful names of yesteryear including Rockefeller and Vanderbilt still exist and have money, but they are not among the richest in the world anymore.

Despite the increasing heights of some individual fortunes, individual wealth does not threaten to undermine our way of life. Many of the wealthiest individuals are also great philanthropists, including Bill Gates and Warren Buffet. This even helps to hasten the cycle of wealth redistribution back to the general population from the wealthiest individuals. That cycle remains alive and well and even provides examples that are worth emulating and striving for, even by those who will never accumulate such large fortunes.

Corporations and Wealth

There is one entity which can exist forever,and as such, has the ability to gather more and more wealth until it has the financial ability to rival that of small and medium sized nations. Additionally, it has few enticements to be philanthropic with its wealth beyond a token level of support for the communities where it does business. That is the Corporation. Corporations have an unlimited lifetime and can continually change leadership to keep the best and most capable in charge. In doing so, they are able to accumulate wealth that far exceeds anything that an individual could.

At the same time, this increased aggregation of wealth lends these mega-corporations a lot of political and societal clout. What they want becomes important to the social agenda because money does talk. What is good for Wal-mart or Microsoft becomes good for politicians, even when it is against the best interests of society in general. Even worse, the impact becomes even greater on the state and local level as large corporations can have a huge impact on cities and states by even just threatening to relocate to places that are more company friendly.

Increasing Globalization makes this worse. Not only is there the threat of corporations relocating jobs to different cities and states with favorable laws within a country, but the very real threat of multi-national companies relocating off-shore from their traditional homes if the business environment becomes contrained in their original home.

This power is only threatening to become worse. Yet, how do you set limits on growth and development - especially when that offers the potential for more efficient production, improved standards of living, and increased employment? There are a few times where it has been recognized that the potential for problems exceeds the potential benefits and anti-monopoly efforts have been undertaken by national governments.

Strength of Free Markets

It is the efficient re-allocation of capital that give free markets their strength. An individual or company that does a poor job of handling capital will lose that money and others who do a better job of protecting and using capital will take their place. When less efficient providers can be supplanted by more efficient ones, the free market does the best job of improving conditions for everybody. This works most of the time.

Laissez-faire is the thoeretical standard that Capitalist economies are compared against, and ideally strive for. It requires a few assumptions however. First is that there is free and open competition for resources, multiple providers and multiple consumers. Second is that there is true efficiency, where different providers and consumers are free to make their own decisions and act unconstrained on those decisions. Anytime a competitor is not efficient, they will lose market share to those who are more efficient.

Mega-corporations

To that end, actions and institutions that distort the free market pose significant threats to the long term health of the global economy. Within the last fifty years, there has been a rise in potential distortions in the guise of gigantic multi-national mega-corporations. With an ability to move large amounts of money between countries at will, large accumulations of capital, and highly recognized and rewarded brands,these corporations have the ability to function long term even when they are not the most efficient provider of a good or service.

Beyond that, the huge reserves of capital and their easy access to debt financing, it is possible for a mega-corporation to make a credible attempt to enter and dominate markets outside its experience and expertise just by throwing money at the problem. In the process, they do not necessarily contribute anything and certainly act as disruptive forces. Even should they fail and abandon their attempts to muscle in on new markets, their impacts can be catastrophic for otherwise effective and efficient competitors who were already in place.

Mega-corporations can grow to such a size that even operating inefficiently, they can linger for years or decades as a large company. In some cases - Worldcom for example - a company can lose billions of dollars, go through bankruptcy and be handed over to their creditors, and when the bankruptcy is discharged, immediately become an industry leader because of the now discharged debt. I understand it was because the former creditors were now the owners, and the former stockholders lost everything. Yet when the bankruptcy was cleared, Worldcom was immediately in a better financial position than its competitors who had not declared bankruptcy.

So, how do you allow for companies and individuals to function in a free market, while avoiding the potential problem of inefficient mega-corporations? The simplest expedient of not allowing corporations to exceed a certain size is more problematic. Some activities and services cannot be well provided by small or medium sized companies. Plus, there is always the ability for a large company to still be efficient - in some cases almost brutally so.

A potential solution would be eliminate an inefficient large corporation when they prove that they are not efficient. Give those companies that have reached a certain size - measured either by assets or revenue - a different set of bankruptcy options than normal. The first would be the same as is offered now: Liquidation.

The second would be: Break-up. Behind the break-up option are a couple of ideas. First, is that the company proved not to be the most efficient at their large size. Splitting into several smaller companies will allow normal market forces to once again play a significant role in the operations of the company. Second, it will force new leadership to be chosen, since the same leadership team cannot run all of the smaller companies. Thus even more will there be opportunities for new competition to come in.

Long live limited market intervention.

PS

There is a lot more to that article. If there are other points that you would like to discuss, feel free to add a comment referencing the part you are interested in. Comments are also welcome on the discussion for this small snippet. Registration is not required to comment either.

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