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Capitalism vs. Socialism? Not Exactly

Sen. Elizabeth Warren
Photo of Sen. Elizabeth Warren by Katherine Taylor for the U.S. Department of Labor

Sen. Elizabeth Warren is convinced that capitalism is broken. But don’t worry – she and her fellow Democrats are here to fix it.

The Massachusetts senator recently penned an op-ed for The Wall Street Journal, which opened this way: “Corporate profits are booming, but average wages haven’t budged over the past year. The U.S. economy has run this way for decades, partly because of a fundamental change in business practices dating back to the 1980s.” Warren has thus introduced a campaign plank, also known as a bill, to “fix” the problem that corporations are run for benefit of those who invest in them.

The legislation would require companies with greater than $1 billion in revenue to get a federal charter and thereafter to serve interests of “all major corporate stakeholders,” in addition to those of shareholders. Workers at such companies must control at least 40 percent of board seats, and it becomes incumbent upon the company and its board to address a literal universe of local and global concerns in its operations, all supposedly for the greater good.

Warren’s proposal did not arrive in isolation. Recently many Democrats have begun to embrace a preferred economic model that is no longer recognizably capitalism. This has been an undercurrent in the party for even longer, but it was deliberately suppressed during the presidencies of Bill Clinton and Barack Obama. Even in Obama’s time, however, it would sometimes crop up. Consider the then-president’s speech during the 2012 campaign in which he said, “If you’ve got a business – you didn’t build that.” As I wrote at the time, the president wasn’t wrong that businesses are joint enterprises; he was simply wrong in assigning the credit. Regardless of his rhetorical intentions, “you didn’t build that” haunted Obama throughout the rest of his re-election campaign.

The shift within the Democratic Party becomes evident when you consider Hillary Clinton’s evaluation in May 2018 that she may have lost the presidency in 2016 partly because she was too much of a capitalist. “It’s hard to know, but I mean if you’re in the Iowa caucuses and 41 percent of Democrats are socialists or self-described socialists, and I’m asked ‘Are you a capitalist?’ and I say, ‘Yes, but with appropriate regulation and appropriate accountability.’ You know, that probably gets lost in the ‘Oh my gosh, she’s a capitalist!’” Clinton said during an interview.

This from a candidate who spoke out against “quarterly capitalism” as early as 2015, in a speech at New York University. But while her comments have an air of Monday-morning quarterbacking, there is one compelling support for her argument: Bernie Sanders. Clinton did – barely – win Iowa’s first presidential caucus, but it was the beginning of a long and contentious primary process. And, even after Clinton secured her party’s nomination, she struggled to win over Sanders’ supporters, some of whom voted for Trump, some of whom voted for a third-party candidate, and many of whom stayed home on Election Day.

In the aftermath of Sanders’ surprising primary traction, even though he ultimately lost the nomination, the anti-capitalist wing of the Democratic Party has gone from quiet murmur to bold statement. Alexandria Ocasio-Cortez, who upset incumbent Congressman Joe Crowley in a New York primary in June, has become something of a spokeswoman for “democratic socialists.” New York gubernatorial candidate Cynthia Nixon has also described herself this way, and the Democratic Socialists of America report membership growth from 6,000 in mid-2016 to more than 45,000 today. (While Sanders also describes himself as a democratic socialist, he is not affiliated with the DSA.) This is a small group by national standards, but they have quickly gained visibility.

Many self-described democratic socialists are frank about the fact that they are less pro-socialism, at least as it has been traditionally understood, and more anti-capitalism. Meagan Day, a democratic socialist and a writer for Jacobin magazine, explained in an essay for Vox: “A robust welfare state in an economy that’s still organized around capitalists’ profits can mitigate the worst inequalities for a while, but it’s at best a temporary truce between bosses and workers — and one that the former will look to scrap as soon as they can.” Their alternative looks something like the Swedish welfare state on steroids. Especially for adults too young for firsthand memories of the Cold War, the idea is clearly gaining ground. Mainstream Democratic politicians are now shifting to try to keep these voters in the fold.

Warren’s proposal captures this anti-capitalist theme nicely and, I’m sure, deliberately. She does not want the government to nationalize companies outright, which would be socialism. She just wants government, either directly or through its designated (read: politically left) proxies to tell companies what they can or cannot do – or, even better, to soak them for cash after the fact for real and imagined transgressions. It would revisit the banking extortions after the financial crisis, which is something that the godmother of Dodd-Frank knows more than a little about.

Bill George, a senior fellow at the Harvard Business School, observed in a column for CNBC that Warren’s bill would essentially create two-tier board systems, in which regular directors meet to make key decisions and then return to the full board, including the employee-elected members, to ratify them. Some European countries, including France and Germany, have attempted such systems; they have proven, in George’s words, “dysfunctional and non-productive.” He also notes that good CEOs and board members already take stakeholder concerns into account, and are often required to do so by state law.

As readers pointed out in letters to The Wall Street Journal reacting to Warren’s op-ed, her proposed legislation is based on shaky logic, ignoring the fact that shareholders are already paid last. They also pointed out holes in the plan, such as uncertainty about how conflicting interests would be addressed. One reader described Warren’s plan as “a shotgun rather than a rifle,” and Rep. Jeb Hensarling, R-Texas, wrote bluntly: “If Sen. Warren’s efforts are successful, she will certainly achieve her goal of ending income inequality. We will all become equally poor.”

Warren thinks the land of the free and the home of the brave should look like… Germany. Personally, I welcome her proposal. Note that I say I welcome it, not that I support or agree with it – heaven forbid. I welcome it for the same reasons I support any reasonable truth-in-packaging legislation. In a country where less than 7 percent of private sector workers have chosen to join unions, and where entrepreneurs who build large businesses that employ legions of workers enjoy the status of celebrities much more often than that of villains, I’m happy to make each and every future federal election a choice between American capitalism and whatever you want to call the goo that Warren and her compatriots are selling.

I commend Warren’s bill to the attention of people in West Virginia, Indiana, Missouri, North Dakota, Montana, Florida, Arizona and Nevada. These are the states where control of the Senate in the next Congress will be decided. If you want Warren to achieve for the rest of American business what she did for banking with Dodd-Frank, support your Democratic candidate. Otherwise, you know what to do.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.

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