Democratize capital-capitalize democracy
"Capitalism without capital is just an 'ism.'" Dr. Martin Luther King's statement speaks volumes about the profound political and economic consequences of concentrated wealth and inequality. The absence of fairly governed corporations and markets, distorts markets through imperfect information about value, economic or otherwise. They are closed capital systems that do not work. Market signals get crossed, prices are distorted, and markets fail.
Such capitalism enables those with political power to insulate themselves from competitive forces, win favorable tax treatment, gain government-protected market share, and promotion of other economically destructive behavior that economists call "rent-seeking," where such crony capitalists extract for themselves an excessive share of corporate earnings or benefit from excessively high prices (for what the government might buy, like drugs) or excessively low prices (for what the government might sell, like mineral rights). Rent-seeking capitalism distorts the economy and generates inequality that lowers growth and lessens efficiency.
In short, excessive inequality amounts to sand in the gears of capitalism, creating volatility, fueling crises, undermining productivity and retarding growth. Nobel Laureate Economist Joseph Stiglitz convincingly argues in his recent book, The Price of Inequality: "Inequality leads to lower growth and less efficiency. Lack of opportunity means that a country's most valuable asset -- its people -- is not being fully used. Many at the bottom, or even in the middle, are not living up to their potential, because the rich, needing few public services and worried that a strong government might redistribute income, use their political influence to cut taxes and curtail government spending. This leads to underinvestment in infrastructure, education and technology, impeding the engines of growth."
The struggle between entrepreneurial capitalism, characterized by broad, inclusive ownership patterns, and corporate capitalism characterized by more exclusive, concentrated ownership, is one of the main themes of the debate about the future direction of capitalism. Building community, business, and capital ownership and the related definition of corporate governance that surrounds it is a logical and necessary extension of the current global challenge. Political representation without economic participation through enterprise ownership (business or social), and the capital access to finance it, could be democracy's 21st century dead end.
We cannot face the next decades of the 21st century with labor and capital in the developing and developed world adversarial, and yet hopelessly in search of one another. New technologies and new markets create the greatest hope for the unrealized promise and potential of the democratization of capital -- realizing the economic dimension of political democracy through an active, enterprising global citizenry. Since the birth of entrepreneurial capitalism in the first start-up global nations, in Holland in the 17th century and later Britain, and the U. S. in the 19th and 20th century, free trade, technological revolutions, and increased economic participation through creating enterprises where cash would flow and ownership would grow was the heart of economic growth. Widespread property ownership was indispensable to the success of democracy -- as it was in the 17-19th century transitions and will be again in the global demographic transition of financial inclusion empowering emerging and frontier markets that will drive the new global economy.
Ultimately, prosperity is a function of the widespread adoption of financial tools that can multiply the access and distribution of all forms of capital: real capital (assets like natural resources, land, buildings, machinery and equipment, hardware); human capital (knowledge, health, education and other determinants of the quality of human resources); and social capital (social networks, social institutions, rule of law).
Capital is both a factor of production and a measure of wealth across the population over time. The best way to combine a democratic government with a market society is to make sure that productive assets are distributed widely through financial and information technology to provide access and distribution of all forms of capital -- social, human, and financial.
Access to capital in all of its forms allows citizens to become owners, opens markets globally for their products and innovations, commits government and private funds to internal infrastructural improvements and opposes fiscal measures that hurt taxpayers. Financial and policy innovations that allow an evolving wider distribution of capital will lead to a more diffused source of wealth formation and more competition and economic growth. This form of democratized capitalism could create concrete political and economic growth policies to create economic independence and raise living standards.
A version of this article appeared in The Marker Magazine, in Hebrew, on July 1, 2013.