Capitalism's 3 Children

We live in a world in which politics has replaced philosophy.

~ Martin L. Gross, A Call for Revolution, 1993

Update: This article was featured in the Carnival of Financial Planning #137 posted at The Skilled Investor. Thank you!

What’s the difference between politics and philosophy? It seems to me that philosophy is about searching for the truth. Politics is more about proving that your version of the truth is better than the other side’s. I’m going to start an informal series today in which I will periodically write about our current economic system. We call it capitalism.

Before you start yawning and surf on to another web page, read a bit more. I intend to write from the perspective of a layperson, mom, wife, and citizen. That makes sense, since I fit into all 4 categories. There’s no danger of getting too deep into economic jargon, as I am only a casual economic observer, and not an expert.

No matter what the economy does or how the politicians change our laws, we are all in charge of our own economic situation for the most part. Last week I tweeted an article that said Believe It or Not, You’re the Economic Expert. If you haven’t had a chance to read it yet, check it out and let me know what you think.

What Is Capitalism?

When the financial crisis hit, global media outlets were rife with headlines heralding the end of capitalism. But what is capitalism? In my mind, capitalism is an economic system whereby private owners are encouraged to take risks by starting businesses that deliver products and services that society needs. They are compensated for that risk by higher potential rewards that, in theory, should be commensurate with the amount of risk taken and effort expended.

In theory, these owners are incented to provide superior products and service in order to remain competitive and to ensure the success of their businesses, and by extension, the prosperity of their managers, employees, and suppliers. The cream is supposed to rise to the top. Those who run the best businesses are supposed to thrive.

I looked up capitalism on Wikipedia and they basically said that “[t]here is no consensus on the definition of capitalism.” Then I wondered if that could be part of the problem. What if we have a bunch of different groups running around with completely disparate ideas on how things are supposed to work?

Maybe we have such tremendous discord in our society at the moment because we have different groups operating under completely opposite assumptions. This is apparent from bickering in the halls of Parliament to kitchen table debates across the developed world. Watching political discourse these days is like stepping into the middle of a debate between my kids.

The 3 Children of Capitalism

When I listen to the noise in our capitalist system, I hear 3 main groups that seem to be jockeying for better positions for their own. I’ll go through each in terms of what they expect for themselves and in terms of where they might have gone off course. (You Moms (and Dads) out there will have a lot of experience sorting out the “he said/she said” squabbles I’m going to outline here.)

Owners

These are the people, as outlined above, who forgo stable salaried positions in favour of more control over their own destiny. Considering the failure rate of start-up businesses, this can be pretty risky. Apparently, this entrepreneurial risk is one that an increasing number of Canadians are willing to take.

Once these owners have built stable and successful businesses, they naturally want to reap the rewards of the time, effort, and money they have invested. They want the most productivity possible from their employees and the best possible performance from their managers. In theory, they can accomplish this by treating their managers and employees well and offering them some share in the company’s success.

Managers

Once an owner’s business has grown sufficiently, he/she will need to delegate some responsibilities to managers who can execute the company’s strategy and act as liasons with employees. Managers are sort of caught in the middle, as they are ultimately responsible to the owners, but they need to have a good working relationship with the employees as well. In terms of risk vs. reward, managers are kind of in the middle as well. They have less responsibility (and income) than the owners, but more of both than the employees.

Employees

These are the people who execute the day to day tasks involved in producing the service or product that the owner’s company sells. Their work is important, as the company can’t operate without them. But they usually do not want the risks, headaches and long hours that go with building a business. They want regular hours and a steady pay cheque. In return, they accept lower compensation than the owners and managers.

In theory, each of these 3 factions are supposed to work together toward the common goal of success for the business and thereby for themselves. As we all know, it doesn’t always work that way. Where does it all go wrong?

Trouble with the Kids

Those of you who have children will be familiar with the scenario where 2 or more of them coming charging at you, shouting about the grave injustices that have been perpetrated against them by the other(s). Once you get all parties to calm down, you put on your mediator hat and try to figure out what’s wrong. I’m going to try to put on my mediator hat and figure out what’s wrong with capitalism.

So we have the 3 parties described above, each with defined roles and compensation levels. But each has a few complaints about the others, and there are consequences to their perceived slights. The workers think the owners and managers are greedy, and that they take more than their fair share of the profits. Perhaps the employees decide to become a little less productive as a result.

The managers are tired of trying to please the owners and the workers at the same time. How are they supposed to balance the needs and wants of both? They may become jaded and not bother to work quite so hard to appease either.

The owners can’t understand why good help is so hard to find. They work hard and feel like they deserve a larger share of the profits since they created the business. Perhaps they squeeze a little more for themselves at the expense of the compensation paid to managers and employees.

Whose Fault Is It Anyway?

So whose fault is it? Apparently, it’s the same guy who keeps sneaking all the chocolate chips from my baking supply. It’s that dastardly villain known as Not Me. He’s been on the loose at our house for about 15 years now, and it seems he’s infiltrated our capitalist system!

The bottom line is that there is usually an ounce of truth in even the most extreme allegations in disputes, whether they are among children or capitalist factions. Usually, all parties bear some responsibility for the problem at hand. Solutions can only be found when all parties agree to be honest, to cooperate, and to compromise.

Obviously, we can’t address all that is wrong with capitalism (assuming there is something wrong with it) in one post. Next time, we’ll look at whether or not capitalism is broken, fundamentally flawed, or doing just fine.

What do you think of capitalism’s 3 children? Is one more to blame than the others for the recent financial turmoil, or do they all share some culpability?