Soviet-style capitalism on Wall Street

Reading time: 8 – 14 minutes

Three years ago, when I visited Moscow and St. Petersburg, I was struck by the nostalgia that many Russians seemed to have for the ‘good old days’ of communist rule.

I also noted that some capitalists in the new Russia seemed to resemble what many Americans might consider to be the criminal class.

Then I realized that Russians are a people that for four generations — since the time of their great-great grandparents— have been indoctrinated in the belief that capitalists are evil monsters driven by greed, exploiters of the underclass — destroyers of humanity.

Since religion was the ‘opiate of the mass’, Marxists standards were the only guide to ‘morality’.

Russians were taught that capitalism and ethics are incompatible — Greed Rules!

When the communist system collapsed, bringing down the Soviet Union, it was inevitable that those who became entrepreneurs in the new Russia would have perceptions of business behavior taught over decades in Soviet schools.

I define ’soviet-style capitalism’ as economic behavior driven by unbounded greed, devoid of ethical consideration, purely selfish in nature, with concern only for short-term profits, and with no thought to the long-term interests of clients, minority shareholders, or society in general.

Adam Smith, who was both an economist and a ethicist,  said that businessmen should have commercial virtues such as prudence, justice, industry, frugality, and constancy, in harmony with higher and nobler virtues of  benevolence, generosity, gratitude, compassion, kindness, pity, friendship, and love.

Adam Smith recognized self-interest as a useful trait, but one that should not be allowed to override the nobler virtues.

In Marxist dogma, capitalists are said to be devoid of virtue — which can only dwell in the collective.

Soviet-style capitalism in America

The mantra ‘Greed is Good’, popularized by the movie, “Wall Street”, is sung time and again when anyone criticizes the porcine, selfish remuneration schemes of corporate executives.

Most corporate executives of giant companies today are, in actuality, mere employees (‘workers’ in communist jargon) and are not capitalists or entrepreneurs at all.

Generally, their excessive remuneration is based purely on the short-term, and often temporary, rise in the price of shares of the executive’s corporation — which, under the now discredited Efficient Market Hypothesis, is supposed to mean that the intrinsic value of the corporation has increased.

This executive remuneration is divorced from any qualification of societal merit, such as inventing and marketing a useful product, laying a railroad across a mountain range to open new lands to settlement, saving millions of lives with a new medical procedure, providing more comfortable and efficient means of air travel, or even improving the economic well-being of the corporation’s employees, customers, suppliers, or shareholders.

Instead, it’s exclusively about the rise in the price of shares, which, in turn, is manipulated upwards by the executives themselves, using shareholder money and corporate buybacks — conveniently exempted from fraud by SEC Rule 10b-18 since 1982.

Casino at Monte Carlo: Economic Game Theory and Monte Carlo Methods were based on the presumption that players would have some skin in the game

No skin in the game

These extraordinary remuneration schemes are provided without executives having employed or having risked any of their own capital and is often paid, even as a corporation slides into bankruptcy.

Yet, when anyone dares to criticize bloated executive pay packets, the knee-jerk response is “well, that’s capitalism” — mimicking the Soviet line that capitalists are greedy pigs and that, from the point of view of socialist Wall Street, “Greed is good”.

Few seem to note that, in capitalism, capitalists are supposed to risk their own money, and under Adam Smith’s capitalism, these risk takers are supposed to be guided and constrained by ethical considerations.

In Wall Street today, the question, “Is it ethical?” had been substituted by, “Is it legal?”

Many don’t see the difference.

Remuneration is not the issue

Now, I have no objection if Steve Jobs wants to have a private corporate jet to fly to Europe, because he is a real entrepreneur, the founder and an owner of his company. He is not an employee.

Andrew Carnegie, born poor, without a college education, revolutionized the steel industry, becoming the richest man in America. He gave away most of his wealth, founding libraries and funding universities. To the socialists, he is a villain.

Furthermore, Steve Jobs, like Andrew Carnegie, George Eastman, Thomas Edison, Henry Ford, John D. Rockefeller, and Milton S. Hershey, and many other capitalists that made America great, actually did something useful for the world.

His economic well-being is not based on scheming to climb the corporate ladder and then betraying the fiduciary responsibility of an employee-manager to shareholders, using the trick of buying company shares with shareholder cash at a high price — shares that were then acquired by the manager himself from the company at no risk.

In fact, it is well and fitting that Steve Jobs is highly remunerated, because this fact may inspire young people to also try to get rich by doing something useful for the world. (See the video clip on this page for Steve Job’s own story of his life.)

Unfortunately, after over a hundred years of socialist propaganda and the rewriting of history, the great capitalists of America’s past have been transformed into villains, earning the perpetrators of this historical fraud places of honor in American libraries and school curricula.

Were the ‘robber barons’ really evil?

Fifty years ago, when I was in high school, I was interested in becoming an entrepreneur. Since there were no entrepreneurs in my family, I went to the library and picked up, “History of the Great American Fortunes”, by Gustavus Myers.

I found this book profoundly disappointing. According to this author, the men that built America in the 19th century, laying the railroads, creating steel mills, and inventing new products, were all villains. Furthermore, this book seemed to hold a high position of authority, carefully researched and documented, and printed by a distinguished publisher.

On the high school reading lists were books by Upton Sinclair, Lincoln Steffens, Ida Tarbell, and Frank Norris — all the muckrakers that were fit to print.

Of course, in those years, I didn’t know what a socialist was. There was only one version of the ‘received truth’ being taught in public schools and that was that the Robber Barons were bad and that Franklin Roosevelt was good.

Years later, after having actually been a capitalist and entrepreneur and having found that these folks were not devils after all, I also discovered that people like Gustavus Myers, Upton Sinclair, Lincoln Steffens, and Frank Norris were all socialists. Lincoln Steffens had gone to the Soviet Union in 1921 and declared, “I’ve seen the future and it works”.

American school children have now had this biased view of history pumped into their young brains for at least as long as youngsters were indoctrinated in the Soviet Union.

Take a look at the depressing video on this page, showing a ‘history project’ prepared by students at an American high school.

Is it any wonder that employee-executives on Wall Street behave as they do?

Who shall teach our children ethics?

In was easy enough for Adam Smith to talk of ethics, living in the cozy Protestant world of Scotland and England — not to demean Smith’s works on ethics and morality — but ethics in today’s global economy, with people from all religious, non-religious, sectarian, and cultural backgrounds, is quite a different matter.

The socialists demeaned religion as the opiate of the masses, substituting instead the opinions of the elite — presumably themselves.

The universities and business schools often adopt either the socialist stance of ethics determined by the elite, or moral relativism, which is translated as Ethics? Whatever!

It seems to me, however, that those who prefer capitalism over socialism, should reject the socialist doctrine that capitalists believe that ‘greed is good’.

But to do this effectively, some hard guidelines for business behavior, consistent with today’s world, should be enumerated.

We do have the namby-pamby ‘corporate governance’ movement that has emerged over the last generation, graced by thousands of pontificating committees, commissions, and assorted what-nots,  that  publish norms that are either innocuous piffle (such as suggestions that directors should develop policies that address environmental, equal employment, community impact, and exploitation of non-shareholder constituencies),  or simply ridiculous notions, such as the search for the mythical ‘independent director’.  Many, perhaps most, involved in the corporate governance movement are not capitalists at all, but rather socialists, employee-bureaucrats, public servants, or tenured academics.

The problem that capitalism faces today is that socialism is again on the rise.

The United States has a socialist (or perhaps, even Marxist) president who revels in attacking the absurd remuneration schemes of corporate employee-executives.

This is pure socialist propaganda — but the truth is that most of the executives in question are not capitalists, but soviet-style bureaucrats, taking advantage of loopholes in company law and the uncertainty of the masses as to what capitalism really is, or should be.

This comes to the conclusion of this article.

In order to defend and boost capitalism, it is necessary to call out and condemn the pseudo-capitalists that simply serve to give credence to the attacks of the socialists.

What do you think?