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Structure: Our Private Sector Economy

When we use the term, “Our Private Sector Economy,” what are we including? And what are we not including?

We include all privately-owned businesses that provide goods and services to customers in America. This category will take in businesses as small as a hairdresser’s salon all the way up to businesses as vast in scope as Disney or Walmart or Apple.

On the other hand, it ought to be obvious that many other functions, just as vital to the well-being of our nation, will not be counted as part of America's "Private Sector Economy." Think public schools. Think post offices and VA hospitals and national parks and the Social Security program.

In other words, if we want to visualize the American economy as a whole, we'll cast a net wide enough wide enough to encompass:

Private Sector Operations;
Public Sector Operations;
Government Sector Operations. 

So, for example, the Disney corporation is part of the private sector economy. My local public school is part of the public sector economy. Our Department of Defense is part of the government sector economy.

In this section, I set aside the public sector economy and the government sector economy, and I focus only on the private sector economy.

The private sector economy is absolutely indispensable. It is also problematic - perpetually problematic. And the habits by which we have been taught to visualize the private sector economy turn out not to be as insightful as we need them to be.

Why do I say this? Well, for starters, because the private sector economy is – simultaneously – a source of technological creativity and economic disparity. At its best, it generates nearly universal prosperity and progress. At its worst, it simultaneously generates great fortunes at the top and great poverty for a remarkably large share of the American workforce. At its worst, the capitalism of enrichment inherently functions as a capitalism of despair. Why were so many American cities thrown into an uproar by the police murder of George Floyd in Minneapolis? Yes, it was partly because our ill-trained police forces inevitably turn to deadly force far more often than necessary. But the demonstrations also reflected years and years of living within a Capitalism of Despair.

There are those who want us to close our eyes to the pain that a poorly supervised private sector will impose on its employees, to the pollution its factories will generate and not clean up, and to the terrible crises and crashes that its financiers unleash on a vulnerable nation.

If you're an eminent conservative, you will almost surely consider it bad form for anyone to criticize America's capitalism sector for its inherent corruptibility. Capitalism does so much good, conservatives will say, that we really ought to close our eyes to the damage that it's also in the habit of generating.

And, conversely, there are those in the liberal camp who would have us close our eyes to the progress that private sector firms are indeed capable of generating. Liberals – especially those who cheer on Bernie Sanders – would rather not salute even the benefits that capitalism creates and delivers. To their mind, no amount of good will ever excuse the bad that private sector capitalism generates at the same time.

Both types of denial get in our way - the pretense of many conservatives that capitalism never misbehaves, and the pretense of a good many liberals that capitalism never behaves virtuously.

I want America to be a country that works well for everyone. And if that's a widely shared goal, as I suspect it is, it makes sense to teach ourselves to see private sector capitalism in an all-sided way – as a positive force when compelled to behave honorably, as a negative force when allowed to behave dishonorably.

There's a close-minded Right in America that will never ever sign up for the mission of an America that works well for everyone - if such a mission implies that private sector capitalists will be required to behave honorably.

By the same token, there's close-minded Left in America that will resist signing on to the mission of an America that works well for all - if such a mission means that private sector capitalism, when properly regulated, will have a major and even vital role to play in the American economy.

All of us – from across the political spectrum – have two obligations.

1) To understand – with real clarity – the underlying genius of free-market capitalism, i.e., the genius of the private sector portion of the American economy.

2) To understand – with real clarity – the perpetual corruptibilities of free-market capitalism. And what must be done to rein in those corruptibilities, to prevent them from becoming engines of widespread damage and decay.

As we have been reminded by many an economist, in primitive economies, everyone ends up being a generalist. Grow your own food, hunt your own game, build your own hovel, produce your own clothing, treat your own ailments. In regions and eras of total backwardness, peasant families inevitably produce for their own consumption. In such eras and regions, there are no specialists bringing goods to market, and, indeed, there are no markets at all, not as we moderns think of markets. Not only are there no shopping districts, there are no annual fairs. Families make do, 365 days a year.

By contrast, once market economies take hold, none of us are compelled to produce all the goods we might need. We are no longer forced to function as isolated generalists.

Instead we produce as specialists, with the mission of serving one particular need, and doing so for the multitude. For the village's multitude. For the nation’s multitude. For the world’s multitude. Shoemakers specialize in shoes, and, more recently, in the branding of their shoes (e.g. Nike and its swoosh). iPhone makers specialize in iPhones. On-line merchants specialize in on-line merchandising.

Adam Smith observed and described the practice of specialization in a Scottish nail factory (nails in his part of the world were known as “pins”). By breaking down the steps in nail-making, and assigning each separate step to a talented specialist, the nail factory multiplied significantly the quantity of nails it could produce in a single day.

Specialization yields efficiencies, efficiencies raise overall productivity, and when the powers of specialization are applied to an entire range of goods, rising abundance for the entire society is the marvelous result.

It was important to Smith to engage his readers in recognizing the significance of the shift from the individualized production systems of peasant societies to the specialized production systems of market economies.

How could a traditional peasant society generate economic progress? Out of reach.

But what about societies with market economies?

In societies that embraced markets, in which folks produced as specialists while consuming as generalists, those ongoing gains in productivity also generated rising prosperity.

And the principle still holds. No peasant producing for his or her own needs alone would ever have created a computer, let alone an iPhone. But market economies, in which all of us “produce as specialists” and “consume as generalists” (my phrasing), inherently generate rising capabilities and deliver all sorts of progress.

And private ownership of specialized companies becomes one of the key elements in a rising economy’s ability to expand both the range of what it's capable of achieving and the efficiency with which it all gets done. Edison gets to patent light bulbs and the day comes when light bulbs are manufactured by specialists and sold by the millions. The Wright Brothers get to patent airplanes and the day comes when millions of people travel by air every single day. (Except during pandemics.) Alexander Graham Bell gets to patent his first telephone and the day came when telephone companies serve tens of millions of customers.

People with extraordinarily innovative minds start out as tinkerers and become industrialists.

It’s a formula we will never want to toss away. As a society, we derive too many benefits from it to give it up.

But it’s also a formula for bringing out humanity’s dark side. Yes, as McKinsey’s Eric Beinhocker has argued, economic principles produce economic evolution in the same way biological principles produce biological evolution. Proliferate, select, amplify. Biological variations occur endlessly, creating a proliferation of potential new species. Some do well and survive and thrive. Others don’t and they won’t make it. And those experiments that do succeed? Well, Nature amplifies their success. Humans were a new biological variation, way back when, and eventually our ancestors caught on. And here we are. Seven billion humans. Eight billion humans. We worry that perhaps we've been too successful for our own good.

Well, large companies symbolize the success of the same process in our economies. Entrepreneurs proliferate, customers go for the options they like best, and those companies that prevail then double down on what they do well.

But as Beinhocker also points out, ours is not only an economy of markets, it is also an economy of firms. And at the top of any leading firm, he then points out, there arises a sociological susceptibility to “Big Man Rule.”

Success begets wealth, wealth begets power, and power begets ego trips.

The sociology of any large firm is such that those at the top will find themselves operating in environments of constant temptation. “The less I pay my workers, the wealthier I become.” “The less I invest in safety, the wealthier I become.” "The less regard I have for Nature's well-being, the wealthier I become."

We humans are biological beings. And so our drives make us inherently susceptible to temptation. Some of us have enough character to say “No” to our darker drives. And some of us don’t. Some of us are gripped by compulsions so powerful we cannot help ourselves. First we say “Yes” to temptation, and then it's not long till we have said "Yes" to corruption!

And for every obsessive egotist at the top, there will sooner or later be a trail of wounded victims in the lower reaches of the same company.

In the Old Testament's most famous story of temptation yielding to corruption, King David is remembered for spotting Bathsheba bathing on a nearby rooftop. He is smitten with desire. He takes Bathsheba as his lover, and then to secure his theft, he arranges to have her husband sent into a battle that will surely get him killed.

Later he is called to account for his terrible sin. Which, generally speaking, is not usually what happens to corporate chieftains regardless of how rotten their behaviors may have been. As the Old Testament tells the story, a wise rabbi knew how to hold David accountable for his lapse from Temptation into Corruption. That's not something one sees very often on Wall Street or in Corporate America.

Humans are corruptible. It's all about our drives, especially when our principles aren't strong enough to control our drives. Especially when our Ambitions aren't righteous enough to keep us honest. Especially when our Culture isn't principled enough to keep us honest.

Put enough temptation in front of ordinary humans and a good many of us will yield to even the grossest of corruptions.

Combine our natural corruptibility - as humans - with the temptations that pass across the desks of corporate and financial CEOs and every capitalist economy that has ever existed will find ways of embracing corruption.

Left unchecked, human corruptibility will spread like a cancer at the top of the any economy that's foolish enough to tolerate it. Any economy. Any era in history. We dare not pretend otherwise. Capitalism is inherently corruptible.

Consider slavery. Agricultural production based on slavery become in its day a source of enormous wealth, and, in turn, a generator of irresistible temptations and perverted corruptions. White planters in the Slave South reached a point where they owed their fortunes to their willingness to murder any slave who got out of line. Just another data point.

Capitalism within a regulated framework learns the disciplines of integrity. Capitalism within an unsupervised framework veers toward all sorts of depravity.

Are conservatives right about free market capitalism? That it’s a source of innovation and progress? Yes, they are.

Are liberals right about free market capitalism, that it is inherently susceptible to enormous amounts of corruption and abuse? Yes, they are.

Are far-right conservatives right when they denounce government regulations designed to curb the corruptions of the rich? No. They’re not.

Are far-left liberals right when they call for Socialism, in the classic meaning of ending the private ownership of business? No. They’re not.

Level-headed liberals and level-headed conservatives have always known a core truth. For America to be a country of prosperity and integrity, with the American Dream working for everyone, we have to place a premium both on the energy of our private sector economy and on the persistent governmental supervision of that economy.

These realities can be expressed in a five part rule.

  • Private sector capitalism has an essential role to play in every modern nation. Innovation. Productivity gains. Prosperity gains.
  • Private sector capitalism inherently enriches its most talented practitioners. Some will choose to be capitalists of good character.
  • And some will be overwhelmed by greed and will pursue as much corruption as they can get away with.
  • So the first role of Government, with respect to any nation’s private sector economy, is to promote a capitalism of integrity, i.e. to promote the practice of “Prosperity Capitalism.”
  • And the second role of Government, with respect to any nation’s private sector economy, is to outlaw a capitalism of corruption and greed, i.e. to outlaw the practice of “Enrichment Capitalism.”

Do away with Government’s role as the permanent guarantor of capitalist integrity and what will happen? There won’t be a capitalist economy anywhere whose moral fiber is strong enough to resist the allure of enrichment through corruption.

Unregulated capitalism harms every nation.

Over-regulated capitalism will hold back any nation that doesn’t know where to draw the line.

It takes a special sort of patriotism and wisdom to get the balance right and to promote an energetic private sector within a well-regulated set of standards.

Innovation gives us the prosperity we want.

Regulation protects our integrity, and in doing so, also protects the soul of our nation.

Am I right? Or have I fallen prey to propagandists on the left?

Let's look at the numbers. They tell a story that confirms the point I have just made.

To create the two charts that follow, I have drawn on databases created by Cal-Berkeley economists Emmanuel Saez and Gabriel Zucman.

In the first chart, I draw from an earlier Saez database to profile the income gains generated by a succession of U.S. presidencies, beginning with Harry Truman and ending part way through Barack Obama's time in office.

I had no idea, when I started, just what I'd find. I asked a simple question. Of the total rise in workforce income that occurred from the beginning to the end of each presidency, how much went to the Bottom 90%, how much went to the Next 9%, and how much went to the Top 1%?

I plugged the numbers from the Saez database into Powerpoint, and here's a near copy of the chart they produced. (This chart first appeared in Chapter 6 of my 2016 book, Getting America Unstuck.) 

Once I'd created this chart, what I was struck by was how stable the first eight sets of bars were. Those in the Top 1% started with 11% of the economy's pretax gains, and then in the presidencies from Truman to Carter, gained anywhere from 1.9% of new income (Truman) to 9.8% of new income (Carter).

And over the same presidencies, Americans in the Bottom 90% pulled in anywhere from 60% of the economy's new earnings (Carter) to 73% (Truman).

And the Next 9% pulled in the remainder, collecting anywhere from 24% of new earnings (Kennedy) to 32% (Nixon).

The second feature that struck me was the abrupt change in fortunes that occurred from the Reagan years onward.

The share of new income being reaped by Americans in the Bottom 90% plummeted to 41% during the Reagan presidency, went negative at the end of both Bush presidencies, and topped out at a mere 49.6% with the Clinton presidency.

Meanwhile, with the Bottom 90% being hammered from the Reagan years forward, the Top 1% were reaping massive gains. At the end of the George W. Bush presidency, 47.5% of the economy's new income had gone to the Top 1%! Staggering. Against a sinfulness of this magnitude, David's seduction of Bathsheba barely registers. Even at their lowest point, during the administration of Bill Clinton, the Top 1% still captured 22.9% of the economy's new income.

In my view, no one has come up with a term that properly describes the distinction between what were clearly two very different chapters in the long history of American capitalism that followed World War II.

A fresher database from Emmanuel Saez and his colleague Gabriel Zucman now lets us see in far more detail how these two periods looked for Americans at every percentile level of the American workforce.

What you will see, in this second graph, are results for the American workforce broken out in much finer detail. Each dot on the chart represents a narrow percentile slice of the entire workforce. The 1st thru the 5th, the 5th thru the 10th, and so on, up to the 95th thru the 99th and the 99th thru the 100th.

You will also see how people in each of these slices fared from 1962 to 1981 (the blue line on the graph) and then from 1981 to 2014 (the red line on the graph.)

I wish this sort of detail were available beginning with 1945, but it isn't, and I wish it were available to at least 2018, but it isn't.

These two lines confirm the story you've seen in the previous graph - a story about how American Capitalism treats the Top 1%, and how it treats the rest of the American workforce. To see the actual numbers for each datapoint - the slice it represents and the income gains it represents, hover your cursor above each of the spots on the graph.

What a remarkable behavioral shift this graph reflects!

Here's the story these two graphs unfold. It was not a story one learns at the Stanford Business School. Nor was it a story I've learned from any of the books I've read. It was a story I finally had to intuit on my own. And it goes like this.

Ours is an economy that's known for its output identity, as expressed by GDP.

But perhaps it also has a second identity, a wealth identity, symbolized by the S&P 500, the Dow, and so on.

And, because it is an economy with two distinct identities, not just one, it is also an economy that can be optimized in two different ways, toward two different ends.

It can be optimized for Prosperity, as it was from 1945 to 1981.

Or it can be optimized for Enrichment, as it has been from 1981 to the present.

What we saw in America's 1945-1981 era was an American economy of Prosperity Capitalism.

What the current era (1981-present) now gives us is an American economy of Enrichment Capitalism.

The American Dream was alive and well for all Americans during our earlier chapter of Prosperity Capitalism.

But with the switch to Enrichment Capitalism, the American Dream dried up and blew away for more than half the American workforce.

What we see, in these two eras and their drastically different track recrods, is confirmation of this essay's essential point. American Capitalism has a bright side - it's capable of generating rising prosperity for the entire workforce. And American Capitalism also has a dark side - it's more than willing to shortchange most of the workforce in order to generate extreme levels of enrichment for the Top One Percent.

Innovation. Commercial Success. Temptation. Corruption.

We want the first two. And inevitably they bring with them the second two, unless we use regulation to keep our private sector economy behaving honorably. And bent toward compliance with our nation's patriotic goals.

An economy optimized for Prosperity is fully compatible with "An America of Systemic Well-Being."

An economy optimized for Enrichment inevitably sabotages our hopes for "An America of Systemic Well-Being." It promotes the triumph of an abusive America.

Prosperity Capitalism shows us what we can have if we pursue a Capitalism of Systemic Integrity.

Enrichment Capitalism shows us what we will get if we acquiesce in a Capitalism of Systemic Corruption.

Enrichment Capitalism also has a second name, describing its impact on those in the lower half of the workforce. The Capitalism of Despair. Why do you suppose the street rallies following the police murder of George Floyd were so intense? The Capitalism of Despair had for years been stoking a quiet rage in the hearts and souls of all those in the lower reaches of the American workforce, especially those whose color forces them to live in fear of their local police. And then, with something as tellingly awful as the police murder of George Floyd, what had been a quietly held rage cannot be held in any longer. The Capitalism of Enrichment (for the 1%) and Despair (for the lower end of the entire workforce) inevitably generates a culture of interlocking evils. Economic oppression. Racial oppression. Police oppression.

The Republican Party has already made its choice. The Republican Party opposes the revival of the American Dream, and instead favors a Capitalism of Enrichment (for the one percent), also known as a Capitalism of Despair (for most of the rest).

Just as the state governments of the Slave South once existed solely to protect the supremacy of the White Planter Elite, so now our national Government - in the mind of the Republican Party - exists solely to promote the special privileges of the Top One Percent.

For its part, the Democratic Party is still awash in muddled reasoning. It has yet to grasp the notion that America has a real choice to make. It has yet to notice, let alone name, our earlier reality of Prosperity Capitalism. It has yet to notice, yet alone name, our current reality of Enrichment Capitalism/the Capitalism of Despair.

And it has yet to take a stand, in opposition to Enrichment Capitalism, in support of Prosperity Capitalism.

Centrist Democrats are nervous about the risks involved in acknowledging the inherent corruptibility of a poorly regulated Capitalism. More Liberal Democrats are nervous about acknowledging the value of an honorably regulated Capitalism.

And that's one of the key motivators for the creation of this website. Ours is a culture of muddied reasoning. On all sorts of vital issues, and on this one in particular.

We cannot bring out America's best, though, till we shake off our legacy of careless thinking and muddied reasoning. Democrats need to get real. The American economy does indeed have two distinct identities. It can, indeed, be optimized in two very different ways, for two very different kinds of ends. One choice brings out America's best. The other choice brings out America's worst.

We know what Republicans want. An America of the One Percent, by the One Percent, and for the One Percent.

But we don't know what the Democrats want. They used to be the party of Prosperity Capitalism, but at the time they didn't quite realize just how special an accomplishment that actually was. Then when Reagan came to power, they lost their mojo and they've never gotten it back. They didn't get it back during their Clinton years, or during the years of George W. Bush, nor during their Obama years, and it's not clear, even now, that the Democrats have quite grasped the central reality that our capitalist economy can be optimized in two very different ways, toward two very different ends.

Slow learners.

What the Democratic Party used to know has to be regained.

Truth One: Optimize the American Economy for the One Percent and most Americans get hammered.

Truth Two: Optimize the American Economy for Prosperity, and the American Dream gets revived. The entire workforce gets to share, again, in the fruits of the economy's rising productivity.

It's a shame that Bernie Sanders has been so intent on demonizing the capitalism of today that he has yet to acknowledge the remarkable era of Prosperity Capitalism that FDR's New Deal bequeathed to the nation. An era that lasted from the End of World War II all the way to the beginning of the Reagan years. Bernie's a sharp guy. How curious that this has never been a story he cares to tell!

The Democratic Party has a mission.

But first the Democratic Party will have to name and acknowledge the distinction between Prosperity Capitalism and Enrichment Capitalism. One is a capitalism of relative integrity; the other is a capitalism of intensified corruption.

Should the Democratic Party finally get its principles right, it will finally be able to shine a clear light on America's higher promise.

An America that realizes its higher promise is an America that delivers on the American Dream. And for America to return to that mission, it will first have to return to being an America that holds its capitalist economy to honorable standards. America will again have to be a country that uses its Government properly, as an instrument for compelling its Private Sector Economy to say "No" to Temptation, "No" to Corruption, and "Yes" to Integrity.

Everything waits on the Democratic Party. Its thinking remains befogged. Not a single mailing sent to me by the Democratic National Committee has ever decried the nation's cruel abandonment of Prosperity Capitalism, or decried the nation's cruel embrace of Enrichment Capitalism. Not a single Democratic Party mailing that I know of has ever laid out the importance of this choice.

And a Democratic Party that cannot teach itself this message is clearly not yet the party that's ready to show our nation the way forward.

But it's not just the Democratic Party whose thinking remains muddled. It's pretty nearly all of us.

We have to know - all of us - our economy's central truth. It is capable of showing the nation its bright side. But its leaders would prefer to show the nation the economy's dark side. There's profit in cruelty, alas, and they haven't enough strength of character to renounce cruelty on their own. The rest of the nation, using the proper powers of Government, has to give the order. "No more economic cruelty." "It's time to reinstate the principles gave us Prosperity Capitalism, before, and that can give us Prosperity Capitalism, again."

We cannot bring out our country's brighter instincts till we recognize what it takes to acknowledge and avert our country's darkest instincts. Our Private Sector Economy is always capable of generating a bright side. But its core instinct is to go with its dark side.

We will always need to see capitalism in an all-sided way, emphasizing the importance of its virtues, insisting on barring its corruptibilities. An abusive capitalism will push the entire nation toward abusive norms. A nurturing America will have to push back, and insist on a capitalism that honors the nation's nurturing norms.

Steven Howard Johnson

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