"CAPITALISM has changed," said Jack Bogle, "and it has not changed for the better." Bogle, founder and former CEO of one of the two largest mutual funds on earth, visited the University last Wednesday to warn about an impending crisis for capitalism. While he correctly identified the erosion of social norms that formerly mitigated the negative effects of capitalism, he failed to recognize that the problems he identifies are systemic. While those problems can be alleviated with liberal government intervention and powerful social norms, structural reform is a precondition for actually solving the problems Bogle identified.
When Bogle founded the Vanguard mutual fund group three decades ago, the average CEO earned roughly 40 times more than the lowest paid worker.Today, that ratio is 350 or 400 to one. As Bogle pointed out, middle class wages have stagnated while CEO pay has exploded, and in the past year middle class earnings fell. Working families have managed to maintain their standard of living only by working more and spending less time together. Rising inequality, Bogle said, threatens capitalism itself. He also cited decline in direct stock ownership, failure of auditors and the loss of trust in the business community as mere symptoms of the loss of capitalism's "soul."
Bogle provided valuable insight on the phenomenon of changing cultural norms within the capitalist framework. He said "values should be embedded in business," then cited Adam Smith's belief in the importance of "propriety," "generosity" and "love of that which is noble" with respect to business behavior.
These are all laudatory sentiments, but they also contradict the ideology of the invisible hand, which says that selfish action will ultimately maximize societal welfare. Bogle is absolutely right -- it would be wonderful to trust our corporations. It would also be idiotic.
CEOs with giant compensation packages, as Bogle pointed out, have huge incentives to manipulate profit reports. More fundamentally, because each person lives in the short term, each capitalist participant will engage in what Bogle called "counterproductive" short term behavior. If we do not live forever and we are maximizing our own utility in line with invisible hand ideology, there is no reason to maintain trust through the end. At some point it is profitable to cheat one's neighbor.
A self-proclaimed believer in "free enterprise," Bogle does not realize that the mechanics of market competition cause the income inequality, exorbitant CEO pay, and corruption of accounting agencies that he views as a mutation of the virtuous marketplace. Moreover, the ideology of the "free" market serves as a convenient rationalization of our inhuman treatment of one another in daily market exchanges.
Capitalism has not changed. With the ascendance of "free market" ideology, particularly on campuses such as this one, it has become more socially acceptable to deny that we are our sisters' and brothers' keepers. Strict adherence to this ideology also makes grotesque CEO pay, poverty wages for most workers and abrogation of pension responsibilities acceptable in polite society. If it were a cultural norm to stone people like Ken Lay, capitalism could be made a bit more humane.
We also cannot ignore the importance of cultural norms when advocating structural change. Socialized health care will not work at levels of maximum efficiency until citizens understand that the lunch has not suddenly become free. Democratically-run worker cooperatives will not function unless their members internalize values of cooperative solidarity.
Ultimately, however, political economic structures force us all to behave in certain ways. If we want to construct a society in which Jack Bogle will not have to criticize the rapaciousness of CEOs, we will have to alter the economic fabric. Restoring "trust" or "values" to the business community might dull the pain, but it won't kill the virus.
Zack Field's column usually appears Mondays in The Cavalier Daily. He can be reached at zfields@cavalierdaily.com.
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