by Richard Schottenfield
Adam Smith, the economist commonly known as the Father of Capitalism, famously wrote of an “invisible hand” that regulated capitalism. His theory, considered to be one of the cornerstones of our modern economy, was that in a free market consumers and sellers pursuing their own self-interest would lead to everyone ending up better off. The constant back and forth between buyers and sellers looking out only for themselves would, thanks to the invisible hand of the market, lead to lower prices, quality goods, and fair profits.
That’s how capitalism is supposed to work. But thanks to a government asleep at the wheel, growing corporate monopoly power has chopped off the invisible hand, leading to an economy that increasingly concentrates prosperity in the hands of small number of rich and powerful elites. If we want to put our economy back on track for long-term, widely-shared growth as it emerges from a coronavirus shutdown, the government needs to stop propping up corporate profits and allowing private companies to become “too big to fail.”
What many don’t understand about capitalism is that it’s not just about growth – our economy needs creative destruction as well. Creative destruction punishes those who misread the markets or overextend themselves, and moves the assets they amassed to be put into more productive hands. Without this destruction, automobile and light bulb manufacturers would never have displaced carriage builders and candle makers. For progress and growth to occur, companies need to be able to fail.
But over the last several decades we’ve seen a greater and greater concentration of our economy into fewer and fewer hands. With regulators and policymakers allowing companies like Amazon to use new technologies to take over markets in monopolistic ways, the number of public companies has plunged as larger companies swallow smaller ones. This process has in times of economic stress led many bad actors to be considered “too big to fail,” leading the government to repeatedly bail out a system in dire need of the market’s creative destruction.
Just look at the government’s response to the coronavirus pandemic. Some money was spent on directly helping the American people, but the vast majority of aid was directed at propping up corporate America and a market that has become completely untethered from the real economy that most Americans experience. No rational person can look at a stock market reaching new highs while our economy is on life support and believe the market is reflective of the current state of our economy. Instead it is reflective of a system that is supporting those in society who need that support the least.
While the current rhetoric from conservatives in Washington attacks progressive social programs designed to lift those at the bottom as socialism, the truth is that they’re the ones giving away irresponsible handouts. Thanks to massive amounts of corporate welfare given out through Fed intervention, lax regulation, and billions of dollars in fiscal stimulus, our free market capitalist society has been replaced by a new era of corporate socialism.
Debt-fueled government support and access to cheap debt have combined to create an illusion of prosperity. But like a drug addict in need of greater and greater doses to get his fix, each time the temporary high of these programs reveals the rot at the heart of our economy it takes a larger and larger stimulus from the government to keep things going.
The spread of coronavirus may have kick-started our current economic crisis, but it didn’t create the problems now facing our country. All it did was reveal the dysfunction underneath the surface. We cannot continue to allow a small number of irresponsible corporations to swallow up more and more of our economy secure in the knowledge that the government will bail them out if things ever take a turn for the worse.
It’s time for some tough love. Our government needs to allow more companies to fail. It’ll hurt in the short run, but failing to address these issues will only lead to a catastrophe too large to mitigate if not now, then in the near future. The invisible hand will eventually make itself known whether we want it to or not.
Richard P. Schottenfeld is a member of the Patriotic Millionaires and the founder and Chairman of Schottenfeld Group holding, the parent company of Koyote Capital which is a proprietary trading firm in New York City. He has also served as the general partner of Schottenfeld Associates and the Schottenfeld Opportunity Fund. Mr. Schottenfeld is a graduate of Franklin & Marshall College with degrees in both Economics and Government. Mr. Schottenfeld has been a frequent guest on CNBC and other business news programs.
