With America more polarized than it's been since before the Civil War, it's easy to look at the Other Side and assume they are totally benighted and ignorant, wrong in every way, and that there's absolutely no common ground. At the higher reaches of official power, that's probably true; if you hold elective office, politics really is a zero-sum game since there are only so many offices to go around.
For ordinary people, though, that's not so, and the Occupy Wall Street crowd provides recurring examples. A more blatant bunch of stinky antisocial anticapitalist lefty hippies could hardly be found. A moment's objective reflection, however, shows they have legitimate complaints and even the occasional rational suggestion.
When Occupiers condemn capitalism as a whole, they couldn't be more wrong. When they call for fraudulent bankers to go to jail, though, they're absolutely right - frauds and cheats belong behind bars, and those most loyal to capitalism should be cheering any demands to put them there. A banker who makes his millions by lying to people about the securities he's selling is not in an economically productive job and isn't properly part of "capitalism" at all - he's nothing more than a con artist.
Does this mean Karl Marx was right and we don't need either capitalism or bankers? Not at all. In his turgid tome Das Kapital Marx famously argued that the only thing of real economic value was labor and thus that the laborers should receive all the profits resulting from their work. Put another way, the workers should rightfully own the means of production and distribution within their particular industry since that capital was amassed by their labor.
A moment's non-drug-addled thought will reveal this to be nonsense. Consider a skilled coal miner. How much coal can he produce on his own? None whatsoever.
At the very least, he's going to need a pick and a shovel. That equipment has to come from somewhere; some other worker has to manufacture it for him. Aren't the shovel-maker and pick-producer entitled to be paid for their labor? Who's going to pay them? The capitalist who owns the mine, that's who. Doesn't that entitle the capitalist to some return?
Now our miner has tools, but where's he going to mine? The coal has to come from underneath land that belongs to somebody. That person, or their ancestors, paid to own the land; is it right and just to steal the coal out from under it without compensation? Again, the landowner has to be paid, and that requires capital from the capitalist.
The point is, virtually every job requires some investment of capital. The reason American workers are able to be paid so much more than, say, Chinese peasants is because of the monstrous amount of capital investment American businesses and, yes, government have made over the past 200 years.
One individual construction worker with a backhoe can move more dirt than a thousand peasants with shovels; the backhoe driver can't expect to be paid 1000 times the peasant because the backhoe has a cost too, but he certainly can receive 100 times their salary without difficulty because of his massively greater productivity. All because of capital invested by capitalists.
At its best, banks and bankers help match capital to workers whose productivity and wages can be improved by adding capital investment to their labor. Every small businessman starts out with an idea and not enough money. For most of the last hundred years, he could go to a bank and get a business loan, providing him with the capital required to open a restaurant, a store, or start a small construction business.
This allowed ordinary, poor but ambitious people to grasp the first rung of the ladder to capitalistic success. If their business went well, they were able to pay the cost of the loan and maybe take out a new loan to expand. The bank made money on interest, the business made money from the investment, and workers were hired to do the labor of a growing business that wasn't there before. Government collected taxes all 'round, of course. Everyone benefited.
For a variety of reasons, this healthy banking role isn't working today. Instead of the small local banks that personally know their communities and small businessmen, we have giant nationwide banks where individuals are just numbers. You can't make a business loan to a number; you have to know him as an individual to make a rational decision about his chances of successful payback.
No computer program can do this, only a human banker. But since the bigshot CEO never meets any of his loan officers - he only reads summary reports - all that matters are the hard numbers, which by definition cannot capture personalities.
Instead, as we saw in the financial crisis, the giant banks preferred to bet their money on things which looked good on paper. "Securitized mortgages" were more risky than they looked, and the big banks lost big.
By rights, they should have collapsed in bankruptcy and been shut down, but because they had access to so much cash, they were able to persuade powerful government officials to bail them out using your tax dollars. The Occupy protesters find this repellent, and we agree wholeheartedly.
The problem stemmed from the way modern banks are structured. It's not widely known, but until quite recently the major Wall Street investment banks weren't corporations at all. They were partnerships, owned and controlled by senior executives and successful brokers. The famous Goldman Sachs was a partnership from the day of its founding in 1869 until 1999!
Each partner legally shared in the financial responsibility and reward for the entire firm. When the firm did well, the partners received enormous dividend checks just like any other owner of a company would. When the firm did badly, the partners not only didn't get big checks, they could actually be personally forced to cover the firm's debts! Arthur Andersen's partners discovered this the hard way when the Enron scandal destroyed their company.
In 1999, Goldman Sachs changed from a partnership to a corporation. The previous partners now owned stock which many of them promptly sold at a premium.
At that point, their incentives changed completely. As partners, they wanted the company to do well, but worried about risks because they could personally be left holding the bag if anything went wrong. After the IPO, they were now stockholders, protected from liability like any other stockholder. They might lose value in their shares, but they couldn't be pursued for whatever cash they'd already pocketed.
It made sense to take much bigger risks. If the risk worked they'd get a whopping cash bonus, but if not, well, someone else would pay the price. The same was true for the rest of the investment banks, from Lehmann Brothers and Bear Stearns on down.
This is not the way banks are supposed to work. There's nothing wrong with gambling and taking risks, of course, but you're supposed to do it with your own money or money given to you for that purpose, not with deposits placed with you for safekeeping and certainly not with taxpayer dollars supporting the bet.
Where proper bankers perform an economically valuable service by matching capital with labor, the gamblers of Lehmann were doing nothing more useful than pulling the handle on a one-armed bandit. Eventually they got held up and down they went. That's not banking, it's gambling, and not an economically beneficial job.
Our capitalist system used to funnel money to people building real businesses, from tiny Mom-and-Pop shops to the Google IPO. It still does, somewhat, but nothing like as effectively as it once did because too many bankers would rather gamble. Given that we've allowed the government to offer "heads you win, tails the taxpayers lose," there's no rational reason for them to stop betting our money.
By now, you should be starting to understand that what appears to be a proper job may be anything but. It should be clear that creating "good jobs" is a whole lot harder than just shelling out paychecks for showing up.
Is there a way to tell the difference? Not directly, but there's one great principle that we'll explore in the next article in this series.