From We First by Simon Mainwaring. Copyright 2011 by the author and reprinted by permission of Palgrave Macmillan, a division of Macmillan Publishers Ltd.

Does Capitalism Need Repair?

We First is about a new way of looking at capitalism. It seeks to instigate a greater degree ofhonesty and frankness into the framework of our thinking about free market capitalism as theeconomic engine that propels our society. Without becoming defensive about capitalism oraccusing those who defend it, it proposes that we need to take a serious look at the results thatthe past practice of capitalism has brought us, and more importantly, where it is leading us in thefuture.

This book is not about doing away with capitalism. It is about recognizing the advantages ofcapitalism as a powerful engine of progress and prosperity, but at the same time acknowledgingthe mounting criticisms that it desperately needs to be reset. Many noted economists, thoughtleaders and social visionaries around the world are all recognizing that capitalism has becomedysfunctional. It has lost its way as an effective, self-regulating and sustainable economicsystem. It has devolved into the single-minded pursuit of profit at the expense of the overallsociety.

What the Great Depression, the Great Recession, and all the decades in between should havetaught us is that free market capitalism is an economic system in need of repair. It embeds a widerange of systemic problems that are slowly choking our societies, preventing our economicinstitutions from achieving what the human race needs--a steady march of upward prosperityand progress for all.

The noted economist Milton Friedman led a movement for most of the mid- and late 20thcentury proclaiming that corporations do not have any social responsibility to society. As anadvisor to Reagan, he championed supply-side economics and the view that the only role ofcorporations was to make profits for their shareholders, regardless of any consequences theiractions might cause to society or the environment, as long they complied with existingregulations. Friedman's philosophy has guided many decades of government policy leading to amassive deregulation of industries and the growth of powerful corporations.

Reasonable people disagree on whether the Friedman's economic philosophy has succeededin producing the economic benefits it claims. But more importantly, and not up for debate, is thatthis economic philosophy has led directly to an increasing impoverishment of the Americanmiddle class and a deterioration of our entire social structure of affluence. Barring governmentregulation and voluntary restraint, free market capitalism has become effectively uncontrollable.Admittedly, the freedom of unregulated capitalism can be, at times, its greatest strength.

The rewards of capitalism inspire people to start companies, innovate, and create new businessesthat both enrich themselves and advance the world. The U.S. in particular prides itself on beingthe leading-edge nation that attracts the best and brightest minds to take advantage ofcapitalism's benefits--a strong investment community, an educated workforce, and a vastmarket of consumers. But at the same time, the unregulated markets of capitalism and the growthof corporations has altered the character of our society and changed capitalism for the worse.What are these systemic flaws of capitalism that prevent it from fulfilling its greaterpromises? If we had to construct a list, it would read as follows:
  • Capitalism allows a small class of people to amass most of the wealth and use it to dominatethe investment markets, corporations, and the overall business environment.
  • It is prone to inflationary periods and bubbles that eventually collapse, wiping outinvestments.
  • It is prone to allowing, in the name of profit, the worst of human nature to game the systemthrough greed and selfishness, especially when government regulations are absent.
  • It is subject to frenzied investor behavior whose impulsive actions can seriously impactglobal markets.
  • Its single-minded pursuit of profit above all other factors takes a huge toll on averageworkers and their families, who unfairly fall by the wayside when wealthy investors andcorporations are willing to sacrifice social progress for purely personal gains.
  • It encourages corporations and businesses to think only about short-term profits at theexpense of the environment.
  • These systemic flaws are increasingly negating the advantages of capitalism, preventing usfrom steadily expanding prosperity and building a better and more stable world. If we are to behonest and responsible citizens--and accept the stewardship of our nations and this planet--howcan we not recognize that capitalism's engine is in need of a serious overhaul?

    Repeating the Same Mistakes

    Taking stock of our situation and beginning to make changes immediately are criticalbecause it is already obvious that most of capitalism's flaws are quickly returning with avengeance after the financial crash of 2008. The powers brokers on Wall Street and within manycorporations are already reverting to their pre-Recession thinking and behaviors. Many, if notmost, of the systems and architectures that wrought the financial meltdown are reappearing--asif nothing happened.

    Enormous CEO salaries and bonuses are back on track and corporate success is still tied tostrictly short-term market gains. Wall Street analysts, powerful hedge funds, and wealthyinvestors are back to dictating that profits are the only result of corporate endeavors that matter.A new wave of Wall Street investors are back to gaming the system, this time in the guise of"high frequency traders" who buy and sell securities up to one thousand times per second usingsmartly programmed computers.

    Meanwhile, the never-ending emphasis on short-terms corporate profits is contributing tokeeping the recession alive, as companies refuse to hire back workers to restart the economy. Inthe middle of 2010, it was reported that the 500 largest non-financial corporations were sitting ona trillion dollars in cash, due partly to their lower expenses and partly to the beginnings of therecovery. But even with that cash, few of them were starting to hire employees. Numerousreports indicated that instead, many of these companies were using the savings from their lowerpayrolls to invest in more labor saving technologies that could further reduce their payrolls,while other companies began buying back shares of their stock so as to increase its value forshareholders. Some economists euphemistically called this strategy a "jobless recovery," whileRobert Reich, former Treasury Secretary under President Clinton, referred to the trend as anoutright "decoupling of profits from jobs."

    The result of the recession and the continuing effects of unemployment are creating a diresituation in the U.S.--the virtual disappearance of the middle class. the In her book Third WorldAmerica, Arianna Huffington makes the analogy that capitalism has decimated the buying powerof the average American family to such a point that it has destroyed our once sacred notion of the"American Dream," turning the U.S. into the equivalent of a Third World nation. The cover ofher book summarizes her thesis well:

    The evidence is all around us. Our industrial base is vanishing, taking with it the kindof jobs that have formed the backbone of our economy for more than a century; oureducation system is in shambles, making it harder for tomorrow's workforce toacquire the information and training it needs to land good twenty-first century jobs;our infrastructure--roads, bridges, water and electrical systems--is crumbling; oureconomic system has been reduced to recurring episodes of Corporations Gone Wild;our political system is broken, in thrall of a small financial elite using the power ofthe checkbook to control both parties.

    These are some of the facts that confirm the situation with the middle class:
  • Disparity of income -The gap between the rich and the middle class is widening sharply.Between 1979 and the present, the top 1 percent of income earners has seen their incomesnearly triple, up by 281 percent, while the bottom 20 percent income bracket has seen theirincomes rise only 16 percent and the middle 20 percent is up only 25 percent.
  • Disparity of wealth ownership - A small class of wealthy people own nearly all the resourcesin the U.S. Between 1983 and 2004, of all the new financial wealth created by the Americaneconomy, the top 20 percent of the population captured 94 percent of it, while bottom 80percent received only 6 percent. Furthermore, the top 1 percent of households own 38.3percent of all privately held stock, 60.6 percent of financial securities, and 62.4 percent ofbusiness equity. The top 10 percent of Americans own 80 to 90 percent of all stocks, bonds,trust funds, and business equity, and more than 75 percent of non-home (commercial) realestate.
  • Rising poverty - The rise in poverty in the U.S. has hit record levels. In 2010, more than 44million Americans lived below the government-set poverty line--1 in 7 people --the highestrate since 1994. As of May 2010, 40.2 million American live on food stamps, a figureprojected to rise to 43 million by 2012. Among them, 6 million report they have no otherincome, so roughly 1 in every 50 Americans lives in a household surviving entirely on afood-stamp card.
  • Descent into debt - Debt is rising. In a 2009 survey, 61 percent of Americans say they"always or usually" live paycheck to paycheck, up from 43 percent in 2007. Over 1.4 millionAmericans filed for personal bankruptcy in 2009, a 32 percent increase over 2008. In 2010,banks estimate they will foreclose on 1 million homes.
  • These are not encouraging statistics as the plight of the middle class is fast becoming grim.They portend an economic environment that is hardly conducive to a healthy economy that cansupport corporate growth and success. It is not logical that corporations would want to support aversion of capitalism that weakens the people rather than strengthens them, turning them intoloyal customers. It is difficult to rationalize this behavior other than to believe that capitalism istaking us down the wrong path.

    This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.