Is Capitalism Incompatible with Democracy?   (June 7, 2012)

Failure and losses are the essential feedback in capitalism which clears the way for success and innovation. Eliminate losses and failure by changing the rules to protect either an Elite or the majority and you doom the system to collapse.

Is the marriage of capitalism and democracy doomed to discord? The question has been pawed over many times, but longtime correspondent M.M. recently summarized the core issue very neatly:

Isn't capitalism actually incompatible with democracy?

Some wise person said "Capitalism without failure is like Christianity without hell."

I agree. Failures are an essential part of the workings of capitalism. But what happens if a very large group invests in a false or foolish enterprise, for example 70% of the citizens become involved in that undertaking. Democracy allows those 70% to change the rules instead of accepting their failure...

Capitalism can be subverted by either an Elite or the majority. Marx traced out how Capital (wealth) naturally consolidates into monopolies or cartels (shared monopolies). These concentrations of wealth then buy political influence via campaign contributions, armies of lobbyists and the full spectrum of cronyism: sweetheart deals, envelopes of cash, revolving doors between the cartels and their regulators, plum jobs for lazy nephews and so on.

This base corruption of the Central State, which is now the dominant force in the economy, allows Elites to change the rules rather than accept failure (also known as losses). Thus we have Crony Capitalism: profits are private and yours to keep, losses are transferred to the taxpaying public.

This mechanism is well known and catches most of the attention. But M.M. highlighted the way the democratic majority can subvert capitalism. This is generally ignored for the simple reason that most commentators are part of the majority subverting capitalism to benefit their own self-interest.

This leads to a terminal state of self-delusion and self-justification: Half of US social program recipients believe they "have not used a government social program" (via

Two examples that come to mind are the housing bubble and Medicare. Slightly more than two-thirds (65%) of U.S. households "own" a home. (The quotes denote the paucity of actual ownership if the mortgage exceeds the value of the home. In that case, it's more like a lease with a balloon payment.) This super-majority is keenly interested in maintaining housing subsidies and any policies aimed at re-inflating the housing bubble: zero-rate interest policy (ZIRP), government-guaranteed mortgages to marginally qualified buyers, and so on.

The fact that this "changes the rules" so failure (the accepting of losses, bankruptcy, etc.) is voided or transferred to the public ledger is perfectly acceptable to the majority of homeowners pining for a return to bubblicious prices.

Their self-interest is misplaced, of course, because when you change the rules to protect yourself from losses, the market can never clear itself of rot and deadwood, and so the system becomes a zombie market dependent on a steady transfer of losses to the taxpaying public. This transfer of risk to the system eventually leads to systemic collapse.

I have reported on Medicare's fundamental unsustainability in depth: That Which is Unsustainable Will Go Away: Medicare (May 16, 2012). Though nobody knows because only a tiny sliver of transactions are audited, it seems about 40% of Medicare's expenses are fraud--phantom patients, phantom clinics, phantom tests, and so on. Another chunk is squandered on unproductive or even counterproductive tests, procedures and medications.

Recall that Medicare and Social Security are "pay as you go" entitlements: the "trust funds" are pure propaganda illusions, as any shortfalls are funded just like any other government agency, by the Treasury selling bonds.

The typical recipient pays in perhaps 10% ($30,000) of the average payout ($300,000-$500,000) in a lifetime of working. The system only functions in the long-term if the worker-beneficiary ratio is close to 10-to-1. It is now roughly 1-to-1, with 100 million Medicare/Medicaid benficiaries and 115 million full-time private-sector workers.

Once a majority of the voters believe they are entitled to something that is "too good to be true" (housing market bubbles, entitlements that pay 10X what is paid in, etc.) then they will refuse to accept its demise. But that which is unsustainable will go away, one way or another; keep changing the rules to avoid failure and what happens is the "too good to be true" system brings down the entire State, economy and nation.

This leads to a fundamental conclusion: In a sustainable system of democracy and capitalism, the Central State's sole role is to protect the commons and enforce and enable competition, transparency, accountability, open markets and dissent. It cannot redistribute funds, as those disbursement streams will quickly fall under the control of wealthy Elites, nor can it distribute entitlements, as those will soon attract super-majorities that demand the rules be changed to protect their share of the unsustainable swag.

The Central State cannot be in the "business" of "managing" the economy, as the mechanisms of this management will quickly fall under the control of wealthy Elites or demagogue politicians promising "too good to be true" riches to a super-majority.

Those in the super-majority are delighted to blame the Elites for everything rotten while holding themselves blameless in the subversion of capitalism's key mechanisms (transparency, accountability, failure, loss and clearing the market) to protect their share of the "too good to be true" swag.

I cover these topics more in depth in my latest book Resistance, Revolution, Liberation: A Model for Positive Change.

Here's my latest YouTube presentation with Gordon T. Long on "Peak Everything." Lots of interesting charts:

Resistance, Revolution, Liberation: A Model for Positive Change (print $25)
(Kindle eBook $9.95)

Read the Introduction (2,600 words) and Chapter One (7,600 words) for free.

We are like passengers on the Titanic ten minutes after its fatal encounter with the iceberg: though our financial system seems unsinkable, its reliance on debt and financialization has already doomed it.

We cannot know when the Central State and financial system will destabilize, we only know they will destabilize. We cannot know which of the State’s fast-rising debts and obligations will be renounced; we only know they will be renounced in one fashion or another.

The process of the unsustainable collapsing and a new, more sustainable model emerging is called revolution, and it combines cultural, technological, financial and political elements in a dynamic flux.

History is not fixed; it is in our hands. We cannot await a remote future transition to transform our lives. Revolution begins with our internal understanding and reaches fruition in our coherently directed daily actions in the lived-in world.

If this recession strikes you as different from previous downturns, you might be interested in my book An Unconventional Guide to Investing in Troubled Times (print edition) or Kindle ebook format. You can read the ebook on any computer, smart phone, iPad, etc. Click here for links to Kindle apps and Chapter One. The solution in one word: Localism.

Readers forum:

Order Survival+: Structuring Prosperity for Yourself and the Nation (free bits) (Kindle) or Survival+ The Primer (Kindle) or Weblogs & New Media: Marketing in Crisis (free bits) (Kindle) or from your local bookseller.

Of Two Minds Kindle edition: Of Two Minds blog-Kindle

"This guy is THE leading visionary on reality. He routinely discusses things which no one else has talked about, yet, turn out to be quite relevant months later."
--Walt Howard, commenting about CHS on another blog.

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