Channeling the pursuit of profit toward the nation’s liberty and prosperity

A great benefit of the free market is the latitude it affords individuals to pursue their own self-interest however they may wish to define it. When that pursuit advances the common good as well, capitalism generates unparalleled prosperity. But the free market alone does not guarantee that individual and public interest will in fact align. Market fundamentalism’s basic error is to misunderstand this point.

Conservative economics distinguishes amongst free markets and recognizes that only some have the alignment between self- and public interest necessary to harness capitalism’s power for the benefit of American workers, their families and communities, and the nation. Markets require constraints if they are to channel investment and the pursuit of profit toward productive ends. Adam Smith shows how the system can work, not that it always will. The American economy’s trajectory demonstrates that sometimes it does not.

Adam Smith shows how the system can work, not that it always will. The American economy’s trajectory demonstrates that sometimes it does not.

In recent decades, as both public policy and technological progress freed markets from their traditional constraints, market actors responded by pursuing profit in ways ever less connected to the common good. When price signals indicated that speculating, offshoring, and monopolizing would offer better returns than building, hiring, and innovating, businesses obliged. American economists applauded, insisting that low prices for consumers were all that mattered, while manufacturing—with its innovation, supply chains, and jobs—headed abroad to nations whose governments actively courted it.

Globalization severed the bond between capital and labor, so that growth and profit no longer depended on investment in a domestic workforce. Shareholders in multinational corporations saw their wealth skyrocket while workers saw their wages stagnate. Entire industries shifted overseas, decimating communities, reducing productive capacity, and slowing innovation. Financialization severed the bond between capital and the real economy altogether, offering huge paydays for producing nothing of value. Capital and talent surged toward Wall Street, the financial sector metastasized, and real investment declined.

Rebuilding American capitalism begins with restoring the conditions necessary for capitalism to work: forcing the nation’s capital back into dependence on the nation’s workers, so that their mutual success is the surest path to a return on investment; focusing financial markets back on their task of bringing capital to productive uses in the real economy; and fostering the industries whose development is vital to the national interest.

No force has done more to undermine American capitalism than globalization.

No force has done more to undermine American capitalism than globalization. Misunderstanding their own theory, economists presumed that abstract concepts like “the invisible hand” and “comparative advantage” would ensure that free trade enhanced the prospects and prosperity of all who participated. This may well have been true several hundred years ago, when international trade meant placing bales of wool on ships and sending them abroad, receiving cases of wine in return. But in the modern global economy, where capital is mobile and large imbalances can persist indefinitely, free trade has meant in practice the hollowing out of American industry, the loss of millions of jobs, and the accumulation of trillions in debt. At the outset of globalization, the United States ran a $60 billion trade surplus in advanced technology surplus. Thirty years later it ran a deficit approaching $200 billion.

For trade to work, it must be balanced: goods and services produced by foreign workers for America exchanged for ones made by American workers for the world. Policymakers have tools such as tariffs to do this—they only need the will. China’s non-market economy and authoritarian political system poses a special challenge, to which a broad decoupling is the only answer. Free trade with a non-market economy only undermines America’s own free market; free trade with an authoritarian nation only undermines American freedom. If satisfying the Chinese Communist Party offers the highest rate of profit, American business leaders have shown they will eagerly do just that.

Immigration poses a challenge parallel to that of trade. Properly constrained and kept in balance, it can benefit America greatly. But as policymakers have pursued it, granting employers easy access to foreign workers as a substitute for Americans, the result has been to weaken worker power and reduce the incentive for employers to invest in productivity, leaving wages low while profits climbed. America must reassert control of its borders, reform guest worker programs, and restrict legal immigration of low-wage workers so that employers have no choice but to create and offer jobs that Americans will do.

The market has become so disordered that many companies now cannibalize their own capital bases to disgorge cash back to shareholders more quickly.

For domestic investment to begin flowing again toward productive uses that benefit workers, their families, and the nation, financial markets will have to return to their proper role as the conduit for capital instead of a diversion. The increasingly complex and deregulated financial sector has become an end unto itself, pulling capital out of the real economy and absorbing a disproportionate share of top business talent for purposes of financial engineering and speculation that generates enormous profits for the practitioners but nothing of value for the economy. The market has become so disordered that many companies now cannibalize their own capital bases to disgorge cash back to shareholders more quickly.

Policymakers must have the confidence to establish rules discouraging market activity that extracts value rather than creating it.

Policymakers must have the confidence to establish rules discouraging market activity that extracts value rather than creating it. Rather than rewarding businesses for taking on potentially ruinous levels of debt, by allowing them to deduct interest payments from their taxes, the law should make the downside more costly for investors and do more to protect workers and communities caught up in an ensuing bankruptcy. Private equity firms and hedge funds should have to provide much greater transparency into their investments, especially when they manage public money. And unproductive activities like high-frequency trading and share buybacks should be disfavored or outright banned.

While any increase in domestic investment would be a welcome change of course, policymakers owe particular attention to industry—those capital-intensive sectors like manufacturing, construction, agriculture, and energy that are responsible for a disproportionate share of productivity gains and provide the foundation on which a modern services-based economy can thrive. Industry is at once most important to the nation and least attractive to short-term, profit-maximizing investors. Other nations, recognizing this, invest heavily in supporting and attracting industry of their own. America can do likewise, using policy to bring self-interest and the public interest into closer alignment, or it can continue to fall further behind.

Policymakers have a range of their tools at their disposal. Constraints like local content requirements can create guaranteed demand for domestic production, inducing investment in new capacity. Needless regulation designed to slow development can be cleared away. Mechanisms like a domestic development bank and pre-competitive R&D consortia can subsidize investment directly and foster ecosystems in which investment is lower-risk and higher-return. An important part of rebuilding American capitalism is, simply put, a recommitment to building.