TIME: Almanac 1993/TIME Almanac 1993.iso/time/caps/80/80capin.2

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                                                                                April 21, 1980

NATION

Capitalism:  Is It Working...?



Of Course, but...

In an age of economic anxiety, real and rising concerns about
whether free enterprise can surmount the problems of inflation,
energy and productivity


The relentless daily pounding of dismal news drives deeper the
public's conviction that the economy is in a profound and
morose crisis. Feverish inflation, previously a rare malady
limited primarily to wartime, has become chronic. Price spurts
once associated with profligate banana republics are now common
to North America and Western Europe and threaten the foundations
of democratic societies. With every sign showing that prices
in the U.S. will continue soaring even as the nation begins
slumping into recession, President Carter, his re-election
jeopardized by the economy more than by anything else, is stuck
in an economic morass.

The litany of U.S. economic woes at times seems endless. Week
after week, interest rates crack new records; home owners face
17% mortgages, and companies confront 20% business loans.
Energy, the oxygen of industrial life, has become so costly and
politically controlled that the U.S. can no longer be certain
of enough fuel to keep its factories running and homes heated.
The output of goods per hour worked has stagnated. From 1948
to 1973, the productivity of American employees increased 2.9%
annually, thus permitting steadily higher real wages and higher
standards of living. Last year productivity dropped .9%. The
real median income of American families jumped 64% from 1950 to
1970, but has crawled up by less than 1% a year in the past
decade. Weekly real take-home pay has been declining for two
years. That gauge of American economic health, the stock
market, has been sharply depressed.

Amid all this, the Carter Administration has appeared paralyzed
and unable to cope with problems that it does not fully
understand. Quips Alfred Kahn, the hapless presidential
anti-inflation adviser: "Anybody who isn't schizophrenic these
days just isn't thinking clearly."

While these travails are felt most acutely in the U.S., the
situation is common to nearly all Western nations. Since the
mid-1970s, industrial economies have grown about as well as
wheat in a drought, while inflation has expanded dangerously.
Even countries that have adapted best to recent economic
problems, notably West Germany and Japan, suffer inflation or
slow growth. The world money system that functioned like a
Swiss watch for a quarter-century has been sending off alarms.
gold, the barbarous relic that Shakespeare called the "common
whore of mankind," has become the refuge for a world fearful of
returning to an economic jungle.

As industrialized and developing nations meet the challenges of
the new economic era, they must choose between two essentially
different economic systems:  the market economy and the command
economy. Neither exists in pure form. They overlap, and there
are myriad variations within each model. But the difference
between them is basic. In market economies the principal
business decisions are taken by individuals, who freely exchange
their goods or services. In the command economy, the state makes
the fundamental business decisions.

Capitalism, the system that relies on the maximum use of free
markets and the minimum of government controls, is today being
challenged as at no time since the Great Depression. On all
sides the haunting questions arise:  Is capitalism working well
enough?  Can the system suffer and survive these problems?  Can
it be repaired or is it fatally flawed?

One might be tempted to say:  What else is new?  The free
enterprise system has been constantly questioned and condemned
ever since that absent-minded Scots professor Adam Smith,
another revolutionary of 1776, enunciated its basic philosophy.
But today's doubts are deeper and the assaults more virulent.
They come not only from capitalism's old critics but from its
longtime champions. Leftist Economists Robert Lekachman of the
City University of New York declares:  "The central economic
fact of our day is the declining vitality and elan of capitalism
and capitalists."  And Chrysler Chairman Lee Iacocca also says:
"Free enterprise has gone to hell."

Critics and champions alike once recognized capitalism's
remarkable vitality and adaptability, but those qualities seem
to be declining. Says Stanford Economist Tibor Scitovsky:  "The
joints of that once wonderfully flexible structure are becoming
more and more calcified and rigid."

Also in doubt is one of the basic tenets of American
capitalism: faith in the future. Though capitalism has always
been regarded as raw and risky, people accepted the system
because it held out the promise that hard work and talent would
lead to high rewards. Not everybody was created economically
equal but, with the indefensible exception of some minorities,
everybody had a full, free opportunity to prosper. Every
distant frontiers and ever brighter tomorrows created a nation
of optimists, who believed that a rising tide lifts all boats.
This was the U.S. social contract.

But a long spell of little economic progress, or actual
retrogression, may cause people to conclude that the system's
potential rewards are not worth its real risks. Rancorous
confrontations among government, business, labor and a thousand
contentious factions could erupt. Warns Arizona Congressman
Morris Udall:  "When you get a constant pie, and when any group
like the steel-workers or the longshoremen gets more, then
somebody has got to get less. We have got to adjust to slower
growth, and the story of the 1980s will be how we adjust."

If market economies are doing so poorly, are the centrally
directed command economics doing any better?  No. Capitalism's
primary rival, Communism, is afflicted by most of the same
ailments, and more. Communist countries are encountering far
more difficulty than the West in adapting to the age of economic
anxiety. After substantial gains from low bases during the
1950s and early 1960s, progress in Communist economies has
sharply slowed in recent years. Technology, innovation and
productivity have fallen further behind most Western countries.
Economic growth in the Soviet Union last year was about 2%, the
lowest since the 1930s.

Inflation, Communist style, is real, though artificially
repressed. In the U.S.S.R. and elsewhere, state subsidies hold
down the prices of some necessities, and the government pays the
bill by keeping wages lean. Bureaucratic ministries are slow
to make minor price adjustments. Thus, when prices do increase,
they explode. Last year Czechoslovak children's clothing jumped
200% and Hungarian bread went up 50%. At the same time,
consumers regularly face shortages. In Communist countries, the
block-long queue at meat markets or clothing stores remains a
common sight.

East European economies are also squeezed by the energy crunch.
The Soviet Union is the world's largest oil producer, its 11.8
million bbl. per day surpassing even Saudi Arabia's 9.5 million
bbl. But output is expected to peak this year, and the Soviet
bloc may become a net oil importer by 1982. Gasoline prices in
Eastern European countries vary widely, but in most cases gas
costs more than $3 per gal.

Yet Communism's troubles are small comfort for the U.S. and
other free economies, which desperately need to find their own
solutions to inflation. THis is the most pressing economic
problem of the age.

The Decline of Risk Taking

Inflation is already beginning to paralyze Western financial
markets. Says Herbert Wolf, chief economist of West Germany's
Commerzbank: "The survival of a market economy depends above all
on price stability."  Without that stability, people lose the
incentive to save and accumulate the capital that feeds the
system.  Their savings debauched, citizens desperately seek
alternatives, some of them extreme. Soaring prices have almost
always been the prelude to social chaos and eventually political
upheaval. There is no such thing as a "stable" rate of consumer
price increase. The 5% inflation of four years ago became last
year's 13.3% and this year's 18.2%. That rate will be even
higher in the future unless effective action is taken to slow
or stop the spiral.

Much of the public is turning for relief toward
government--which is itself in large measure the problem, not
the solution. During the past half-century, governments, in
response to public demand, have steadily gained more control
over the production, jobs and wealth of society. THis enlarged
state role was undertaken in an attempt to create a
recession-proof economy. Deeply scarred by the 1930's
Depression, politicians, labor leaders and intellectuals adopted
the slogan of 19th century French Utopian Socialist Etienne
Cabet: "Nothing is impossible for a government that wants the
good of its citizens."

In the U.S. federal, state and local agencies in 1929 spent an
amount equal to only 10% of the nation's total output; last year
they spend 32%. Fifty years ago, government income-support
payments to individuals were 3% of the total amount of wages and
salaries; last year they had swollen to about 20%.

But today there are more and more questions about the
government's ability to accomplish its benevolent goals and
growing weariness of meddling by government regulators.
Proclaims a Texas bumper sticker: "If you like the post office,
you'll love a nationalized oil company."  A historic revolt
against government is underway. One symptom:  in the U.S.,
voters in almost a quarter of the 50 states have put limits on
taxes. The revolt is largely justified.

Successive U.S. Administrations since the mid-1960s have
mismanaged the economy by wildly spending more than they
collected in taxes and then recklessly printing money to pay for
the prodigal policies. In 18 of the past 19 years the federal
budget has been in deficit, creating a sea of red ink totaling
$372 billion. Until recently, the Federal Reserve Board has
cooperated with the spend-and-spend policy by pushing up the
growth of money. This rapid increase in expenditures and credit
beyond any real growth in the production of goods and services
remains the basic cause of inflation.

The Government's attempts to create a risk-free economy, in
which there will never be a danger of serious business slumps
or steep unemployment, has built an inflationary bias into
society. Managers and workers have become confident that the
state will intervene to stop any sharp business decline. Thus,
instead of restraining wage or price demands when the economy
slows, companies and unions continually push for more. Adam
Smith maintained that each individual seeking his own profit
would promote society's good, as if guided by an "invisible
hand."  But the late economist Arthur Okun argued that the
comfortable relationship between Big Business and Big Labor has
led to an "invisible handshake" that lifts both wages and
prices.

Typical was last year's pay settlement between Chrysler and its
employees. At the same time that the company was asking for a
fat federal loan guarantee, it agreed to raise the wages of some
of the nation's best-paid workers from $60.24 a day to $76.96
over three years. Because both sides at the bargaining table
assumed financial help would be coming from Washington, there
was less pressure to make a significant sacrifice. it was left
to Congress, as a condition for a federal loan guarantee, to
force the union to accept a $463 million reduction in the wage
package.

The search for a fail-safe society is also pursued by
businessmen. Though they still extol free enterprise's virtues
in after-dinner speeches, American capitalists can often be the
system's most dangerous opponents. Rather than embracing the
maketetplace and competition, many businessmen look longingly
to those societies, notably Japan, in which the government
intervenes to sponsor, subsidize or otherwise ease the way for
business. These U.S. "free enterprisers" demand that their
Government protect sales from foreign or domestic rivals, oppose
steps to remove regulation whenever it shelters their own
business, and lobby hard for federal or local grants.

As economic pressures have ben building in recent months, more
and more producers of goods as varied as cars and cheese, steel
and shoes have turned to Government to demand relief from
imports. Protectionism, of course, pushes up prices. Despite
last year's major agreement on reducing world tariffs and other
trade barriers, backsliding toward protectionism is growing.
Nearly half of all world commerce is now restricted by tariffs
or quotas, as compared with 40% in 1974. Recalling his days as
Treasury Secretary, WIlliam Simon says:  "I watched with
incredulity as businessmen ran to the Government in every
crisis, whining for handouts or protection from the very
competition that has made this system so productive."  At the
same time, workers want assured salary increases and consumers
products that never break and never can be dangerously misused.
Says General Motors Chairman Thomas A. Murphy:  "There is that
peril in our society, the unwillingness to take a reasonable
risk."

Inflation and Government

The state's new role as a regulator in the capitalist economy
has been growing steadily for decades, but it exploded during
the past dozen years. When public budgets became tighter in the
early 1970s, officials saw Government regulations as the means
of achieving their social goals. Rather than spending billions
of tax dollars to clean up the air and water, authorities passed
laws obliging companies to spend large sums to do the job. Such
federal regulations, which came to 20,000 pages in 1970, swelled
to 77,498 pages last year.

These regulations, originally well-intentioned, often turn into
generalized hostility toward businessmen. Often, too, they are
grossly inflationary. Stanford Economist Michael Boskin notes
that when the Government orders, say, General Motors to put $400
in pollution equipment on a car, that amounts to a $400 tax on
the consumer, who eventually pays the sum in the purchase price
for the automobile.

While quite willing to benefit from Government support,
businessmen nevertheless complain with much justice that the
leaden hand of Government undermines the freedom and incentives
that make capitalism so productive. Managers see themselves as
Prometheus bound, unable to launch a new product or finance
research into a tempting field without completing a fat book of
federal forms and paying exorbitant, sometimes needless
expenses. Complains Pennzoil Chairman J. Hugh Liedtke:  "We sit
here in management meetings deciding on projects that may cost
hundreds of millions of dollars. But we do not know what the
Government regulations will be for pricing, importing,
entitlements, allocations."

Private companies can best--and at least cost--accomplish the
goals of public regulation if the state does not tell them
precisely how to control bad side effects but sets standards and
allows the companies freedom to devise means of compliance on
their own. The Environmental Protection Agency's "bubble plan"
for air pollution control is an example of this flexible
approach. Rather than strictly controlling the pollutants from
each and every smokestack in a factory, the agency sets overall
standards for the effluents from the entire plant or groups of
plants. The air-quality goal is the same, but the means of
reaching it are more liberal and less costly. Managers determine
how to achieve the goal.

Some would-be reformers push a sort of bubble plan for the
whole economy. Despite the state's poor record of ensuring
prosperity and stable prices, many left-leaning economists and
even some businessmen regard further Government economic
planning as the next inevitable step. The Government would fix
the broad goals for economic growth and targets for investment
and production in specific industries, although the details
would be left to private firms. Only in this way, they argue,
could inflation be brought under control and a path of steady
growth set.

But in Western Europe, where planning within capitalism
originated, such government direction has fallen into disfavor.
France's Le Plan has operated since 1946, but the program is
now virtually ignored; the Eighth Plan, covering 1981-85, will
not even contain specific growth targets. In the past, programs
directed by the French government produced too many white
elephants, like the supersonic Concorde and the steelmaking
complex near Marseille, that look brilliant to a bureaucrat but
flop in the marketplace. Admits Francois de Combret, the top
French presidential economic adviser: "A bureaucrat like myself,
with his butt in a chair all day long, does not know enough to
make all economic decisions. Those who know what to do are the
ones who have skills, the ones willing to take the risks."

In a form of Gresham's Law, bad planning by government drives
out good planning by private people. No detailed plan emanating
from a computer bank in some bureaucracy could ever store the
information necessary to tell the would-be entrepreneur to open
a new corner carry-out or Revlon to launch a new Charlie. No
plan could foresee the economic effects of the overnight success
of some new Xerox or IBM. Modern industrialized economics are
far too complex to permit a rigid master plan. The state can
provide its fallible view of future economic developments, but
the best planning is still provided by private businessmen and
-women making decisions on the basis of the information they
receive from consumers in the marketplace.

At the same time, the right overall Government policies and
strategies are necessary. Nobody is demanding that the state
revert to the minor role that Adam Smith envisaged for it, which
would not even include operating a nation's canals. All
capitalist countries have mixed economies that combine some
free-market features and some government controls, depending on
practical needs, tradition and political trends. But there are
sharp new questions about the mix. Says Jan Tumlir, chief
economist of the world trade organization GATT (General
Agreement on Tariffs and Trade):  "The 1980s must be a period
of rethinking the functions of government. We should figure out
what governments should do and can do well and what governments
should not even try to do."

Ralf Dahrendorf, director of the London School of Economics,
argues that the welfare state produces what German Sociologist
Max Weber called "the iron cage of bureaucratic bondage."  He
admits that centralization and government activity in the modern
economy are inevitable but stresses that in the future the
burden of proof for turning over functions to the government
must rest "on the centralizers and not the other way around."

The economics profession, which for four decades was dominated
by John Maynard Keynes' disciples, who stressed a strong
stimulative role for the government in the economy, is now
swinging away from state solutions. The new Rational
Expectations school, led by the University of Chicago's Robert
Lucas and the University of Minnesota's Thomas Sargent,
emphasizes that government policy initiatives often do more harm
than good, creating more inflation than economic growth. The
hottest topic among Washington economists is the "supply side"
theory. It maintains that Keynesian policies placed too much
emphasis on stimulating consumer and business demand and paid
too little attention to stimulating the production, or supply,
of goods and services. Supply siders, such as Senator Lloyd
Bentsen and Michael Evans, the president of a Washington-based
economic advisory service, propose tax cuts for business to
spur investment rather than just tax relief for consumers to
heighten spending.

The brightest younger economists on campuses, including
Harvard's Martin Feldstein, Southern California's Arthur Laffer
and Stanford's Michael Boskin, generally emphasize the strengths
of the free market and the failure of government intervention.
The theme that unites them is skepticism about the
effectiveness of state action in the economy.

President Carter's chief economic adviser, Charles Schultze,
also argues that the government should make greater use of the
free-market mechanism rather than government Diktat in
formulating state programs. Wrote he:  "The historically
demonstrated power of market-like incentives to influence the
pace and direction of technological change warrants every effort
to install such incentives in our social programs."

Like a sailboat tossing about in a wild sea, the government's
activities in the economy under capitalism have bounced from
one extreme position to another. For more than a century the
state had very little or no role in the overall running of the
nation's business affairs. When the government did intervene,
it was usually on the side of corporations, with such aid as the
19th century land grants to help the railroads build their steel
path across the country. During the past generation, however,
the state has become the often overpowering major-domo of the
economy. And now its actions frequently carry an undertone of
antibusiness hostility. While not returning to the earlier
hands-off posture, government leaders must recognize the
limitations of economic central direction and restore some lost
freedom to the free enterprise system.

Problem of Expectations

Inflation, of course, is the result not only of government
actions but also of the changing cultural atmosphere in Western
nations. Societies that once held up temperance, frugality and
industry as ideals now increasingly cherish consumption, leisure
and even hedonism. The culture that formerly stressed tomorrow
now emphasizes today. This instantly gratifying good life is
easily available through installment buying or "plastic money,"
which the Carter Administration last month attempted to
restrict.

When capitalism took root in the 18th century, religion
exercised a strong influence within a rigid social structure.
The principles of the new economic system coincided in large
measure with those of religious faith. Free enterprise demanded
sacrifice and delayed satisfaction in order to build savings as
a source of investment funds. Limited consumption and hard work
were required to create more capital and more consumption for
the future. Self-denial and individual diligence in this life
were signs of someone's virtue and even of salvation in the next
life. Max Weber labeled this "the Protestant ethic."

The decline of religion's dominant influence starting early in
this century opened a conflict between contemporary social
values and economic virtues. Capitalism still needs savings,
hard work and postponed rewards, but consumers want immediate
satisfaction. THis conflict is visible within the business
corporation itself. Writes Sociologist Daniel Bell in The
Cultural Contradictions of Capitalism: "In the world of
capitalist enterprise, the nominal ethos is still one of work,
delayed gratification, career orientation, devotion to the
enterprise. Yet, on the marketing side, the sale of goods,
packaged in the glossy images of glamour and sex, promotes a
hedonistic way of life whose promise is the voluptuous
gratification of the lineaments of desire. The consequence of
this contraction is that a corporation finds its people being
straight by day and swingers by night."

Consumer expectations exploded during the quarter-century of
seemingly endless prosperity following World War II.
Capitalism created the affluent society, but the more prosperity
the public enjoyed, the more it wanted. If hard work, talent
and savings no longer provided the affluence, the public
demanded it from the government. THe family that once was
"satisfied" with only two cars looked around the open-window
culture provided by instant communications and saw many other
people with two cars and a boat. Then the family not only
expected but began demanding its "right" to everything--and felt
somehow cheated when galloping prices frustrated its desires.

The poor, handicapped and racial minorities can feel
particularly isolated within affluent capitalist societies.
Poverty and urban decay like New York's South Bronx are an
outrage to any nation or economic system. The U.S., of course,
has tried to solve such problems. Social spending is now by far
the largest item in the national budget, amounting to $423.8
billion this year as compared with $145.1 billion for defense.
But some well-intentioned Government spending, such as the $8.6
billion annual outlays for the heavily criticized Comprehensive
Employment and Training Act (CETA), has created new
bureaucracies rather than solving urban problems. Social
expenditures have grown so rapidly that they have become a heavy
load on a national economy that is growing only slowly.

In short, people today ask things from capitalism that no system
can deliver. They confuse hope with promise. When everyone
begins demanding more, the inevitable result is a madder
scramble for a nation's limited output and a bidding up of
prices. Says Albert T. Sommers, chief economist of the
Conference Board, a leading business research group:  "The
failure of our political system to contain the growth of social
demands within limits tolerable to the free market is the
essential first cause of inflation."

The problems of socially stimulated inflation have been
compounded by the now deeply ingrained inflation psychology.
The attitude of "Buy it now because it will cost more tomorrow"
has long been common in such Latin American countries as
Argentina and Chile, where annual price rises of 100% or more
have been known. But the American reaction as recently as 1973,
when inflation hit 12%, was to save in the face of higher costs.
Price rises created insecurity, and people fearful of losing
their jobs began putting more in banks. During the past year,
however, Americans have caught the Latin virus. They no longer
believe a Government that has been telling them for years that
inflation is about to drop. So the American consumer is
radically decreasing his savings and increasing his personal
consumption. AMericans are saving only 3.4% of their income, vs.
7.7% in 1975. By contrast, the West Germans last year put aside
13.5% of their earnings, and the Japanese 22%.

Finding solutions for these social and psychological causes of
inflation will be excruciatingly difficult. Attitudes toward
work and thrift have evolved over decades and can be changed
only slowly. The most important change would be to recognize
that immediate consumption must be limited, and that the public
needs to save and invest for tomorrow. Says Political
Philosopher Dahrendorf:  "Some stabilization of expectations is
inevitable and even desirable. The society of more and more of
the same things cannot and probably should not continue
forever."

Beyond reining in consumer expectations, several basic, if
familiar, steps are necessary. The first is to reduce the
previously excessive growth of money and credit in order to
restrain demand and restore stability. Federal Reserve Chairman
Paul Volcker has started a series of necessary credit-tightening
measures to restrict demand. The second step is to limit
severely government spending at the federal, state and local
levels. The third step is to increase the supply of goods by
giving tax incentives for saving and investment and to relax the
regulations that force business to channel scarce capital into
projects that may or may not be good for society but that create
no new wealth.

Wage and price controls are an attractive temptation,
supported, according to the latest public opinion polls, by a
strong majority of the American public. But they remain fool's
gold. Studies show that once mandatory price restraints are
removed prices soar as high as or perhaps even higher than they
would without any legal restrictions. Virtually all free-market
economists, whether liberals or conservatives, reject mandatory
controls as ultimately detrimental in fighting the causes of
inflation.

The Energy Dilemma

In its bid to find a political scapegoat for roaring inflation,
the Carter Administration has tried to place the blame almost
entirely on OPEC for raising energy prices. While the foreign
oil cartel is a major force behind inflation, it is far from the
only one. Energy costs amount to about one-third of this year's
projected 15.5% inflation rate. But indisputably, the new
energy era poses a serious challenge to free-market economies.
Modern industrial nations have been built on relatively cheap,
easily available fuel. There is a real question of how, and
whether, capitalism can continue to grow in an era of expensive,
easily interrupted energy supplies.

The adjustment to energy scarcity has been made harsher because
markets have not been allowed to operate properly. Only for a
brief time during the 1930s were petroleum prices set entirely
by supply and demand. The cost of oil:  an astonishingly low
$.10 per bbl. Prodded by the major oil producers, the Texas
Railroad Commission began controlling output, thus pumping up
the price.

Later the multinational oil companies were powerful enough to
manipulate prices up or down to guarantee the optimum production
and maximum profit. The real price of oil declined by 50%
between 1950 and 1970 because of abundant U.S. supplies and rich
Middle East discoveries. Under the circumstances, it was
perfectly reasonable for the U.S. to consume energy as lavishly
as it did. But when oil demand scraped up against the limits
of easy supply in the early 1970s and the OPEC producers began
raising prices to levels previously unimagined, the importing
nations were as helpless as an addict hooked on cheap heroin.

The best hope for ultimately restraining energy prices,
increasing supplies and loosing the control of the cartel is to
allow the market to function at last. Initially, there were
would be a severe penalty. If the U.S. removes all controls on
oil, gasoline and natural gas, their prices will rise to world
levels. This will reduce consumption and save oil for the most
important uses, such as vital transportation or petrochemical
production. This is the unavoidable step needed to establish
correct energy prices and the basis for sound economic growth.

No country, of course, can afford to renounce new energy
technology. Unless and until the scientific breakthroughs make
solar power or other sources feasible, nuclear energy will
remain necessary both to provide enough power and to control
fuel costs. France has shown the was to safe and extensive use
of nuclear energy. By the mid-1980s the country will be getting
55% of its electricity from the atom, as compared to 19% with
the U.S.

Challenges for Business

As free-market economies grapple with inflation, unemployment,
slow productivity and low innovation, no private institution
will come under more careful scrutiny or acute pressure than the
corporation. The public's concerns about the role and rationale
of the corporation are real, and businessmen who ignore them
risk the demise of free enterprise.

Early capitalism did not foresee the rise and growth of the
huge, bureaucratic corporation. Adam Smith opposed what he
called the joint-stock company, arguing that hired managers
would not work zealously for firms they did not own. More than
a quarter-century ago, Harvard Economists Joseph Schumpeter
glumly concluded that the very success of capitalism would
undermine it, as impersonal corporations grew up and swallowed
the entrepreneurial spirit.

While brilliant innovators such as William Norris (Control Data)
and Frederick Smith (Federal Express) can still build large new
businesses from scratch, corporate control has passed
increasingly from entrepreneurial proprietors to hired managers.
Leading companies are no longer owned by the founders'
families. The Rockefellers control less than 5% of Exxon, the
parent of the empire John D. Rockefeller built; ownership has
spread to 687,000 individuals, mutual funds and pension plans.
Such broad ownership gives still more control to managers.

Unlike gutsy founding fathers, corporate managers--responsible
to boards of directors and subject to intense public and
political scrutiny--are often less willing to risk, to dare, to
take the calculated gamble on an innovative product or
imaginative idea. Yet it was precisely far-out ideas that gave
capitalism the creativity that it sometimes seems to lack today.
For corporations, a prime challenge of the 1980s will be to
find means of restoring the verve of the entrepreneurs, while
preserving the best of modern management techniques.

One way would be to appoint younger chief executives. They
would be more likely to look at long horizons and take the
creative chances that would pay big dividends on some distant
tomorrow. The median age of corporate chiefs is not 59, and so
they are often driven to achieve short-term results. There is
too much pressure for risk-free, sure and often modest success.
Unless managers know--and the public understands--that they
must be free to fail in some ventures or wait for the
longer-term payoff, they will never take the daring step.

Government can stimulate the growth of entrepreneurial companies
by reducing taxes on high-risk investments. When Congress in
1978 cut the maximum long-term capital gains tax from 49% to
28%, there was a burst of new investment in small, venturesome
companies. Initial stock issues by such firms almost tripled,
raising $592 million for them in 1979. If more new companies
develop, they will give the big, old corporations a competitive
run for their profits and act as a renewing force in capitalism.

Certainly the company's main objectives must remain production
and profit, but the capitalist firm also has important social
functions. The corporation will increasingly have to face the
sometimes conflicting demands of the balance sheet and society.
The new corporate constituency extends beyond the shareholders
to embrace the company's employees, customers and the community
at large. Demands for "social accountability" are increasing
among legislators and consumerists and, very important, among
younger corporate managers. Their questions are tough, and the
answers are not clear-cut.

Should companies add more "public" directors, as demanded by
powerful leaders, from Ralph Nader to Chairman Harold Williams
of the Securities and Exchange Commission?  Yes, if these
outside directors add a new dimension of thinking, expertness
and dedication to the corporation; but no, if they are merely
tokens or single-issue obstructionists who would block rather
than promote corporate initiatives and company welfare.

Should corporations firmly pursue affirmative action?  Yes, if
they make special efforts to consider qualified members of
minority groups as well as women for almost every job and
promotion; but no, if they set rigid quotas that compromise
efficiency, dilute the meritocracy and grossly discriminate
against whites and men.

Should firms accept reduced profits in order to spend much more
to control pollution and improve safety?  Yes, if the
investment produces demonstrable results at a reasonable cost;
but no, if the costs far exceed any possible benefits or place
an oppressive burden on the company.

Some of these dilemmas require something close to squaring the
circle. Compromises will be necessary and progress will be
imperfect. The lesson of the past, activist decade is that, if
capitalist managers do not take social actions voluntarily,
unforgiving legislators and regulators will force them to do so,
and the consequences will be harsh.

One of the modern corporation's most important new challenges
will be in dealing with its own employees. Karl Marx's case for
Communism was based in large part on the "alienation" of
industrial workers, who felt estranged from society because of
the dehumanizing nature of 19th century industrial life. The
overwhelming size of many modern factories and offices now makes
the alienation more acute. But attempts are being made to
create a stronger sense of participation by workers in both
their jobs and their firms.

These attempts range from experiments to reduce assembly-line
monotony to employee stock-purchase or profit-sharing plans that
give workers a larger stake in company earnings. The furthest
reaching program is West German co-determination, which allots
workers and management equal numbers of seats on the supervisory
boards of large firms. But both sides have become somewhat
disenchanted with the system. Management charges that union
representatives have leaked board secrets, like plans to lay off
employees. Workers claim that they are usually outvoted on the
board by the employers, who have a tie-breaking extra vote in
case of deadlock.

U.S. union chiefs have generally opposed board seats for
employees, fearing that they might begin to think like managers
and soften their wage demands. United Auto Workers President
Douglas Fraser is expected to be elected a Chrysler director
next month as part of an exchange for a somewhat lower raise for
Chrysler workers than that given by GM and Ford. This is an
exceptional and highly controversial case. Not many American
unions are willing to trade off wages for a place on the board
of a relatively prosperous company.

A well-functioning capitalist system nonetheless demands some
social compact in which employers, unions and government
recognize their common obligation to achieve price stability.
A wages-chasing-price-chasing-wages inflation does nothing for
either a company or its workers. SOme capitalist countries in
northern Europe have commendable programs in which major unions,
management and government leaders periodically and informally
try to set wage-price goals. This kind of tripartite cooperation
has been given credit for West Germany's relative success in
fighting inflation.

It is doubtful that such concerted action in its present form
could be adapted to the U.S. The method has worked in countries
where a few large, national unions dominate labor. This makes
a discussion among business, union and government easier to
conduct and firmly commits all sides to any agreements. In the
U.S., unionized laborers make up only about a quarter of all
workers and are divided into many independent unions.

Nonetheless, American management and labor could imitate the
cooperative, rather than adversary, approach that is common in
northern Europe. Neither side would lose its independence or
compromise its interests through joint discussions of ways to
reduce inflation, raise productivity or stimulate investment and
job creation. The hangover of ill will on both sides, which
dates to the robber baron era of the turn of the century and the
bitterly divisive 1930s, is blatantly archaic. What is needed
more than anything else is a new mind-set. Both workers and
bosses are penalized by capitalism's serious difficulties, and
both will have to contribute to the search for solutions.

Faces of Free Enterprise

Capitalist countries have reacted in various ways to the
interlocking challengers of inflation and energy, sluggish
growth and scarce resources. In a surprising number of cases,
there has been a movement back toward market-oriented economic
policies and growing disillusionment with welfare states that
cost too much and deliver too little. Says Emile van Lennep,
head of the Organization for Economic Cooperation and
Development:  "It is quite clear now that in the industrialized
democracies we let the success of the 1960s go to our heads.
In responding to the rising economic and social aspirations of
our people, we allowed our economies to become overloaded,
overregulated and insufficiently profitable."

The most ambitious experiment in freedom is British Prime
Minister Margaret Thatcher's attempt to unwind a socialist mess
by cutting income taxes and reducing subsidies to inefficient,
government-controlled industries. Thatcher's bold program is
being severely tested by labor unrest and continued high
inflation. French President Valery Giscard d'Estaing two years
ago also started to turn the rudder of economic policy. His
government decontrolled many basic prices, including those of
bread, which had been regulated since the let-them-eat-cake days
of 1791.

Even in Scandinavia, where government control has been pervasive
and popular, citizens in recent elections have called for less
of it. After 44 years in office, Sweden's Socialists were voted
out in 1976, and last year they were again defeated. Denmark,
Norway, Finland and Iceland have all moved to the center in
their latest elections.

Perhaps the world's most successful capitalist society is West
Germany. Though the government is nominally center-left and
holds minority interests in the steel, oil and auto industries,
it interferes little in the thriving private sector. Chancellor
Helmut Schmidt will run for reelection this fall with a record
that would be any other politician's dream:  last year the
economy grew 4.4%, inflation was 4.4%, and productivity
increased 3.5%. Bonn's enviable record results from policies
that foster--in addition to cooperative labor-management
relations--tight money, a strong currency and a high savings
rate.

Capitalism is flowering expansively in Asia. In addition to
Japan's fabled success, South Korea, Taiwan, SIngapore and Hong
Kong have prospered by using the classical capitalist tools:
private initiative and the profit incentive. Over the past four
years the Hong Kong economy has grown by an amazing 12.75%
annually, while unemployment has been a modest 2% despite huge
influxes of refugees from neighboring China. During that
period, per capita real income increased 25%.

Capitalism is even showing its first blush in post-Mao China.
As part of the Four Modernizations programs, Communist leaders
are rehabilitating former capitalist "running dogs."  Nearly
5,000 older entrepreneurs have been asked back to become factory
managers or advisers. Their confiscated capital has been
returned, with interest, and China now has some 100 millionaires
in U.S. dollar terms. Hu Qiaomu, the director of the Academy
of Social Sciences, admitted in a policy statement in the
People's Daily that China has had to adopt such capitalist
principles as "the pricing system, the rule of value, and the
advantage of material incentives."

It is in the developing nations of the Third World that
capitalism today is weakest. Most new countries lack an
entrepreneurial class, and they usually adopt some form of
statism. Often, existing elites in tribes or clans prefer a
centralized system that reinforces their own authority.

Yet those developing countries that have pursued the strongest
centralized economic planning have fared the worst; those that
have adopted some degree of private initiative have achieved the
most impressive economic gains. Take the cases of neighboring
African countries that have similar peoples, natural resources
and other conditions:  free-enterprising Kenya has surged,
whereas Tanzania's command economy has slumped; the Ivory Coast
is capitalist and prosperous, while neighboring Guinea is
socialist and impoverished.

Capitalism will face serious challenges in the Third World
during the 1980s. The colonial era is only just over; distrust
of the old rulers and their economic systems runs high in
developing countries. OPEC's price increases are just the first
grab by these countries for a larger share of the wealth of the
industrial nations. Third World demagogues will doubtless push
a soak-the-rich program on an international scale. The
staggering $350 billion that the developing countries will owe
international banks and institutions by the end of this year
will create another source of potentially dangerous global
tension. Warns Father Theodore Hesburgh, president of the
University of Notre Dame:  "The real threat to capitalism is the
maldistribution of wealth across the globe. We cannot hope for
world peace when 20% of the people in the world have 80% of the
goods."

But the situation cannot be solved simply by aid or
"reparations" to the poor. True, free enterprise governments
must be ready to help through development aid and also by
opening their markets to more THird World exports of both
traditional raw materials and new manufactured goods. As former
West German Chancellor Willy Brandt concluded in a study done
for the World Bank this year, rich and poor nations will
mutually benefit from a progressing world economy; stagnations
and protectionism will ultimately harm both. Yet underdeveloped
countries must help themselves by hard work, realistic economic
policies and guarantees for outside investment.

The multinational corporation, which Father Hesburgh calls "the
colossus of capitalism," should be a leading force in the
stimulation and redistribution of the world's wealth. Says
Hesburgh:  "The multinationals are among the greatest resources
for transferring technology and education. Most do it well;
some exploitive. But rather than pillorying them, we ought to
be using them."

At their best, multinational are the ultimate exporters of
capitalism. By creating jobs, training technicians, grooming
managers, awarding contracts to myriad local suppliers, and
selling shares to local investors, they create a capitalist
middle class. That is not their primary intent, of course, but
they usually do good while doing well. In the 1980s, GM
Chairman Murphy sees even larger profit potential in the
yearning new markets of the Third World than in the advanced
nations, where growth will be slower.

The multinationals, of course, will also be obliged to prove
that they are not just carpetbaggers who despoil the
environment, exploit labor and then close up shop once they have
reaped their profits. Host governments are increasingly fearful
that multinationals can quickly shift plants, jobs and capital
from one country to another to extract the maximum profit and
the most favorable taxes. To ease these anxieties, many
multinational officers are willing to accept a convincing
international code of conduct, pledging them to reinvest much
profit and generally to be good corporate citizens in
developing nations.

A Fateful Rivalry

In both developing and industrialized countries, Communism and
capitalism for decades have fought intense battles that have
often resembled the 17th century wars of religion. Free-market
advocates correctly point out that the command economy has
performed dismally. In a system where the millennium is always
at the end of the next five-year plan, the concrete results in
Communist societies have regularly been insufficient
agricultural output, inadequate and substandard consumer
products and few personal freedoms. Rather than creating the
promised classless society, Communism has always established its
own "new class," which enjoys special privileges and benefits.

Capitalism's critics likewise have railed against the
inequities, uncertainties and the social flux it creates. As
Karl Marx saw it, "All that is solid melts into air, all that
is holy is profaned." Foes charge that the capitalist system
perpetuates grave inequalities of wealth and extravagantly
rewards success. Communists proclaim that capitalism demands
periodic depressions as the way to keep workers poor and
subservient. Psychoanalyst Erich Fromm wrote that 19th century
capitalism's drive for profit made people overly competitive,
warped and aggressive. Finally, Economist John Kenneth
Galbraith argues that free enterprise values wasteful private
consumption more than needed public services.

Such charges are extreme and often unfounded. For the most
part, the inequality of wealth under the free enterprise system
is the unavoidable price that must be paid for genius, hard work
or plain luck. The equality of results demanded by many leftist
reformers would stultify society; complete equality can only be
enforced by dictatorship. Income-leveling experiments in
Britain and Scandinavia have proved that an economy without
reward for success produces social entropy. There is little
incentive for anyone to do more than the minimum necessary to
maintain his own standard of living. Argued Winston Churchill:
"The inherent vice of capitalism is the unequal sharing of
blessings; the inherent virtue of socialism is the equal sharing
of miseries."

Certainly, the large divergence of income within capitalist
societies can be a cause of serious social tensions. In the
society described by Plato in The Laws, no person would be
permitted to be more than four times richer than the poorest.
In the U.S. the upper 20% of the population earns 46% of the
income, a figure that has changed very little in the past
generation. In France that same group earns 44% and in Britain
40%. But those who complain that the chairman of General Motors
earns nearly $1 million a year never criticize the Who for
pocketing that much or Marlon Brando for collecting that sum
for just one motion picture. Any attempt by government to set
limits and establish "just incomes" or "equitable incentives"
would quickly break down or be arbitrarily and rigidly enforced.
The progressive income tax and social welfare programs have
become capitalism's methods of providing some income leveling.

Rather than pushing workers deeper into poverty, as Marx
predicted, capitalism has lifted the vast majority of laborers
into the middle class. In addition, modern unions have given
employees a counterforce to management's power. An economic
downturn now hits harder at corporate profits than at wages,
which are usually fixed by contract.

Contemporary economic policies have attenuated, though not
eliminated, the peaks and troughs of the business cycle.
Recessions are not only unavoidable but often
beneficial--despite the pain they cause some individuals--to
society as a whole. They can purge the system of excesses,
failed products and mismanaged companies. Since World War II
such slumps have been less severe; social programs like
unemployment insurance mean that they are not as painful as in
the days of unbridled capitalism.

While Communist theory assumes that people are instinctively
good and cooperative, but in practice does not trust them to be
free, capitalism has never had any such illusions. Adam SMith
maintained that among the most powerful forces in society was
"the desire of bettering our condition."  Capitalism seeks to
use this desire to benefit the whole society.

Collectivist systems have failed to achieve their professed
ideas. Pure Communist societies, from 19th century utopian
communities like New Harmony, in Indiana, to the hippie communes
of the late 1960s, have struggled with the reality of individual
self-interest. Sixty years of Soviet efforts to make workers
more productive and innovative through slogans, medals, bonuses,
and threats have not overcome the basic problems of the
U.S.S.R.'s inefficient agriculture and erratic industry.
Bertolt Brecht, the Marxist German dramatist, said sardonically
after the 1953 workers' riots in East Berlin that in view f of
the system's problems with its subjects, it might be easier to
"dissolve the people and elect another."

The type of material goods produced by capitalism, or by any
economic system, returns to what Lenin called the question of
"who-whom."  Who is direct and dominate whom?  Where is
society's Solomon?  Who is to decide that this year a nation
should produce heart valves rather than vacation houses?  The
market system provides the most democratic answers. Rather than
a government planner's dictating what a society should produce,
consumers themselves decide what they buy. They vote in the
marketplace. This is not invalidated by the fact that the
votes--and the market--can sometimes be manipulated.
Capitalist bosses, for all their power, have far less real sway
over people than Communist planners.

For all capitalism's proven success in producing material
prosperity, the ultimate justification for the system does not
rest on its output of cars or cosmetics. Capitalism's
fundamental rational is that it permits and promotes freedom by
enhancing the rights of the individual and limiting the power
of the state. While some capitalist countries are not
democracies, no Communist or totally socialist economy has
remained a democracy for long. And every democracy practices
some version of capitalism. The reason is clear: political
freedom is impossible without economic freedom. As the British
poet and essayist Hilaire Belloc noted, "The control of the
production of wealth is the control of human life itself."

During the past year a group of American, Canadian and British
theologians conducted a long-distance debate on the moral
justification of capitalism. The majority concluded it offers
greater moral freedom than any other economic system. Said
Anglican Edward Norman:  "Capitalism is full of minor evils,
existing beneath the umbrella of its overall good effect of
preserving individual freedom. Capitalism has a good case to
argue. It is the case of freedom."  The fact remains that
throughout the world, millions prefer security to freedom, or
think they do, never having known real freedom. Indeed
double-think Communism teaches them to redefine security as
freedom.

Inflation and the other problems of the new age of expensive
and scarce energy will place tremendous pressure on Western
societies and their economies. The transformations in cities
and companies, in living place and work place, will be on a
scale not seen since the Industrial Revolution. No amount of
rhetoric, false promises, or chases after demons of whatever
stripe will help to confront this transformation. Increases in
living standards will be moderate, and growth will be slower.

While tackling the herculean tasks, capitalism must demonstrate
anew the daring and flexibility that were once its hallmarks.
Plainly, capitalism is not working well enough. But there is
no evidence to show that the fault is in the system--or that
there is a better alternative. Though neither comfortable nor
easy, free enterprise contains the protean potential that will
be needed in the coming difficult years. For all its obvious
blemishes and needed reforms, capitalism alone holds out the
most creative and dynamic force that any civilization has ever
discovered:  the power of the free, ambitious individual.

________________________________________________________________
COMMENTS ON CAPITALISM

"For the first time, huge numbers of people throughout the
Western world have built some affluence and created some assets
for themselves. Now they see inflation eroding those assets.
Above all, they want to conserve those assets, and so they are
moving to support more conservative, more capitalist
governments."

--Alan Greenspan, former economic advisor to President Ford

"The very large differences in income and wealth will become
increasingly abrasive. When the country was growing rapidly,
it eased the pressure. But in a period of more limited
expectations, which is here already, there is greater social
friction related directly or indirectly to income and wealth
inequalities."

--Martin L. Weitzman, M.I.T. economist

"Look at OPEC. They will still put most of their money in the
U.S. There is nothing European investors want more now than to
invest in the U.S. The reason is your capitalist system. Your
crisis is caused not by the system but by the workings of the
system. When an engine breaks down, you don't call the
principle of internal combustion into question. You fix or
replace the engine."

--Francois de Combret, economic advisor to the President of
France

"Capitalism makes mistakes like oil spills, but they are
compartmentalized and hence limited. When Government makes a
mistake, it is a big one, like the Post Office or Viet Nam."

--Ben Heineman, president Northwest Industries

"Capitalism works best in nations that are strong and rich and
not so well in the weak and poor. But capitalists have learned
over the years that they had to do something for the less
favored. There is a danger, however, that one can get confused
about equality. Is it equality of opportunity or of result?
It is better to make it equality of opportunity."

--Kiichi Miyazawa, former Japanese Foreign Minister

"Socialism might work if it were possible to invent a new man,
but until then capitalism has the advantage in inventiveness.
The only thing that can kill capitalism is for it to slip into
bureaucratic stagnation. As long as we have the former peasant
who has become a 19th century-type entrepreneur, the boorish
type who doesn't care whether he is loved or not, capitalism
will survive. When we lose that kind of man, we are in
trouble."

--Franco Ferrarotti, Italian sociologist

"In the rich, industrialized countries of the Western world,
mixed economies will remain--but with diminishing power for
capitalism. As is shown by its present crisis, capitalism will
have diminishing influence."

--Olof Palme, former Swedish Prime Minister

"Capitalism is being questioned as it was in the '30s, but there
is less possibility of a change of systems. Then the West had
alternatives to capitalism--socialism, social democracy,
fascism. Now in the West there are no such alternatives. And
a system will not die unless it is pushed aside by something
else."

--Piero Bassetti, Italian Christian Democrat and political
economist

"Capitalism presents much greater possibilities [than Communism]
for the development of personal initiative. These democratic
values cannot be entirely separated from the capitalist economy.
Under the socialist system, the owner of every enterprise, the
boss at every institution is the state. And if a person of a
democratic turn of mind protests against this system, then he
cannot work. The state is boss everywhere. If he doesn't
please the boss, he won't be accepted."

--Roy A. Medvedev, historian Marxist and Soviet dissident

________________________________________________________________
RANKING SOME OF THE ECONOMIES

         PER CAPITA  GROWTH   INFLATION  INDUSTRIAL  PRODUCTIVITY
           G.N.P.  % rise in  % rise in  PRODUCTION  % rise in
          in U.S.  real G.N.P.  C.P.I.     % rise    output per
          dollars   annually   annually    annually  hour worked

U.S.      $9,700       2.3%       14.1%      4.2%       0.6%

Sweden     10,210       3.8        13.6       6.5        5.7

W. Germany  9,600       4.4         5.6       5.4        3.6

Canada      9,170       2.8         9.4       4.2        4.7

Japan       7,330       6.1         8.0       8.3        7.9

Britain     5,030       2.0        19.1       3.6        1.8

U.S.S.R.    3,700       2.0         N.A.      2.4        N.A.

Brazil      1,570       6.4        77.2       6.9        3.5

Kenya         320       3.0        10.0      14.4        N.A.

Tanzania      230       4.5        12.0       3.8        N.A.


Latest comparable statistics available. Per capita G.N.P.
figures are for 1978.