Not Perfect, but Better!

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If you read any of the content we regularly publish here at Concentus, you must know by now that one of the pillars of our capital market philosophy is Rational Optimism, and that it is impossible to make a good investor out of a pessimist. We believe firmly that an educated optimism is the only outlook that is supported by history, and that any rigorous study of the history of mankind will make clear the fact that the human condition has been getting better and better for the last 10,000 years.

We are so confident in this optimism because the economic trend of progress we see continuing is an essential expression of human nature. Our optimism is based on the instinctive impulse of all 7.5 Billion humans on earth, to become more:  To be, to do, and to own.  The spirit of capitalism combined with human ingenuity and technology are thriving all over the world – despite government, politics, financial crises, armed conflict, natural disasters, religious strife, and terrorist atrocities. And yes, no matter who is sitting in the Oval Office.

It’s the combination of our human urge to become more, together with our natural ingenuity, which has driven the incredible explosion in quality of life in the last 10,000 years, and we can be comfortable investing in a future shaped by human ingenuity, because it is a resource that can never run out, and we have not even scratched the surface of what it can accomplish.

Lucky for us who live here in America, which is at the very center of this explosion in quality of life, thanks to our system of Capitalist Democracy, which sets the conditions for human ingenuity to thrive.

A friend recently sent me the brilliant article below, written by Michael Novak for the Wall Street Journal back in 1994. Mr. Novak’s incredible insight into the “co-dependency” of capitalism and democracy makes it clear how brilliant our founding fathers were, for the powerful system they created.  I hope you enjoy this thoughtful piece.

Democracy, Capitalism and Morality

A free world isn’t a perfect world, but it’s better than any alternative.

By Michael Novak

(This article appeared in The Wall Street Journal, Dec. 27, 1994. Michael Novak died Friday at 83.)

Democracy, Winston Churchill once said, is a bad system of government, except when compared to all the others. Much the same might be said of capitalism. It is not a system much celebrated by the poets, the philosophers or the priests. From time to time, it has seemed romantic to the young; but not very often. Capitalism is a system that commends itself best to the middle aged, after they have gained some experience of the way history treats the plans of men.

My own field of inquiry is theology and philosophy. From the perspective of these fields, I would not want it to be thought that any system is the Kingdom of God on Earth. Capitalism isn’t. Democracy isn’t. The two combined are not. The best that can be said for them (and it is quite enough) is that, in combination, capitalism, democracy, and pluralism are more protective of the rights, opportunities, and conscience of ordinary citizens (all citizens) than any known alternative.

Better than the Third World economies, and better than the socialist economies, capitalism makes it possible for the vast majority of the poor to break out of the prison of poverty; to find opportunity; to discover full scope for their own personal economic initiative; and to rise into the middle class and higher.

Sound evidence for this proposition is found in the migration patterns of the poor of the world. From which countries do they emigrate, and to which countries do they go? Overwhelmingly they flee from socialist and Third World countries, and they line up at the doors of the capitalist countries.

A second way of bringing sound evidence to light is to ask virtually any audience, in almost any capitalist country, how many generations back in family history they have to go before they reach poverty. For the vast majority of us in the U.S. we need go back no farther than the generation of our parents or grandparents. In 1900, a very large plurality of Americans lived in poverty, barely above the level of subsistence. Most of our families today are described as affluent. Capitalist systems have raised up the poor in family memory.

The second great argument on behalf of capitalism is that it is a necessary condition for the success of democracy—a necessary, but not a sufficient, condition. The instances of Greece, Portugal, Spain, Chile (after Pinochet), South Korea and others allow us to predict that once a capitalist system has generated a sufficiently large and successful middle class, the pressures for turning toward democracy become very strong. This is because successful entrepreneurs speedily recognize that they are smarter and more able than the generals and the commissars. They begin demanding self-government.

As has been recognized since ancient times, the middle class is the seedbed of the republican spirit. Capitalism tends toward democracy as the free economy tends toward the free polity. In both cases, the rule of law is crucial. In both, limited government is crucial. In both, the protection of the rights of individuals and minorities is crucial. While capitalism and democracy do not necessarily go together, particularly in the world of theory, in the actual world of concrete historical events, both their moving dynamism and their instincts for survival lead them toward a mutual embrace.

On this basis, one can predict that as the entrepreneurial spirit grows in China, particularly in its southern provinces, we can expect to see an ever stronger tide in favor of democratic institutions begin to make itself felt. The free economy will unleash forces that propel China toward the free polity.

True, some dictators have chosen to permit capitalist systems even though such systems severely limit their own power over the economy. But there is an inherent defect in one-man rule that makes capitalism in such nations vulnerable. That defect is human mortality and the problem of succession. One of the great advantages of democracy is that it solves that problem of succession in a routine, regular and peaceful way. For the long-run health of capitalism, then, I venture the hypothesis that democracy, with its methods of peaceful succession, is also a necessary condition.

Another service to capitalism that democracy performs better than dictatorship draws upon its representational function. A free economy has a great many parts, and a parliament or representative congress tends to represent all these parts. Thus in a democracy every part of the economy has at least some active voice. This may make it more difficult for clear and simple decisions to be made. But the active representation of all economic parties does make less likely the harsh, unilateral decisions to which dictators are prone. Pinochet and other dictators have caused great harm to their economies by unconsidered, unilateral decisions, which a parliament might have prevented them from making.

People do not love democracy if it does not bring improvement in their economic conditions. They will not be satisfied with democracy if all it means is the opportunity to vote every two years. Typically, they do not ask for utopia but would like to see the possibility of solid economic progress for their families over the next three to four years. This is the psychological mechanism which makes capitalism, or at least a dynamic economy, indispensable to the success of democracy. Capitalism delivers the goods that democracy holds out as one of its promises.

Another service provided by capitalism to democracy is less well understood. The founders of the U.S. understood it very clearly, however, as one can see by a careful study of Federalist No. 10 and No. 53. Benjamin Franklin in London and Thomas Jefferson in Paris searched libraries to find out why previous republics had failed. Envy, it turns out, is the most destructive social passion—more so than hatred, which is at least visible and universally recognized as evil. Envy seldom operates under its own name; it chooses a lovelier name to hide behind, and it works like a deadly invisible gas. In previous republics, it has set class against class, sections of cities against other sections, leading family against leading family. For this reason, the early Americans stood against division (“divided we fall”) and sought ways to neutralize envy.

To accomplish this task, the Founders determined that a republic cannot be built upon the clerical (priestly) class; nor upon the aristocracy and military (whose interests in “honor” caused so many rivalries and contestations); but upon a far humbler and typically more despised class, those engaging in commerce. They opted for what they called “a commercial republic.” Why did they choose as their social foundation a class, and an activity, universally regarded by philosophers, religious leaders, and poets as lowly and ignoble?

They chose commerce for two reasons. First, when all the people in the republic, especially the able-bodied poor, see that their material conditions are actually improving from year to year, they are led to compare where they are today with where they would like to be tomorrow. They stop comparing themselves with their neighbors, because their personal goals are not the same as those of their neighbors. They seek their own goals, at their own pace, to their own satisfaction.

Indeed, in America, as de Tocqueville and others noted, there was a remarkable freedom from envy. On the whole, people rejoiced in the success of others, as signs of the coming prosperity of their village, city, and nation. Across America today, in public schools and colleges and universities, one still sees many portraits of public benefactors who were successful in commerce and industry. Democracy depends on a growing economy for its upward tide—for social mobility, opportunity, and the pursuit of personal accomplishment.

The other reason the Framers chose commerce and industry as the economic foundation for this nation is to defeat the second great threat to republican institutions, the tyranny of a majority. James Madison and Alexander Hamilton, in particular, understood the ravages of original sin in human affairs. They, therefore, strongly supported Montesquieu’s (and Aquinas’) notion of separated powers, plus the “principle of division” throughout every branch of society.

It is in the nature of commerce and industry that they focus the interests of citizens in many different directions: Some in finance, some in production, some in supply, some in wholesale, some in retail, some in transport, some in lumber, others in tobacco, or cotton, or vegetables, or whatever. In their structure and goals, industry differs from industry, firm from firm. In such ways, commerce and industry render highly unlikely any single, universal majority.

In summary, commerce and industry are a necessary condition for the success of republican government (”government of the people, by the people, and for the people”) because they (1) defeat envy, through open economic opportunity and economic growth; and (2) defeat the tyranny of a majority, through splitting up economic interests into many different foci.

 

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About the Author:

Erik is one of the co-founders of Concentus Wealth Advisors and currently serves as the Chief Executive Officer of the firm. With over 25 years of industry experience, Erik guides the firm’s overall strategy. After graduating from Amherst College in 1991, Erik spent a year working with Rittenhouse Capital Management, before joining Gerald in 1992. Erik currently holds his general securities registrations and insurance licenses, as well as CERTIFIED FINANCIAL PLANNER™ and Chartered Financial Consultant designations. In addition to his formal designations, Erik has appeared on CNBC’s Worldwide Exchange, Fox News’ America’s News HQ, Live Well’s Mary on Money, CN8’s Money Matters Today and The Real Estate Connection. In 2012, Erik was one of thirteen advisors named to Main Line Today’s Top Financial Advisors list. Erik lives in Bryn Mawr, PA with his wife and three children. He serves on the boards of the Philadelphia Chapter of the Salvation Army, Acting Without Boundaries (serving young people with disabilities) and The Holy Child School at Rosemont. In addition, he is on the financial advisory board of the Sisters of St. Francis in Media, PA.

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