One of my favorite scenes from the movie “Miracle” seems apropos for this edition of Willingdon Views. In a pivotal moment, late in THE hockey game between the U.S. and Russia, at Lake Placid in 1980, Coach Herb Brooks made an amazing statement. Brooks said, “He doesn’t know what to do.” Brooks realized that the Russian coach did not know how to adjust his strategy when they were behind late in the game. He simply wasn’t prepared for it nor could he adjust in the pressure of the moment.
Noted World War II historian and author, Stephen Ambrose noticed the same weakness of totalitarian systems when he studied the invasion of Normandy and the subsequent battle to liberate Europe. Overall, the Allied troops were much better than the Axis troops at improvising and demonstrating individual initiative. In many cases, this made the difference between victory and defeat in battles across western Europe.
Totalitarian systems work well when everything is going according to plan, but under stress have proven less adaptable. Conversely, democratic, free-market systems are breeding grounds for creativity and entrepreneurialism. Moreover, as decision making is pushed to lower levels, individual initiative and adaptability create greater opportunities for success, especially under pressure. Why does this distinction matter today?
Today’s major battle ground between the U.S. and China related to trade policy, has ramifications for global economic leadership far into the future. The battle pits the centralized, state-controlled Chinese economic system against the current U.S. version of capitalism.
First, an important distinction… Our current version of capitalism is more accurately called “crony capitalism.” Big business, political elites, and wealthy activists are all gaming the system to benefit their interests and to remain in positions of power. Crony capitalism is ripe for corruption at multiple levels. Higher taxes, more regulation and more government control make this situation worse, not better.
A move away from crony capitalism, and toward free-market capitalism, which may be an ideal, more than a potential reality given the complexity of our economy, would require truly dynamic leadership. It would also require a commitment to values that are largely absent today on the national stage – servant leadership, self-sacrifice, and integrity, to name a few.
The election in 2020 may largely determine which version of capitalism will dominate in the years to come. Philosophically, one path points in the direction of free-market capitalism with lower taxes, less regulation and less government control, while the other path leads to higher taxes, more regulation and more government control. Without question, the devil is in the details, as actual policies and the character of our leadership matter a lot. Nonetheless, it is important to realize that these two competing economic and political philosophies are diametrically opposed. Moreover, the economic results will likely be very different depending on the election outcome. On one hand, lower taxes and a more pro-business environment will likely produce greater overall economic growth as it has over the past two years. On the other hand, higher taxes and more centralized control will stifle the entrepreneurial spirit that drives economic growth. Businesses will sit on cash and be less inclined to take risks, both of which tend to suppress economic growth. There is no doubt that the markets will adjust accordingly, depending on political developments.
If we become further entangled in crony capitalism, or move even closer to centralized control, we won’t win the battle against China for global economic superiority. We risk losing our entrepreneurial spirit and our ability to adapt under duress, which will undoubtedly have dire consequences.
If we can pursue free-market capitalism within a business and government structure centered around positive core values, we will be an unstoppable economic force, driven by a powerful, entrepreneurial spirit and a commitment to doing good in the world. Which path we take is our choice. It is also our hope and our calling, as citizens of this great country.
Michael Kayes, CFA