American Capitalism: The Bright Ages
In this essay we want to acknowledge the rate and force of change in the world today, and that we believe the US is in an enviable position to benefit. To this end we provide a brief history of broad changes prior to the beginnings of American democratic capitalism- compared to the Dark Ages, these are the Bright Ages. The European Union (EU) is mimicking aspects of America, which supports the notion that America has distinct advantages versus the rest of the world. Finally, America’s largest generation is entering their prime and their collective circumstance has primed them to maximize the opportunities afforded by capitalism.
The world is becoming more innovative and entrepreneurial, more capitalistic. And this is both exciting and a bit scary. It is exciting because innovators and entrepreneurs create the most amazing transformations that impact our lives in ways that we cannot readily or accurately imagine. It is exciting because innovations spread faster and farther than ever, so US citizens can benefit from much innovation around the globe in short order; sadly, innovation does not yet flow as readily into many areas of the world due to oppressive governmental and other structural issues. It is exciting because the US is the most innovative country in the world, but also it is scary to think that being on the leading edge of change is critical to the health of our nation. Fortunately, America’s imperfect economic and social systems provide an indisputable advantage versus the rest of the world.
Innovation has changed countries and empowered people. Going back in history, when European travel became unsafe in the 400s AD, commerce ground to a halt, and people moved to the country to become subsistence farmers. The following 900-year period is known as the Dark Ages[1] because there was little possibility of acquiring or sharing knowledge, innovation, or cultural development. Nobles used knights and trained armies to prey on the hapless peasants, developing feudal systems and shifting power from kings. Eventually, the Dark Ages came to an end with a game-changing innovation, the longbow. Not only did the longbow play an important role in ending the Hundred Years War, but any commoner could use one. To promote the longbow, kings sponsored tournaments with attractive prizes and encouraged archery. As the innovation spread, nobles could no longer prey on commoners (think Robin Hood) and feudal systems collapsed. Commerce resumed, knowledge was acquired and shared, culture was developed, and the quality of life generally improved for people.
Even if you have not read ahead in a history book, it should not be much of a surprise that as the power shifted from nobles back to kings and monarchs, they gradually and increasingly abused their power through the mid-1700s. This led to the Age of Revolution in Europe and the Americas2. The American Revolution also produced an innovative representative democratic government, while other revolutions more or less modified or created centralist governments[2][3][4]. We believe that the Age of Revolutions also includes the European Industrial Revolution, and we further believe that the innovations of the European Industrial Revolution were the primary driver of nearly all advancement.
The concept of capitalism is an old one but, from what we can tell, it was not until America’s founding that capitalism was woven into the social system. To our understanding, capitalism is all about fair competition and this allows for government influence to foster and promote fair competition. Capitalism is more of an orientation of perspective than something that has actually existed for an extended period of time in a significant population. Non-capitalist economies place a much greater emphasis on central planning than America’s imperfect representative democracy, and capitalistic forces had a significant influence on the rate and quality of advancements in America. This is one of the biggest factors in how America came to become the world’s superpower, in our opinion.
America’s remarkable success certainly held the attention of Europeans and was part of many European debates about economic structure and the relationship between the people and government. Karl Marx was probably smarter than anyone at RAM and wrote much about America. If he were alive today, he would probably be befuddled by the progress and envious of the standard of living.
Europe seems to be gradually mimicking the US and who could blame them. The European Union (EU) is still relatively new and will go through several machinations over the next century. The EU today even bears a bit of resemblance to the early US. In Europe, there were separate countries with separate currencies and a history of conflicts between countries. Now the euro is the single currency and the EU is comprised of 28 member states[5]. Similarly, early US immigrants tended to follow paths of prior immigrants from their country with the idea of setting up colonies. For example, many “wicked smaht” Irish immigrants went to Massachusetts and many Scottish immigrants went to South Carolina, etc., and to an extent, their European identities and grudges traveled with them. Each state had its own currency which was later replaced by a single federal currency.
When the Great Recession hit in 2008, Europe was in a considerable bind. For sure, the EU has been quite busy propping up countries and systematically important financial institutions, but that has been primarily journaling money between accounts. When the EU economy was darkest the Small Business Act for Europe[6] was created and it bears a striking thematic resemblance to the US Small Business Act of 1953, from our perspective. Here are some excerpts from the EU proposal:
“Dynamic entrepreneurs are particularly well placed to reap opportunities from globalisation and from the acceleration of technological change. Our capacity to build on the growth and innovation potential of small and medium-sized enterprises (SMEs) will therefore be decisive for the future prosperity of the EU. In a globally changing landscape characterised by continuous structural changes and enhanced competitive pressures, the role of SMEs in our society has become even more important as providers of employment opportunities and key players for the wellbeing of local and regional communities. Vibrant SMEs will make Europe more robust to stand against the uncertainty thrown up in the globalised world of today.”
“In general, EU SMEs still have lower productivity and grow more slowly than their counterparts in the United States. In the US, surviving firms on average increase their employment by 60% by their seventh year, while employment gains among surviving firms in Europe are in the order of 10% to 20%.”
The proposal cites excessive regulatory costs, structural difficulties, and rigidities in labor markets as impediments in EU nations, as well as a stigma of failure for those associated with unsuccessful ventures. It also states that because of the late payment culture of Europe, 25% of insolvencies were due to late payments and could have been prevented. In this way, the EU recognizes a key component to America’s advantage and seeks to mimic it.
Going forward the US is again in the catbird seat. The Baby Boomers are no longer the largest generation. Our largest generation is entering their prime, and they have a penchant for being “entrepreneurial minded.” This is being nourished and guided by higher education as there are twenty times the number of classes on entrepreneurship that existed in 1985[7]. Scott Redmond recently attended the Washington & Lee University Entrepreneurship Summit. The sixth one! It was invigorating and he plans to return. Perhaps the biggest entrepreneurial asset of the rising generation is all the disappointment they have experienced. Having done what their parents said and played the game, they now are sitting on mounds of student loans, limited employment opportunities, limited ability to buy a home, etc. They are not in a place to be complacent, they are not content, and this may be the source of great energy. It is no wonder, from our perspective, they love to poke holes in established practices. After what they have been through, they are appropriately questioning everything. For example, when cars were too expensive for young people to buy, insure, operate, and maintain, they created Uber. And they are just getting started.
From an investment perspective, American capitalism will allow for a multitude of opportunities for innovation, thus generally improving people’s lives while also providing a plethora of investment opportunities. These opportunities will be found from small pioneering companies all the way to large established companies that use innovation to reignite growth engines. This is exciting. But it is also a bit scary because of the potential for disruption in established business models and the fear of missing out. Our approach to investing in these rapidly changing times will reflect Washington & Lee’s motto, non incautus futuri, “not unmindful of the future.” To us, this means that we need to be equally grounded in present realities and mindful of innovative changes.
October 2017
[1] https://en.wikipedia.org/wiki/Dark_Ages
[2] https://en.wikipedia.org/wiki/Age_of_Revolution
[3] https://en.wikipedia.org/wiki/Revolutions_of_1830
[4] https://en.wikipedia.org/wiki/Revolutions_of_1848
[5] https://en.wikipedia.org/wiki/European_Union
[6] http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52008DC0394
[7] https://www.theatlantic.com/business/archive/2016/07/the-myth-of-the-millennial-entrepreneur/490058/
