Why Screw It Up: Keep Democracy and Capitalism Alive

The interplay between Democracy and Capitalism is the strength of America.

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Democracy and capitalism are both misunderstood.  If we zoom in to understand the core principles and zoom-out to get the big picture, as Steve Jobs used to say, we can appreciate their beauty, challenges, and interdependencies.  The combination of democracy and capitalism has worked well for America.  Both are based on simple principles and have the inherent capacity to correct themselves.

Democracy at its core is “one person one vote” where each person votes in accordance with his or her conscience but the collective outcome serves society. It could be equated with collective wisdom, like in the Millionaire show where ‘ask the audience’ produces 91% accuracy.  Periodic reelection cycle allows the system to readjust to changed norms and expectations, new leaders emerge and new voters come of age. As a result, democracy advances.

Capitalism is an economic system, with private ownership of industry driven by profit motives of the owners, producing goods at lower costs.  But under competitive pressure, the goods are also sold at a lower price so that people can afford more.  In capitalism, the owners, workers, and consumers benefit — contrary to the belief that it serves only the rich.

Capitalism also needs an efficient financial system. Banks lend money to individuals and businesses.  Stock exchanges make IPOs possible through which employees and investors get liquidity but when people buy and sell stocks of Facebook or Amazon, they can also participate financially in the success of these companies.

At the heart of successful capitalism lies savvy government regulations, an outcome of a sound democracy.  Financial institutions are heavily regulated for good reason.  Without government oversight, they can be rigged, destroying the economy.  Bank deposits also need to be safeguarded.  Still, the financial industry is far from perfect as was shown by the 2008 financial meltdown.

The need for regulations for private industries is less apparent.  In 1890, when Rockefeller of Standard Oil garnered 90% of oil refinery market share, gobbling up competitors through predatory practices, hiring lobbyists and bribing politicians, the government enacted the Sherman Antitrust Act and broke up the monopoly of Standard Oil and 100 years later of AT&T.

When companies become monopolies, consumers have fewer choices, leading to higher prices.  Preventing monopolies to form, or breaking them up is what the Federal Trade Commission (FTC) focuses on.

Policing technology companies has been rather difficult because they innovate so rapidly.  In the case of Microsoft, the Department of Justice, latched on to the value of browser, early on.  Had they not brought the antitrust case against Microsoft forcing Windows to work with independent browsers, Google would not exist.

Amazon, Facebook, and Google have grown unchecked.  Market shares of Amazon are 47% in e-commerce, of Google 90% in search engine and of Facebook 55% in social networking.  But Amazon offers products at attractive prices and the other two companies charge nothing for providing enormous value to users through their platforms.  Their real competitive advantage, as we now understand, is big data.  How to factor that in, is the challenge.  They do not fit the classic model of a monopoly.

The cartel of big data needs to be broken. Can FTC force Facebook to spin-off WhatsApp, for example, with no advertising revenues and 1.5 billion monthly active users’ data?  Maybe some venture capitalists will fund it, converting WhatsApp into a profitable business model. 

New business models are part of innovation.  The big three could also be forced to offer third-party digital-advertisement interface on their platforms, to promote competition in big data.

Before we blame the problem of not busting the big three on democracy,  patrician divide or on our leaders, we should realize the complexity of the issue — even for people in the thick of it. 

However, there is no excuse for how Facebook caused Russian meddling, and why Google reads all our emails. Both know exactly what we are saying, buying, doing and sharing, and where we are.  Who agreed to this invasion of privacy?  It is simply creepy and wrong!

Competition is a painful reality for companies in Silicon Valley. The startup success rate is between one in 1000 to 10000.  Cisco is one of the few recent Valley giants still standing after 40 years.  My own public company fell to the competition when we did not evolve fast enough; Cisco’s routers engulfed our technology and wiped us out.  Despite our superior technology, Cisco had the advantage of consolidated equipment. Even so, competition is healthy for our democracy.

I would also argue that democracy is better equipped to be less corrupt and more transparent. Leaders, if not trusted, can get tossed out in subsequent elections.   Corruption is a big drag on innovation, as innovators cannot efficiently ward off existing leaders if they have to fight an opaque political system.

Democracy needs capitalism and vibrant industries that provide jobs, without entitlements.  Handouts take incentives away and increase taxation, reducing take-home income. However, democracy must strive to provide affordable water, electricity, housing and healthcare, so that citizens can contribute to their own and country’s wellbeing.

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6 comments

  1. Rakesh Reply

    Democracy is about birth of leader in and Capitalism is about distribution of assets of a nation. Neither of these exist unadulterated in a nation e.g. it has been socialistic in US to redistribute or control use of assets. The leadership of the day decides as per it’s judgement.

  2. Naren Gupta Reply

    Excellent thinking about going back to basics re democracy and capitalism. Neither can exist without the other for the long term. China seems like an exception at least for now.

  3. Vijay Gupta Reply

    I think our democracy and government regulators have been hijacked by big corporations. Recently, Dr. Scott Gottlieb, the ex-FDA commissioner, joined the board of Pfizer, a company whose products he was regulating at FDA. Earlier (2009), Dr. Julie Gerberding recommended the HPV vaccine (made by Merck) in her position as the head of CDC, then joined Merck as the president of their vaccine division (which makes HPV vaccine).

    And these are not isolated cases. Most top officials at government regulatory agencies really work for the industry’s interests more than they work for the voters’ interests. So if you think that HPV vaccine is as safe and effective as it should be, or that the FDA position on GMO foods is based on honest science, you are probably thinking wishfully.

    Our politicians are similarly corrupt. Our Congressman Ro Khanna has been promoting the idea that no politician should take any money from big companies. But there is little chance of his dream coming true. As it stands now, we have our democracy for sale to the highest bidder. It is not one person, one vote. Rather it is X dollars per vote (for the bills that favor the industry).

    There is one way to make some headway against this big and fundamental flaw in our system. That is to somehow reverse the US Supreme Court’s verdict on ‘Citizens United v. FEC.’ It was one of Bernie Sanders’ major election promises (and that is probably why he lost to Hilary Clinton who raised tons of money from big donors).

  4. ViJay Agarwal Reply

    Excellent and well written.
    Keep up the great job you are doing.

  5. asha bajaj Reply

    Reminds me of Ayn Rand :how do we account for the Chinese experiment with capitalism without democracy and Russian oligarchy with free markets.
    I fel we need to keep our minds open and fluid to find the right balance for developing soceities The jury is still out with new forces of globalization, access to media and other markets.
    Regards
    asha

    1. vinitagupta Reply

      Well said.