The condottieri of capitalism

The five major powers of Italy – the duchy of Milan, the Serene Republic of Venice, the kingdom of Naples, the Florentine republic and the Papal States – were not known for their military prowess. While Florence had a militia of sorts and Venice was known for its navy, for the most part they relied upon condottieri for their defenses – mercenaries who not only had no significant attachment to the city-state that employed them, but often were not even Italian.

Indeed, the most famous condottiero, Sir John Hawkwood of the White Company, was an Englishman. Like most mercenaries throughout history, the condottieri were reluctant to risk their lives, without which their pay was useless, and so combat on the Italian peninsula evolved over time into a bloodless pageantry of parade drill and political intrigue.

This system appeared to work well, for a time, but the foolishness of placing Italy’s fate in the hands of indifferent mercenaries became clear in 1495 when King Charles VIII of France marched south and easily claimed the throne of Naples, and his successors made Milan into a virtual French protectorate.

Much has been written about the failure of capitalism with regard to the chicanery practiced by the executive officers of companies like Enron, Worldcom and Tyco. But it is not the capitalists who were guilty of misdeeds in any of these situations – for in a free market system, it is not the executives who are the capitalists, it is the shareholders.

Management is not ownership. While there is occasionally some overlap between the two, the average CEO holds only a very small percentage of a company’s total shares and those only because they have been given to him by the ownership. But America’s capitalists have been imprudent to place their trust in a group of mercenaries with no more loyalty to their shareholding employers than had Francesco Sforza to the Visconti of Milan.

The furious debate about stock options is only the most recent demonstration of the conflict of interest between owners and executives. While CEOs such as Craig Barrett of Intel and John Chambers of Cisco simultaneously argue that a) it is impossible to value stock options granted to employees, but b) valuing stock options would have cost a third of their companies’ profits this year, billions of dollars are traded every day on the Chicago Board of Options Exchange, which seems to have no problem putting a price on the time value of options using the Nobel prize-winning Black-Scholes model.

One of the biggest myths in America is that big business is an enemy of big government. The opposite is true, because big business, which is primarily led by the management class, is tireless in demanding that government protect it from the consequences of its own actions and from the natural fluctuations of the business cycle. It is the capitalist class of small business entrepreneurs that is usually opposed to government, which frequently acts as a defender of big business in seeking to maintain the competitive status quo.

But this is a violation of what Schumpeter accurately described as the capitalist process of creative destruction. This is dangerous, because it is the protection of giant corporations and their rapacious, self-seeking stewards that not only threatens to lead to a Japanization of the economy – wherein profitless zombie organizations continue to drain the lifeblood of the economy, precious capital from the savings pool, like monstrous business vampires – but creates a strong inclination toward unproductive growth through acquisition and a focus on short-term quarterly financials instead of the long-term health of the business.

Still, excessive CEO pay, be it through options, cash or shady “loans” is only a symptom, not the problem. The condottieri of capitalism are a cancer, certainly, but as with most things, the cause of this cancer can be traced back to government interference – in this case, with the free market. This interference, through the tax laws and S.E.C. rules and abetted by investment-bank preferences, creates a constant bias toward the elevation of the management echelon at the expense of the shareholding owners.

As the bear winds grow increasingly colder, it is important to remember that the difficult times ahead are not a crisis of capitalism, they are instead the inevitable result of anti-capitalist machinations on the part of corporate management, the banking community and the federal government.