The Battle for the Soul of Capitalism

As some readers will recognize, that paragraph, aptly describing our nation as the twenty-first century began on January 1, 2001, is a play on the words of the famous opening paragraph of Edward Gibbon’s 1838 epic, The Decline and Fall of the Roman Empire. And yet, Gibbon continued, “the Roman Empire would decline and fall, a revolution which will be ever remembered and is still felt by the nations of the earth.”(1) By the end of his epic, the Roman Empire was no more. Constantinople had fallen, the fruitful provinces overwhelmed by Vandals; Britain was lost; Gaul was overrun; and the brutal Goths had conquered Rome itself, as in 410 A.D. the Imperial City was delivered to the licentious tribes of Germany and Sythia.

Why did the Roman Empire fall? One answer seems to lie in its citizens’ unshaken demand for material goods (“bread”) and the self-indulgence of its civic order (“circuses”); the acceptance of money as the measure of their worth, their wants, and the value of their property; their need for honor and recognition, even as their vision of freedom, liberty, and greatness was fading. As Saint Augustine suggested, it was self-love that led to the fall of the Roman Empire. Gibbon’s conclusion is expressed in this profound warning: “O man! Place not thy confidence in this present world.”(2)

Gibbon’s history reminds us that no nation can take its greatness for granted. There are no exceptions. So I am concerned about the threats we face, not only the external threats to America’s greatness in this present world, but the internal threats we face at home. This book is my attempt to address one of those major threats: the remarkable erosion that has taken place over the past two decades in the conduct and values of our business leaders, our investment bankers, and our money managers.

My vantage point is that of an American businessman (and a lifelong Republican) who has spent his entire half-century-plus career in the financial field—writing an idealistic thesis on the mutual fund industry during 1949 – 51; then spending a near-quarter century working at and finally heading fund pioneer Wellington Management Company; founding the Vanguard Group of Investment Companies in 1974 and serving as its CEO through early 1996; and subsequently, to this day, researching, writing, and lecturing on investment issues. For better or worse, my youthful idealism—the belief that any truly sound business endeavor must be built on a strong moral foundation—still remains today, at least as strong as it was all those years ago.

By the latter years of the twentieth century, our business values had eroded to a remarkable extent. Yes, we are a nation of prodigious energy, marvelous entrepreneurship, brilliant technology, creativity beyond imagination, and, at least in some corners of the business world, the idealism to make our nation and our world a better place. But I also see far too much greed, egoism, materialism, and waste to please my critical eye. I see an economy overly focused on the “haves” and not focused enough on the “have-nots,” failing to allocate our nation’s resources where they are most needed—to solve the problems of poverty and to provide quality education for all. I see our shocking misuse of the world’s natural resources, as if they were ours to waste rather than ours to preserve as a sacred trust for future generations, and I see a political system corrupted by the staggering infusion of money that is, to be blunt about it, rarely given by disinterested citizens who expect no return on their investment.

America’s Bread and Circuses
As the new millennium begins, America has her own bread and circuses. That they are not the same as those of ancient Rome is hardly surprising, but they exist nonetheless. Much of our bread, as it were, goes not to keep the masses peaceable but to a fairly small elite, including the fabulous compensation paid to corporate chief executives and star athletes and entertainers. (Shades of the Roman Empire!) Our bread was leavened even more with the incredible wealth creation of the stock market bubble of 1998 – 2000, enriching senior corporate officials, aggressive entrepreneurs, venturesome investors, investment bankers, financiers, and the managers of other people’s money. During the subsequent 50 percent stock market crash, however, half of the paper wealth created for the investing public during the bubble went up in smoke. Despite the market’s strong rebound in 2003 – 4, investor wealth in equities remains more than 20 percent below the peak it reached five years ago.

Too late, investors learned that, absent the delivery of the future cash flows, stock valuations are evanescent. For all its trumped-up promise, for example, the “new economy” of technology, science, and communications during the bubble era produced an earnings growth rate of just 8 percent per year, barely larger than the 7 percent growth rate of the “old economy” of traditional goods and services. The over-leavened bread of market values that accompanied that modest growth inevitably fell flattest in the new-economy sector, precisely where the extraordinary popular delusions and madness of the investing crowd had departed furthest from reality.

And our circuses abound, too. While our nation’s largest arena, the stadium at the University of Michigan, holds but 107,501 citizens—one-third the 320,000 capacity of the Circus Maximus—television screens bring U.S. sports and entertainment to worldwide audiences that reach into the billions. As stocks became entertainment, perhaps our greatest circus became our financial markets. Electronic trading abounds; dealers and day traders move the market in spasms; stock market turnover has risen to the highest levels since 1929. CNBC and CNN and Bloomberg television alert opportunistic traders of stocks to the contemporaneous opinions of Wall Street gurus about each merger, each earnings report, each uptick and each downtick in the stock market. And earnings are almost universally described in terms of how close they come to widely publicized “guidance” from management. Any deviations from expectations, positive or negative, can inexplicably mean billions of dollars, more or less, in the market capitalizations of large corporations. Not surprisingly, then, companies rarely report earnings that disappoint the omnipotent market.

When we should be teaching young students about long-term investing and the magic of compound interest, the stock-picking contests offered by our schools are in fact teaching them about short-term speculation. And the biggest financial circus of all—today’s incarnation of the Circus Maximus—is the garish eight-story NASDAQ MarketSite Tower in Times Square, displaying stock prices on what is proudly billed as the “world’s largest video screen.” That display, it seems to me, is the visual paradigm of a stock market that has become not only a circus, but a casino for speculators. Yet as Lord Keynes warned us: “When the capital development of a country becomes the by-product of the activities of a casino, the job is likely to be ill-done.”(3)

Beyond the Financial Markets
While our bread and circuses are different from those of ancient Rome, we’d best consider whether they bear the seeds of our own undoing. As Mark Twain reminded us, “history may not repeat itself, but it rhymes.” So we would be wise to accept the hardly far-fetched analogy of ancient Rome with modern America as a warning to put our house in order. For while the situation I’ve described goes to the very heart of our wealth-oriented, things-fixated society, we still have the ability and the freedom to solve our problems and build a better world. All we need is the wisdom to recognize our challenges and the willpower to surmount them. It will not be easy. But as my marvelous cardiologist, Dr. Bernard Lown, wrote to me a few years ago, “the destination for a society deserving of human beings is still distant, but it is up to all of us to hasten the day of ar-rival.”(4) So, I leave to my readers not only to decide whether I exaggerate our problems, but also to consider whether we have the will to solve them.

Beyond our borders, and now even within them, we are threatened by a malevolent war of terrorism. Radical elements of the Muslim world, operating in a globe that is now virtually without borders or meaningful protection, threaten our daily lives. While the type of massive attack that reduced our proud World Trade Towers to rubble four years ago has not been repeated, no one denies the possibility—even the likelihood—that we have not seen the final act of devastation take place on America’s shores. Whether or not one agrees with our nation’s policies and actions since September 11, 2001, our self-appointed role as the world’s police force and the wars we launched in Afghanistan and Iraq have clearly inflamed the hatred of much of the Muslim world for America’s values and her power, and have consumed an alarmingly high amount of our national resources ($300 billion through 2005) that might have been better expended on our needs at home, or even, in the name of fiscal rectitude, unexpended. For history is clear that economic power is the ultimate bulwark of political and military power and national dominion, and capitalism is its bulwark.

Enter Capitalism
It is not my province to address in this book the vast challenges that our nation now faces at home and abroad. But the example of the fall of the Roman Empire ought to be a strong wake-up call to all of those who share my respect and admiration for the vital role that capitalism has played in America’s call to greatness. Thanks to our marvelous economic system, based on private ownership of productive facilities, on prices set in free markets, and on personal freedom, we are the most prosperous society in history, the most powerful nation on the face of the globe, and, most important of all, the highest exemplar of the values that, sooner or later, are shared by the human beings of all nations: the inalienable rights to life, liberty, and the pursuit of happiness.

Today’s capitalism, however, has departed, not just in degree but in kind, from its proud traditional roots. Over the past century, a gradual move from owners’ capitalism—providing the lion’s share of the rewards of investment to those who put up the money and risk their own capital—has culminated in an extreme version of managers’ capitalism—providing vastly disproportionate rewards to those whom we have trusted to manage our enterprises in the interest of their owners. Managers’ capitalism is a betrayal of owners’ capitalism, a system that worked, albeit imperfectly, with remarkable effectiveness for the better part of the past two centuries, beginning with the Industrial Revolution as the eighteenth century turned to the nineteenth.

The human soul, as Thomas Aquinas defined it, is the “form of the body, the vital power animating, pervading, and shaping an individual from the moment of conception, drawing all the energies of life into a unity.”(5) In our temporal world, the soul of capitalism is the vital power that has animated, pervaded, and shaped our economic system, drawing its energies into a unity. In this sense, it is no overstatement to describe the effort we must make to return the system to its proud roots with these words: the battle to restore the soul of capitalism.

1. Edward Gibbon, The Decline and Fall of the Roman Empire (1776–88; New York: Random House, 2003), 11.

2. Ibid., 1137.

3. John Maynard Keynes, The General Theory of Employment, Interest and

Money (1936; New York: Harcourt, Brace and Company, 1964), 159.

4. Dr. Bernard Lown, letter to the author, undated.

5. Quoted in David B. Hart, “The Soul of a Controversy,” Wall Street Journal, April 1, 2005.

COPYRIGHT NOTICE:

Copyright © 2005 by John C. Bogle. All rights reserved. This book may not be reproduced, in whole or in part, including illustrations, in any form (beyond that copying permitted by Sections 107 and 108 of the U.S. Copyright Law and except by reviewers for the public press), without written permission from the publishers.