Sharing the wealth to avoid socialism

Let's be honest: Capitalism is not working for many people. It's one of the reasons why “capitalism” has become a dirty word in some circles.

I come from a working-class background, and I've lived under various socio-economic systems. I've always looked at these systems through the lens of what they could do to improve living standards, and whether or not they could reduce poverty.

Although capitalism is one of the greatest engines of wealth creation in human history, it has a fatal flaw: Over time, more and more capital becomes concentrated in the hands of fewer and fewer people.

Consider this: In Canada, the top one per cent of the richest families own close to 25 per cent of the country's wealth, according to statistics released last year from the Parliamentary Budget Office, while the bottom 40 per cent of Canadian families own barely more than one per cent. In the United States, the story is pretty much the same, with the top one per cent owning nearly one-third of the nation's wealth, according to the Federal Reserve.

The end result is that the rich are getting richer, and the gap between the wealthy and the workers is growing wider. It's not surprising, therefore, that more and more people are turning to socialist ideas.

The problem with socialism, however, is that it is based on the distribution of wealth, rather than the creation of wealth. What socialism fails to account for is that we must first create wealth before we can distribute it. This is why socialist systems, even though they may be noble in their intent, ultimately fail.

After the Second World War, Germany provided a fascinating living laboratory for studying the effect that economic systems can have on living standards. The country was split into two, with West Germany operating under a capitalist system and East Germany operating under a Communist system.

Free-market West Germany became one of the world's most productive and successful economies. But socialist East Germany experienced a drastic increase in poverty and was ultimately no longer able to feed its population. East Germany was a textbook example of the economic reality that we must first create wealth before we can distribute it.

Today, we're seeing a growing appetite for socialistic policies, particularly among the young. And who can blame them? They often graduate from college or university saddled with large debts to pay for an education that in many cases does not lead to good-paying jobs. They end up disappointed, disillusioned and filled with a feeling that the current system is rigged for the benefit of the few.

In my view, business is largely to blame because it has failed to turn workers into capitalists through profit and equity participation programs. If workers don't feel that they're getting a fair slice of the economic pie, they will be tempted to support government wealth redistribution policies, and we as a society will drift further and further toward a socialistic system.

Our No. 1 priority, therefore, should be to find ways in which workers can get some of the wealth they create — not from government taxation, but from the businesses they work for. One of the best ways for this to happen would be to give workers the opportunity to share in a portion of the profits they help make.

The creation and distribution of wealth is at the crux of any economic system. Every economic system must answer two fundamental questions: How do you create wealth? And who gets that wealth?

Capitalism is extremely effective at creating wealth, but the concentration of capital in the hands of relatively few people ultimately leads to increased taxation and social programs designed to redistribute wealth on a more even basis, as we are now witnessing in Europe and North America. Socialism, meanwhile, is effective at distributing wealth, but in the process, it stifles productivity and wealth creation. It kills the goose that lays the golden egg.

There is another option. It's the system I call “fair enterprise.” It's an economic philosophy that recognizes that a successful business is driven by three forces: managers, workers and investors, and that all three driving forces have a moral right to share in the success of the business. Fair enterprise is designed to generate greater wealth, and then distribute that wealth in a way that is much fairer and more broadly based than any other system.

Bottom line: Until businesses starts doing a better job of sharing the wealth they generate, we will have a problem. We will keep going down the road of socialism and wealth redistribution, and the day will come when there's going to be no more wealth to spread around.

KONSTANTINOS TSAKALIDIS / BLOOMBERG Capitalism's great trap, Frank Stronach writes, is that over time, more and more capital becomes concentrated in the hands of fewer and fewer people.