The Financial Times led off its series on ‘Capitalism in Crisis’ with a wandering piece that attempted to outline the problem. Unfortunately, the FT writers don’t seem to understand what capitalism is, let alone what is wrong with it. They say they are “rethinking capitalism.” But it doesn’t appear that they ever thought about it the first time.

“At the heart of the problem is widening income inequality,” they write.

Anatomically, income equality is right on the surface…not at the heart. It is more like warts or boils…on the skin of the system for all to see. Right out in the open. The question is what causes these blemishes… More in just a minute…

First, let’s look briefly at what is going on in the markets. A quick preview — nothing much. The Dow rose 69 points yesterday. Gold shot up $23.

Meanwhile, The Wall Street Journal tells us that consumers have begun to borrow again:

Consumer borrowing leapt as holiday spending kicked in late last year, according to a new Federal Reserve report that hinted the era of household debt reduction that has held the economy back for years might be entering a new, milder phase.

The Fed said Monday that household borrowing on credit cards, car loans, student loans and other kinds of installment debt rose at a 9.9% seasonally adjusted annual rate in November, the fastest monthly increase since November 2001. That was when the economy was bouncing back from the Sept. 11 terror attacks and Detroit car companies were rolling out zero-percent…

Whoa… Does this mean the Great Correction is over? Have households decided to go back to their old free-borrowing, free-spending ways? Is it 2005 all over again? Let’s hold that question…

What are consumers doing? Are they taking their cue from the US government? USA Today reports that federal debt is now as big as the entire economy. That is, we have a government debt-to-GDP ratio of 100%. And only if you don’t count the rest of government’s debt — such as the debt of Fannie and Freddie, and unfunded pension debt, as well as state and local obligations. Add them to the calculation and the ratio jumps to high heaven.

Fortunately for the feds, they have no trouble borrowing money. Bloomberg reports that there are plenty of people willing to give the Treasury more rope:

The Treasury attracted record demand at today’s $32 billion auction of three-year notes as concern that a resolution to Europe’s sovereign-debt crisis is far off drove investors to the safety of the securities.

The auction’s bid-to-cover ratio, which gauges demand by comparing total bids with the amount of notes offered, was 3.73, the highest since at least 1993, when the government began releasing the data. Yields on US debt securities were little changed. German Chancellor Angela Merkel was meeting International Monetary Fund Managing Director Christine Lagarde as pressure grows to complete a Greek debt resolution.

“There is still strong risk aversion in the market,” said Adrian Miller, fixed-income strategist at Miller Tabak Roberts Securities LLC in New York. “There is still enough headline risk out there that it should keep the Treasury market relatively in check and in this very narrow range.”

The yield on the current three-year note was little changed at 0.36 percent at 5 p.m. in New York, according to Bloomberg Bond Trader Prices.

How do you like that, dear reader? Lend money to the world’s biggest debtor…who has no plausible plan for ever paying off these debts…and get a paltry third of a percent on a three-year note. Pretty soon, you’ll have to pay to lend the feds money.

Is that strange, or what?

And now let’s return to the “Crisis in Capitalism”…

In 1965, US chief executives received 24 times the wages of the average worker. Over the next 25 years, the ratio went to 70 times. Then, it exploded to the upside, rising to 299 times in 2000 and 325 times today. People look at these figures with the same look of appalling disgust as they once looked at syphilitics. It is ugly, the outward sign of an inner sin, they believe.

But it is hardly the heart of capitalism. Nor the liver. Nor the kidneys. Nor any other vital organ. Executive pay is not a benefit to capitalism. It’s not what makes the system works. It’s a cost. A drag. An impediment. It’s only a benefit to a very special segment of the working class, the managers. They are the cadres…the insiders…the controllers. More like plantation overseers and prison wardens than capitalists, their interests are very different from either the working stiffs or the shareholders. They squeeze the former and cheat the latter. They cut costs…deliver profits…and pay a large percentage of them to themselves.

According to John Kay, also writing in the FT, a breach opening between capitalists and managers was observed as early as the 1930s. The capitalists still owned the capital. But the managers controlled it.

“Modern titans derive their authority and influence from their position in a hierarchy, not their ownership of capital,” Kay explains. “They have obtained these positions through their skills in organizational politics, in the traditional ways bishops and generals acquire positions in an ecclesiastical or military hierarchy.”

They are bureaucrats, in other words…glad handlers…schmoozers…not entrepreneurs or capitalists. And over time, like major domos, regents, and regisseurs, they use their control of the institution for their own benefit.

How do they get away with it? It is a part of the process we call ‘zombification.’ Institutions all tend to shift, over time, from fulfilling some outward-centered purpose — such as making bread or making war — to looking out for themselves. Whether it is a government or a corporation, hustlers, anglers, and idlers figure out how to take advantage of them. These ‘insiders,’ pervert the organization and divert its power and money to themselves.

The club secretary, the company president, the charity director, the dictator and the senator…all look for ways to build their own power and wealth. National economies are undermined. Whole industries are corrupted.

We thought the idea was somewhat original. We thought we had come up with something new. But once again, Mansur Olson, a professor of institutional economics at the University of Maryland, was way ahead of us. He described the process as it applies to government in his 1982 book, The Decline of Nations. His view of it was a little narrower and more responsible than ours. He described how lobbyists and special interest groups corrupted the government and the economy. Businesses — protected, subsidized, heavily regulated — became inefficient. Real output per unit of investment went down. The nation declined.

We’ve already seen how in the US, the health care, education and defense industries have been thoroughly zombified. Huge amounts of money have been “invested” in these industries over the last four decades. Despite all the money, people are statistically no healthier…and no better educated. As for defense, military lobbyists insist that we are safer. But never have so many foreigners had a grudge against America.

Bill Bonner is the President of Agora Publishing. For more on Bill Bonner, visit The Daily Reckoning.