28th April 2018

Economic Disorder

The capitalist system has served us quite well, at least by creating an incredible civilisation and increasing GDP per head in Western Europe on average 20 times in the last 200 years. But over the last 40 years it has become largely dysfunctional mainly by creating an enormous difference in income between the ‘capitalist elite’ and the rest of us and gradually destroying democracy. Here is a list of just some of the most cardinal errors in the capitalist system that drive the world economy astray:

  1. Concentration of economic and political power on a global scale by a tiny proportion of the world’s population. Corporate capitalism has been criticized for the amount of power and influence corporations and large business interest groups have over government policy, including the policies of regulatory agencies and influencing political campaigns. Many social scientists have criticized corporations for failing to act in the interests of the people; they claim the existence of large corporations seems to circumvent the principles of democracy, which assumes equal power relations between all individuals in a society.
  2. Corruption of democracy. This is perhaps the most serious charge. Watching how Donald Trump campaign was run, one might broadly agree as this is not only the symptom of failure of capitalism in the USA, but in most western democracies, e.g. Japan, Israel, Italy (Berlusconi) to name just a few. It’s money that controls politics and not the other way around. In the USA it is more apparent than perhaps anywhere else because it is so public, like the ‘deal’ that candidate Trump made with the National Rifle Association for their monetary support. The astronomical amount of money spent on presidential campaign in the USA, now reaching $1bn is nothing else as corruption in white gloves, since that money under the disguise of lobbying is then used to pay for favourable legislation e.g. no gun control.
  3. Extreme concentration of wealth. One area where change is happening at nearly exponentially is extreme wealth concentration. According to Forbes, in 2017 the number of billionaires jumped 13% to 2,043 from 1,810 the previous year, the first time ever that Forbes has pinned down more than 2,000 ten-figure-fortunes. Their total net worth rose by 18% to $7.67 trillion, also a record. The change in the number of billionaires – up 233 since the 2016 list – was the biggest in the 31 years that Forbes has been tracking billionaires globally. Gainers since last year’s list outnumbered losers by more than three to one.
  4. Capitalism’s inefficiency. Planned obsolescence has been criticized as a wasteful practice under capitalism. By designing products to wear out faster than need be, new consumption is generated. This would benefit corporations by increasing sales, while at the same time generating excessive waste. A well-known example is the charge that Apple designed its iPod to underperform after 18 months. Critics view planned obsolescence as wasteful and an inefficient use of resources.
  5. Lack of proper accountability. Corporate managers are the de facto ‘owners’ of large corporations, since institutional shareholders, who represent real owners e.g. millions of pensioners, are simply individuals that are either former board members of similar companies or ‘professionals’ quite often going hand in hand with the board. That’s why Annual General Meetings are so pointless, because the board only very rarely is overruled by the shareholders, to the extent that there is a new trend called shareholders’ activism attempting to give shareholders the real power they should have.
  6. Instability and debt accumulation problem. The main source for growth capital is not organic money, i.e. from the company’s its profits, or equity, i.e. selling part of company’s shares, but bank debt. As long as a company can repay the interest, it is deemed to be solvable. Therefore, if it wants to take over another company, it increases its debt level, the only real guarantee being the ability to repay the interest. No wonder then that any significant fluctuation in money supply and interest rate can lead to severe turbulences in the markets, like during the 2008 largest financial crisis in history, directly caused by the collapse of the sub-prime mortgage market.
  7. Subsidized industries. Some examples are: the airline industry (fuel), Steel industry (electricity), oil and coal industry, farming and agriculture in general.
  8. The doctrine of maximizing shareholder value. This is based on Milton Friedman’s assertion that the so-called agency-based model puts the obligation on the company manager (the agent) to conduct the business in accordance with shareholders’ wishes, in precedence to other stakeholders. This is of course a shortcut explanation, as the matter is quite complex, but the main point is that such a model of managing companies has led to a significant abnegation of the traditional role of a company’s owner, who had to take risks and responsibilities that shareholders do not do. The result of that has been that shareholders’ rights, as owners of capital, have been far superior to other stakeholders, such as employees, who deliver intellectual and manual ‘capital’. But most importantly, globally it has led to trading in companies on the stock exchanges like in commodities, leading to big economic and financial crises, like in 2008.
  9. The failing financial systems. Banks and the financial sector in general have become widely criticized and blamed for how they behaved before 2008 financial crisis. 10 years have passed and barely anything substantial has changed. Banks don’t do what they are supposed to do i.e. the economy’s payment mechanism and an intermediary between savers and investors, providing capital to new and growing businesses. Instead, more often than not, some banks are gradually turning into casinos, investing not for the long-term in real economy but gambling on micro-second transactions and creating derivatives that represent the original value several times inflated. And then one day, we all pay for it, and the carousel spinning the money, goes on.
  10. The crisis of tax systems and the boom of tax heavens. Some multinational corporations are well positioned to take advantage of tax havens, but smaller businesses, are unable to do the same. That already creates an uneven playing field and distorts competition. Tax revenue is essential to fund vital public services such as education, health and infrastructure, etc. By hiding income and assets, tax havens allow such companies and unscrupulous individuals to evade taxation, thereby allowing them to amass even more wealth and making inequality worse. Perhaps more importantly, the secrecy promoted by tax havens makes corruption pay, and with impunity. A conservative estimate of assets hidden in ’tax haven’ jurisdictions is $7.6 trillion in 2013. New estimates of revenue losses made in 2015 by International Monetary Fund estimate total tax losses at approximately $600 billion globally.

This is just a small selection of the charges laid at the door of several hundred years old capitalism. For sure one could add quite a few more, but that is not the point. It is sufficient to see that capitalism is in real crisis, which can endanger not only the economy but democracy and our freedoms. It has now reached its “sell by” date, and its basic principles need to be redefined.

Next: Social Disorder

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