Modifying the Capitalist System
Goldman’s Lloyd Blankfein, Citibank’s Vikram Pandit and, of course, Barclay’s Bob Diamond, all have something in common. Even their normally acquiescent shareholders have been moved to express concern about their latest round of excess, greed and thuggery. But they are only the tip of the ice-berg. It has become custom and practice for top people to take spectacularly from the businesses they command. Whether their take, largely for unacceptable performance, is £5m or £67m makes little difference. It obviously bears no relation to their true worth: their talent, or their hard work.
These are the unacceptable faces of capitalism, the reasons why people have so little trust in the integrity of corporate business. They are why people are demanding ‘new models of capitalism’, ‘ethical capitalism’, ‘capitalism with a conscience’, etc. And why Ed Milliband makes the clear distinction between what he refers to as ‘good capitalism’ and ‘bad capitalism’.
But capitalism with a conscience won’t work. We may all start out with a conscience, but if the system tempts us with untold riches for doing not a lot, then most of us are likely to fall for it. Our intrinsic good intentions will be crowded out by extrinsic incentives or greed. The problem is making the system proof against that simple human frailty.
Our legal system was founded on the establishment and protection of private property. Industrialisation was enabled largely by private finance in support of private enterprise. The economic gains from industry were almost always allocated for the greater good of owners, with the rest, from time to time, being forced to suffer extremes of deprivation. No-one ever claimed the outcomes were fair and equitable. Our law should have been based on equity and human rights rather than property. But it isn’t. To achieve any degree of fairness and equity the system would have to be modified to prevent the owners of private property impoverishing the rest, as they are doing at present.
Over the years, some degree of social justice was established, with legislation offering protection against extremes of abuse. And the trickle down argument was seen to have some validity. The living standards of the least well off progressed as the economy grew, fed it seemed by reinvestment of the capitalists‘ wealth.
But trickle down no longer works. The wealthy have many more exciting things to invest in than the manufacture of widgets. The deregulation of finance has enabled the creation of all sorts of deliberately obscure synthetic financial “products” to be offered for sale, promising improbable rates of return. So wealth is no longer invested in the real economy, but is largely invested for high returns, albeit at high risk, by professional fund managers intent on climbing their particular greasy pole.
Promotion of ethical business, capitalism with a conscience, and the rest, won’t have any real effect on how the system works. Those who are ethical and have a conscience will continue to work with integrity; those who exploit and abuse will similarly continue. It’s the system that has to be changed.
A couple of legal amendments which have been proposed and which might have some positive impact are to:
1. Require the composition of financial products to be stated as clearly as is required of food items, and those that remain opaque to be illegal, their sale being a criminal offence.
2. Give employees 50% representation on company remuneration committees.
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Gordon,
In the P-CED white paper for an alternative to capitalism, the core argument suggested that:
“Modifying the output of capitalism is the only method available to resolving the problem of capitalism where numbers trumped people – at the hands of people trained toward profit represented only by numbers and currencies rather than human beings. Profit rules, people are expendable commodities represented by numbers. The solution, and only solution, is to modify that output, measuring profit in terms of real human beings instead of numbers.”
It was in Russia where the trickle down approach failed spectacularly. This was described in David Mclintick’s article ‘How Harvard Lost Russia’ where he concludes
“In running Harvard’s Russia Project, Andrei Shleifer and Jonathan Hay had an
opportunity to preach the importance of integrity, transparency and fairness in
shaping a business culture, and to work to enshrine those values in the country’s
legal and financial infrastructure. Instead, their personal dealings sent a very
different message.”
The P-CED proposal was to turn this approach on it’s head, and invest in local micro-economic development bottom up. The research and recommendations in 1999 sourced the Tomsk Regional Initiative, which was replicated by USAId in several other cites.
In our paper for microeconomic development and social enterprise in Ukraine we said this:
‘This strategy places adequate funding for social benefit under control and management independent of government and the very obvious vicissitudes and conflicts inherent therein.
This is a long-term permanently sustainable program, the basis for “people-centered” economic development. Core focus is always on people and their needs, with neediest people having first priority – as contrasted with the eternal chase for financial profit and numbers where people, social benefit, and human well-being are often and routinely overlooked or ignored altogether. This is in keeping with the fundamental objectives of Marshall Plan: policy aimed at hunger, poverty, desperation and chaos. This is a bottom-up approach, starting with Ukraine’s poorest and most desperate citizens, rather than a “top-down” approach that might not ever benefit them. They cannot wait, particularly children. Impedance by anyone or any group of people constitutes precisely what the original Marshall Plan was dedicated to opposing. Those who suffer most, and those in greatest need, must be helped first — not secondarily, along the way or by the way.
From there, broad economic and social development can develop “upwards” concurrently with more conventional top-down approaches to economic development. Moreover, this program will not only meet initial, most critical and urgent objectives of childcare reform and poverty relief in Ukraine, it will also provide training for ever-growing numbers of specialists educated in social enterprise economic thinking with sufficient funding to put ever more well-designed projects into action as Ukrainian citizens invent them. ‘
[...] Professor Gordon Pearson makes the point that the current demand for ‘new models of capitalism’ and capitalism with a conscience won’t work. It depends on personal good and resisting the temptation toward being greedy and law is on the side of the owners of property. rather than equity and human rights. [...]
Correction – not Professor! Agreed most of our law stems from the protection of private property ownership, but ownership of public companies is rather different. Company law is on the side of the company. Shareholders own share certificates that entitle them to dividends and capital growth, both of which are at risk. Their ownership is with limited liability. Company directors have a legal duty as agents of the company (not shareholders) to act in the best interests of their principal (the comapny, not shareholders). But the law as it stands is not activated. Thus Cadbury directors, for example, did not have their service agreements terminated when they agreed and recommended the sale of the Cadbury company to Kraft. Nor were they sued for dereliction of their legal duty to act in the company’s best interests. Instead they paid themselves massive bonuses for their betrayal, and did so with impunity because of the generalised, but wrong, belief that it was their legal duty to maximise the wealth of shareholders. The law is on the side of the company and charges directors with the duty to have regard to the interests of all its various stakeho0lders, including (see 2006 Companies Act) the local community and the environment. But the law isn’t actioned. If the law as it stands were acted on, it could be far more effective than the softer (though of course valid) focus on equity, human rights, and against greed.