Tuesday, December 27, 2011

Utopian Capitalism

This article begins by citing a recent book by Richard Branson who earned his billions creating the Virgin businesses. His book makes the case for a form of capitalism that has the well being of people as its goal, and which is more concerned about the longer term. This raises the general question about the relationship between capitalism, which has profit maximization as its goal, and broader social concerns. Adam Smith believed that a system of capitalism, in which everyone pursued their self interest, was workable because people also possessed moral sentiments, and empathy for others, that would moderate the exclusive pursuit of self interest. Alan Greenspan believed that the preservation of a business's reputation would also serve as a limit on business behavior. He claimed to be "shocked" by the behavior of bankers who ruined their reputations in the pursuit of profit. In any case, these are some of the ways in which self regulating capitalism is a form of utopian capitalism.

Most economists believe that incentives drive behavior. If we look at the incentive systems that operate in most large corporations its easy to see why management focuses on short term financial performance. Their compensation is primarily a function of financial performance that is related to the appreciation of their stock options. Ostensibly, the incentive systems were designed to align the interests of management with that of shareholders. Corporate directors are there as well to look after the interests of shareholders. We have learned that this system does not achieve the intended result. Corporations are managed to maximize executive compensation and that does not always benefit shareholders. Corporate boards, are largely comprised of corporate executives as well. We have a form of corporatism, that we call capitalism, that is operated and governed by a management class. Shareholders have a very weak form of control over the businesses that they collectively own. They can sell their stock if they are not happy with management. I don't think that this is what most people mean when they define capitalism as the ownership of the means of production. The management class has developed an incentive system and a form of governance which is heavily weighted to serve its best interests.

Some argue that corporations are legally defined by governments and they operate in conformity with laws that are written by legislatures that are democratically elected to assure that they operate in the public interest. If that worked out in accordance with theory, we would not need to depend upon the good will of business management to limit the human propensity to maximize self interest. Politics in many countries is essentially about how the relationship between government and business ought to function. We have libertarians who argue for a very limited role for government in this relationship. Of course, most of them do not object when governments provide infrastructure and services which enable business to operate profitably. They also don't seem to be troubled when government spends tax dollars on the purchase of products and services by private industry. The "libertarians" compete with those who argue for a larger role for government in producing business outcomes that serve the public interest as well as corporate interests. They also understand that capitalism is dynamic, and that business cycles are omnipresent for the economy as a whole, and for industries and firms. They believe that government should play a role in moderating the impact of business cycles. This might mean providing assistance to workers and in some cases government might assist businesses which need assistance in a bad cycle, or even when they have taken risks which might cause business failures that affect the economy as a whole. Libertarians describe this kind of relationship between business and government as socialism. That would mean that capitalism does not exit in our mixed economies. Of course, one of the problems with a tight relationship between business and government is that governments might tend to confuse the public interest with the interests of the businesses that they regulate. In that case, we have a failure in the democratic processes by which the public regulates the performance of government through the electoral system which has increasingly required political candidates to obtain campaign contributions from the executive class that operates the corporate system.

It should be apparent that capitalism can only be defined in very broad terms. It takes different forms in different social and political environments. Capitalisms in Japan and Sweden are different from each other and they both differ from how it functions in America. In fact, our current form of corporate capitalism in the US is very different from how it operated in the past. Moreover, globalization has changed the relationship between the nation state and the large corporations that increasingly operate across national borders, and fall under the jurisdiction of multiple governments. Increasingly, the nation states have been forced to organize among themselves to deal with issues that impact their national interests. This has not been an easy adjustment.

This article was precipitated by the publication of a book by a successful capitalist who has some ideas on reforming capitalism. They were described as utopian capitalism. In my view, most common definitions of capitalism are utopian. They describe capitalism as a system of free markets that are regulated by competition. Very few markets work this way. We have a system that is dominated by very large corporations that function internally as command and control systems. That form of organization is usually attributed to the totalitarian state, but that is the way even highly decentralized corporations are organized. If it were otherwise, we would not attribute so much importance to the CEO and the executive leadership team. They make all of the strategic decisions and they hold decentralized management responsible for achieving financial goals set by corporate management. Corporations, of course, compete with each other just as states compete with each other. Winning in this environment often requires cooperative behavior between competitors with a common interest. It also requires the use of resources and strategies that limit the ability of competitors to enter markets that are controlled by a handful of very large firms that have greater revenues than many nation states. This is not the utopia that is commonly defined by the operation of free markets.

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