Sunday, September 2, 2012

American Capitalism Under The Microscope

There is a general agreement that American capitalism has lost some of its appeal.  It is no longer the model that other countries hope to emulate.  This has led to an outpouring of books that attempt to diagnose the patient and prescribe the appropriate medicine.  This article reviews several of the books that have been recently written on this topic.  Some deny that there is a real problem with American capitalism, and some of the diagnoses are not very deep.  There are a few themes, however, that tend to run together and form a core message.  American capitalism has lost its moral foundation.  Economies need to have have a purpose.  The idea that greed is good, which seems to be its moral foundation today, is not a good foundation upon which a sustainable economy can be built.  Underneath the erosion of the economy's moral decline, are several institutional changes that undermine its social purpose.

One of the bad institutional developments has been the preeminence of maximizing shareholder value as as the objective of the economy.  It has not worked to maximize shareholder value but it has maximized the paychecks of CEO's.  The return on F500 stocks, since the late 70's, when the doctrine of maximizing shareholder value written into stone has not been good for shareholders.  The returns to shareholders has been lower than it was when multiple stakeholders were considered to be important.  On the other hand, CEO compensation has grown eight times faster than corporate profits.  Managing investor expectations and the stock price has crowded out the management of the enterprise.  It has also led to bad practices as rising expectations about continuous growth have been difficult to satisfy without "creative" accounting.

It was also ironic to see books by the liberal Joe Stiglitz and a conservative economist from Chicago arrive at similar diagnoses of the problems in American capitalism. The both agree that a more equal distribution of output of the economy is good for society and for the economy.  Rising inequality has distorted democracy and it has diminished consumer demand.  Instead of an economy regulated by real competition in product markets, corporations have captured government and changed the rules of the game to their advantage.  Crony capitalism, facilitated by government, has not been good for the economy or for the majority of Americans.  Income inequality, and diminished social mobility, interact in ways that exacerbate social problems and the ability of government to deal with them.

In general the diagnoses of the problems are better than the solutions that are proposed.  The economic  train has left the station and it is going to be difficult to put it on a better track.  Crony capitalism did not develop overnight.  It has taken over 30 years to replace a system that worked better for most Americans with what we have today.  The diagnoses are the first step in taking the actions that will be required.  We understand the problem.  We just need to begin to do what we know we have to do.

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