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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