Capitalism to the Rescue

There are an increasing number of live initiatives for making the capitalist system more sustainable and equitable. Improving environmental, social and governance performance would be steps in that direction. Transparency in terms of measuring and reporting progress would also be important. Including content on sustainability and equitable governance in the mandatory curriculum for all secondary, further and higher education students might start to change the general understanding of these critical issues. Creating an alternative system of ethically focused capital markets and enlightened financial institutions might challenge the financial sector to a more enlightened capitalism role.

These initiatives are all positive and worthwhile. But if the generally held core belief persists, that a successful economy depends on people all seeking to maximise their own material self-interest, such innovations will remain niche, if they remain at all. Their impact would be both limited and short-lived.

The original purpose of the capitalist system was to fund industrialisation. That generated the economic gains for entrepreneurs and their stakeholders and the industrial infrastructure paid for by taxes, as well as providing for the common good by improving health, education and general living standards.

Over the past forty years, that progression has been reversed, with former public goods unravelling, markets being corrupted and capital flows being reversed out of the real economy. The result has enriched the wealthy and impoverished and polluted the planet for future generations. If the human species is to survive and prosper, that core belief must be rejected and a more balanced version of the capitalist system pursued.

Rejecting the core economic belief might not be as difficult as it seems. It is, after all, based on absurdity and falsehood.

Attempting to understand the real world, and to make policy decisions affecting its economic well-being, on the basis of simplistic calculus-based mathematical models, is truly absurd, as most economists themselves agree. Firms are not production functions comprising price, cost and quantity; profit is not maximised by setting quantity at the level where marginal cost equals marginal price. Such absurd models are quite unnecessary to understanding how price relates supply and demand. Such absurdity is only exceeded by the multitude of totally implausible assumptions that have to be made for such models to be internally consistent even on their own terms.

Nor are people the nightmare vision portrayed by economics, seeking only to maximise their own material self-interest. Knowledge and understanding of human motivation is far more sophisticated than that. But people can be corrupted. Their intrinsic motivations which might be generous and altruistic, can easily be crowded out by monetary incentives. That is exactly what the economic model seeks to do, and the current self-indulgent remuneration of corporate and financial bosses, and the endemic fraud and criminality among bankers, suggests it is working very well. Among those privileged few, higher level motivations seem to have been completely crowded out, leaving only greed and corruption.

The neoclassical credo is what led to the 1930s crash and great depression, after which common sense was applied and monopolistic monsters were broken up, market competition was protected and taxation was increased and made progressive, to pay for an improving general good. The result was prolonged periods of economic success.

Over the past forty years those protections and moderations have been dismantled again resulting in the mess of unsustainability, inequity and economic failure currently experienced. An even bleaker future awaits, unless change is made. That disastrous process was promoted by Milton Friedman, the simplistic ideologue and populariser of free markets, open access, minimised state and minimised flat rate taxation, whose intellectual honesty has been assiduously questioned by, among others, fellow Nobel memorial laureate, Paul Krugman (New York Review of Books, 15.2.2007).

Friedman’s distinctive contribution to the dogma was to assert maximising shareholder wealth as the real duty of company bosses, and it was accepted, both by specialists and by the general public who are the ones who pay the price. But it’s a lie and has to be rejected.

Company directors have contracts direct with their company that require them to act at all times in the best interests of the company, not the shareholders. That is the law. Companies Acts specify the legal duty of directors is also to have regard to the long term and to the interests of the various stakeholders, including the community and the environment. But never mind the law, Friedman is still believed. The result has been a multi-trillion dollar disinvestment from American companies to their shareholders over the past decade with a similar movement in the UK where industry after industry has been sold off for the short term gain of the plutocrats. Those funds extracted from the real economy have been reinvested in speculative financial ‘products’, which have been estimated globally as worth around $54 trillion, close to the GDP of the planet and many times the total value of the world’s stocks and shares.

Without the absurdity and falsehoods of Friedmanite neoclassical dogma, initiatives to eliminate that disastrous predation and to improve equity and sustainability, would stand a chance of significant and lasting results. A truly sustainable capitalist global economy might then not be a complete impossibility.

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