Category Archives: Free Market Capitalism

The economic theory from Adam Smith, through Ricardo, Say, Mises, Hayek and Friedman

Bank Bonuses, Banking, Economics, Free Market Capitalism, Political Decision, Regulation

Is Japan’s Misfortune the Real Tipping Point?

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From time to time the real world where people eat, drink, sleep and have their being, is impacted by the very unreal financial world of speculative markets, and invariably to its huge disadvantage. The bursting bubble of 2007-8 was one such example, which some hoped might be a tipping point, leading to a more civilised future. But not just yet. Now, the speculating elements are picking over the humanitarian disaster unfolding in Japan, to seize the chance of a quick profit. And there is still no sign the ‘madmen in authority’ have the stomach for making any fundamental change. The real world will continue its devastation.

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Banking, Co-operation, Corporate Ownership, Economics, Financial Sector, Free Market Capitalism, Management Practice

Co-ownership Financing Growth

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As announced this week, the John Lewis partnership is raising £50m to finance further expansion by issuing a savings bond to its ‘partners’ and customers. If it succeeds it would make a lot of expensive City activity seem rather unnecessary, and its success is not seriously in doubt.  The bond will return  4.5% gross plus 2% in John Lewis vouchers which puts it slightly ahead of the field in terms of returns.  City “experts” seem worried that this sort of thing might catch on. They advise investors to proceed with caution because the issue is not covered by the Financial Services Compensation Scheme.  So, if John Lewis were to go bust over the next five years, investors might lose their money.

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Bank Bonuses, Banking, Economics, Financial Sector, Free Market Capitalism, free trade ideology, Management Practice, Political Decision, Regulation

Restoring Enterprise by Burying Dogma

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The almost universal acceptance of neoclassical economic theory, at least in Britain and the United States, has resulted in much destruction of professional management practice. The so simplistic dogma leads to a set of mindless clichés which have not only severely damaged enterprise management practice, but, also the wider management of the real economy, as has been seen over the past two years.

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Climate Change, Economics, Free Market Capitalism, free trade ideology, Political Decision

Food Insecurity: Another Big Bubble

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Neoclassical free market orthodoxy, by which the world is still ruled, makes no distinction between real and speculative markets. Both are granted maximum freedom to grow. Speculative markets started as a strand within the financial sector which itself was brought into existence to support investment in the first industrialisation. But while the size of real markets is limited by the ‘appetite’ of potential customers, speculative markets have no such limit. Their growth has been phenomenal; the market for derivative securities has already been estimated as close to the GDP of the planet and many times the value of the world’s stocks and shares. But that is only the start.

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Economics, Free Market Capitalism, Political Decision, Regulation, Uncategorized, Unemployment

The Ignorance of Economics

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Despite their much vaunted economic expertise, the leading national and global institutions failed to prevent the financial and economic crisis they’re now arguing over how to clear up. The IMF’s Independent Evaluation Office (IEO) reported last month on why the IMF, as one such institution, failed to identify the risks and give clear warnings. The prime causes of that failure were identified as ‘analytical weaknesses’, which were actually shared by all relevant institutions. These analytical weaknesses included a tendency, among IMF economists, to be dominated by neoclassical free market dogma, and so to believe ‘market discipline and self-regulation’ would be sufficient to avoid financial disaster, and to trust the new mathematically based techniques for spreading financial risk, and to conflate the financial and industrial sectors, thus ignoring the influence of finance over the real economy. ‘Perhaps the more worrisome was the overreliance by many economists on models as the only valid tool to analyze economic circumstances that are too complex for modelling.’ (Paragraph 46).

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Co-operation, Economics, Free Market Capitalism, free trade ideology, Political Decision, Shareholder Value, Unemployment

The British Government’s Hopes for Partnership with the Unions

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The end of the self-defeating miners’ strike in 1985 led to the somewhat fundamentalist right wing government imposing severe restrictions on the unions’ rights to engage in industrial action. Despite the 13 years of Labour rule, those restrictions were never undone. So it remains extremely difficult, within the law, for the union movement to mount any general industrial action. However, the wholesale nature of the current government’s expenditure cuts, presents a once in a life time opportunity for the unions to mount a hundred or more individual legitimate trade disputes, which could, to all intents and purposes, look very much like a general strike. The unions hope this will be the appearance of their London demonstration at the end of March, which they expect to attract a million supporters.

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Corporate Ownership, Economics, free trade ideology, Management Practice, Management Theory, Shareholder Value

The Neoclassical S-Curve

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The pattern of technological progress has been found to be surprisingly consistent. New technology has to clear various hurdles before attracting funds for its commercial development. A successful project that gets fully exploited grows fast, all the time getting detailed improvements and added features. Eventually, progress begins to slow, returns from further R&D diminish and the technology begins to stagnate, before being replaced by something totally new and different which starts the whole process off again. The graph of this progression is the S curve, starting at the tail of the S, going through a rapid growth and tailing off, before being replaced by a new S.

About 30 years ago, when Friedman’s fixation on maximising shareholder wealth was beginning to be widely adopted, S curves were a trendy form of strategic analysis. They had been applied to many industrial sectors, studying the introduction, development and replacement of technologies, all following discernible S curve progressions. However, the idea was not then applied to theoretical development.

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Climate Change, Economics, Free Market Capitalism, free trade ideology, Resource Depletion

Shared Value: another variation on the neo-classical theme

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An article in the current issue of Harvard Business Review, by eminent Harvard Business School economist, Michael Porter, and his business partner, consultant Mark Kramer, claims to be showing ‘how to reinvent capitalism – and unleash a wave of innovation and growth’. The secret is “Creating Shared Value”.

It criticises the ‘outdated approach to value creation that has emerged over the past few decades’. That ‘outdated approach’ might be summarised as short term shareholder value maximisation – the target of much criticism in other posts on this site. Porter and Kramer propose a “new conception of capitalism”. But, despite the rather breathless, teenage language, it all boils down to an increased orientation to the usual candidates: concern for the wellbeing of customers, employees, suppliers, local communities, and also for the firm’s role in depletion of key resources, especially water and energy, and its role in polluting the atmosphere and thus, probably, contributing to climate change. So what’s new?

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Climate Change, Company Law, Corporate Governance, Economics, Free Market Capitalism, Green Business, Management Practice, Political Decision, Shareholder Value, Uncategorized

Bury the Dogma

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Neo-classical microeconomic theory, especially in its more recent fundamentalist manifestations, has done immense damage to the real economy while nurturing the parasitic financial sector, as recounted from time to time elsewhere on this site.

Various alternative approaches have identified and addressed problems created by that theory. Welfare economics, the economics of social balance, and what is referred to as behavioural economics, have all sought to modify how the neo-classical maximising model operates. However they have not provided a clear and simple alternative to neo-classical mathematics. So the neo-classical model prevails and will survive all such challenges. Utility maximising economic man and the profit (or shareholder wealth) maximising firm, operating within an assumed to be efficient market, will continue to be accepted as the solution to maximising economic growth and social welfare. The obvious inequity of distribution between rich and poor, both within and between nations, will continue to be regretted as necessary to the utilitarian result. Moreover, it is argued, care for the environment could be more readily financed by a successful economy, rather than by one which is struggling to survive.

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Corporate Governance, Economic History, Economics, Free Market Capitalism, free trade ideology, Management Practice, Management Theory, Political Decision, Public Sector, Shareholder Value

In Praise of Renegades

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The economic mainstream has flowed on its capital oriented way with relatively little deviation despite its manifest limitations, errors, omissions and downright falsehoods. And despite the occasional disasters to which it gives rise.

In the middle of last century, J M Keynes corrected some of the more apparent errors of the classical model, but his aim was improvement rather than revolution. He did argue powerfully that ‘the madmen in authority’ should accept the maintenance of full employment as their moral responsibility, but renegade he was not.

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