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Capitalist Supporters Warn About Weaknesses in the System
May 15, 2012 11:42 AM   Subscribe

"Capitalism itself could crumble if companies don't start putting their long-term interests first, according to the Henry Jackson Initiative for Inclusive Capitalism. The group argues that companies' short-term profit-taking and disregard for income inequality are eroding popular support for the free-market system. "Capitalism is very much under siege," the group warns." [Complete Paper (PDF)] [Wording from SmartBrief on Leadership]
posted by stoneweaver (39 comments total) 24 users marked this as a favorite

 
Companies need to reduce the gap between executive and average pay, she said.

Who goes first, though? Because the only way this happens in the regulatory vacuum we have now is that these companies police themselves. And we saw (again) what happened in 2008, when a mostly laissez faire setup allowed bankers to walk away from the global mess they created.
posted by Blazecock Pileon at 11:49 AM on May 15, 2012 [10 favorites]


Companies should help reduce income inequality and focus more on long-term goals, a new group of supporters of capitalism said on Monday.
...
[The group] also includes Carly Fiorina, former chief executive of Hewlett-Packard.


Irony just died, came back to life, died, came back to life, hemorrhaged, shat twice and died.
posted by delfin at 11:52 AM on May 15, 2012 [29 favorites]



Irony just died, came back to life, died, came back to life, hemorrhaged, shat twice and died.
posted by delfin at 11:52 AM on May 15 [+] [!]


It's not irony, it's just vested interest.
Generally the ultra rich aren't interested in reducing income equality because they think that they're being overpaid by an unjust system, they're trying to reform capitalism because it's been incredibly profitable for them.
posted by Stagger Lee at 11:54 AM on May 15, 2012 [1 favorite]


Yeah, but it's a classic collective action problem, isn't it? Resources directed at long-term interests are resources that cannot be directed at short-term interests, insofar as those interests don't align (insofar as they do align, there's no problem and what are we talking about?).

So the first firm in a market to divert resources away from short-term competitive advantage will lose relative market share. The last one to so divert resources will gain relative market share. So long as the incentives support this state of affairs, long-term interests will lose out.

This is how competing in an efficient market becomes indistinguishable from management by crisis.
posted by gauche at 12:04 PM on May 15, 2012 [2 favorites]


Short term interest will always kill an otherwise successful venture. Just look to silphium, one of the world's first effective birth control drugs:
The last remaining stalk of the laserwort was snipped and sent to Emperor Nero as a “curiosity,” and thus ended six hundred years of reliable birth control. ... [The decline] may have started around 74 BCE when the region was absorbed into a Roman senatorial province. This change gave control of the laserwort crop to a long series of one-year-term governors who were largely motivated by short-term profits.
posted by Orange Pamplemousse at 12:06 PM on May 15, 2012 [13 favorites]


Surely the only weakness in Capitalism is that it hasn't as yet completely subsumed democratic government. On that point, it's running a bit behind schedule, though it certainly has made great strides over the past 20 years or so. The investors are impressed.
posted by Thorzdad at 12:06 PM on May 15, 2012 [3 favorites]


The author presumes that Capitalism is blind to its enemies and its weaknesses.

The author was apparently not watching the live stream out of New York City and Oakland last autumn. Capitalism doesn't need popular support, it needs bigger sticks (or goads if you were the victim 200 years ago) in order to sustain its current level of 'success'.
posted by Slackermagee at 12:20 PM on May 15, 2012 [1 favorite]


I don't know, I kind of like the paper. From the conclusion:

However, there comes a point in all public debates when the balance of criticism swings from constructive to destructive. We believe we may now be at such a point. Economic populism serves a certain purpose, but it is at its best when tempered by pragmatic and reasonable responses from all groups in society. By chipping away at our confidence in business to generate economic growth, and encouraging the belief that state regulation may be the answer, we are in danger of weakening our economies precisely when the challenges of globalization demand we strengthen them.

We believe that the better solution is a self-imposed solution. Business must acknowledge the problems of the past, and indeed the present, while maintaining its energetic ability to deliver a brighter economic future for all.


In other words, we better knock if the f*ck off before they come for us with the pitchforks and torches.

Which, whatever we might say about it, is better than the typical Fox News line, which is - hey, the system if working fine, shut your yap and work harder and it'll all work out just fine.
posted by kgasmart at 12:21 PM on May 15, 2012 [3 favorites]


Capitalism itself could crumble

Oh, no!
posted by ricochet biscuit at 12:21 PM on May 15, 2012 [5 favorites]


I like this idea,

"In its first paper, the group, called the Henry Jackson Initiative for Inclusive Capitalism, suggests companies should stop reporting earnings quarterly, to encourage investors to think over the longer term."

Bondholders are of course exempt from this suggestion because they don't have a long term view and only want to know if their principal is going to be returned when the company's bonds mature in four months, or four days, or four years.

Now the cat is out of the bag. Bondholders know what first quarter earnings are and the equity holders don't. This doesn't seem very equitable.
posted by otto42 at 12:28 PM on May 15, 2012


The first mistake is calling our current economic system Free Market Capitalism.
WE LIVE IN A COMMAND ECONOMY - anyone who thinks differently is a fool.
Banks are bailed out. Auto makers are rescued. Oil companies get massive subsidies.

Meanwhile, Haitian workers are not free to sell their labor or their agricultural products. (Labor and agricultural products are the two examples Adam Smith cited most often in the Wealth of Nations, and both are exempted from WTO / GATT rules for supposed security reasons.)
posted by Flood at 12:35 PM on May 15, 2012 [5 favorites]


But capitalism is pretty much indelibly rooted in short term profit. If company A decides to go long term, then company B will make more money and can buy out company A. And that's assuming company A's shareholders don't launch a lawsuit because company A isn't producing maximal profits
posted by sotonohito at 12:42 PM on May 15, 2012


@Flood Ah yes, the "so long as any regulations, no matter how puny, remain then it isn't **REALLY** capitalism so you can't blame capitalism!" defense.
posted by sotonohito at 12:42 PM on May 15, 2012 [2 favorites]


Free market capitalism is more popular in China than it is in the US:
GlobeScan found Americans strongly agreeing or somewhat agreeing dropped to 59 percent from 74 percent, a 15 percent dip from the year prior and the second largest year-over-year drop of any country besides Turkey. An even more dramatic drop (32 percent drop) occurred among those in the U.S. with annual incomes below $20,000, of which only 44 percent agreed that the free market was the ideal system.
...
The U.S. drop-off means merging economies like Brazil (68 percent support for free economy) and China (67 percent) now appear to support free enterprise at a much higher rate than Americans.
It would be perversely funny if China ends up invading the US sometime in the distant post-revolution future to liberate us from communism.
posted by mullingitover at 12:50 PM on May 15, 2012 [1 favorite]


Why not just tax capital gains at different rates -- hold the asset longer, pay less tax.

Boom solved.

What's next?
posted by notyou at 12:51 PM on May 15, 2012 [2 favorites]


so what he means is that "capitalism" as we know isn't really that free a market but actually engineered?

that scarcity, poverty, income inequality, "eroding" of "purchasing power", closing of windows of opportunity or plain old "consumer confidence" are created by corporations for to make a quick buck?

oh, well, damn.
posted by liza at 12:54 PM on May 15, 2012 [2 favorites]


The "get in, get paid and get out before the bubble collapses" model of capitalism argues that long term viability is for suckers.
posted by doctor_negative at 1:01 PM on May 15, 2012 [2 favorites]


In all honesty, if you read between the lines, these are the leaders of global concerns who are waking up to the genuine anger around them. This is an effort to head off the torches and pitchforks, not to save capitalism. Self-preservation uber alles.

They sad thing is, IMO, is they aren't scared of the American sheeple. We have too good of a track record of just bending over and taking it. Europeans are fucking pissed, and aren't afraid to take to the streets or toss their governments out on their collective ears.
posted by Benny Andajetz at 1:03 PM on May 15, 2012 [7 favorites]


@sotonohito - I am not defending anything.
Our current economic system stinks. There is no really chance of pure capitalism.

My point is quite the opposite - millions of Americans line-up to defend free market capitalism, and they are not at all living in such a system. A defense of our economy as capitalism is like defending a ghost.

And no, I do not have any better ideas. I just know the current system is rigged in favor of the corporations and the rich.

Finally, "regulations, no matter how puny" - are you out of your mind? The regulations that exist today to rig the system are gigantic and over-whelming. As an under-grad, I happened to study the Quantum Theory. A few years later in law school, I studied Tax Law. I can tell you, quantum mechanics is more uniform and regular than the US Tax Code. "No Matter How Puny" - not only did you miss the point of my comment, but you are clueless about the state of government control over our economy.
posted by Flood at 1:05 PM on May 15, 2012


Value investing is the problem. Somehow, someone got the idea that companies were only going to go up in value, forever, so that stock should not pay dividends and that the customers value was somehow being in an enterprise that was not going to go bankrupt.

Corporations should pay dividends for the ownership of their stock. It keeps them honest to their owners. One of the worst parts of corporate America today is how the shareholders actually don't get a lot of the value. All wrong.
posted by Ironmouth at 1:15 PM on May 15, 2012 [3 favorites]


In all honesty, if you read between the lines, these are the leaders of global concerns who are waking up to the genuine anger around them. This is an effort to head off the torches and pitchforks, not to save capitalism. Self-preservation uber alles.

You know, if the perception is that the only way to avoid a European-style left turn is to reform before we are made to reform, perhaps at pitchfork-point, then I'm all for it
posted by kgasmart at 1:16 PM on May 15, 2012


Value investing is the problem. Somehow, someone got the idea that companies were only going to go up in value, forever, so that stock should not pay dividends and that the customers value was somehow being in an enterprise that was not going to go bankrupt.

Sort of. A lot of companies switched to doing stock buybacks. Partially because it confounds the dividend growth model for estimating what a stock should be worth but mostly because it allows investors to get their "dividend" when it is convenient to do so.

Instead of getting the companies profits paid back to you in a big, regular, quarterly dividend that you have no control over, you get them buy selling the stock when you either need to, or it's advantageous for your tax situation (like you have some other one-time deduction).
posted by VTX at 1:26 PM on May 15, 2012


Why not just tax capital gains at different rates -- hold the asset longer, pay less tax.

This is a pretty smart idea applied to the lifetime of the holding. Whereas right now you have short term (1 year or less) and long term (more than 1 year.) You could still grant a low long-term capital gains rate at 15%, but it could take 30 years to get there. Start by taxing anything less than 6 months at income rates and lower the rate year-over-year. You could add a second axis to make it less impactful for low-earning families. If your gains was less than some X, you are subject to a progressive capital gains rate.

And I'm off topic now. Oh well.
posted by braksandwich at 1:42 PM on May 15, 2012 [2 favorites]


The group argues that companies' short-term profit-taking and disregard for income inequality are eroding popular support for the free-market system.

FTFThem. I mean seriously guys, it's hard to rally in support of smoking wreckage.
posted by Kid Charlemagne at 1:51 PM on May 15, 2012


Why not just tax capital gains at different rates -- hold the asset longer, pay less tax.

This is already the case.

There is still the disparity between capital gains tax, which those who live off assets pay, and income tax, which those who live off work pay. This is a separate factor in income inequality and the injustice of our economy...but that's a derail for another thread.
posted by Hollywood Upstairs Medical College at 2:00 PM on May 15, 2012


Why not just tax capital gains at different rates -- hold the asset longer, pay less tax.

That presumes capital gains taxes exist at all. The latest Ayn Ryan budget proposals would eliminate all capital gains taxes, full stop. Jahb creators and whatnot.

Papers like this are shouting in a vacuum, the people in power right now don't so much believe in capitalism as an societal system of growth through economic competition, as they seek to use the power of the state to enrich entrenched interests and transfer public revenue streams with guaranteed returns based on the power of state coercion to private control. Short term destruction IS their long term interest, as the plan is to go Galt as soon as the last drop of wealth is extracted. If the revolution comes before their floating cities on the ocean are ready, well that's why they've been stocking up on various tools of oppression.
posted by T.D. Strange at 2:15 PM on May 15, 2012 [6 favorites]


How am I supposed to take seriously someone who says something like "Capitalism itself could crumble"?

That's like saying "Terrorism itself could collapse if Bin Laden blah blah blah" or "Science itself could crumble if journals don't blah blah blah" or "Dancing itself could come to a stop if the kids can't stay off my lawn blah blah blah"
posted by straight at 3:48 PM on May 15, 2012 [3 favorites]


A lot of companies switched to doing stock buybacks. Partially because it confounds the dividend growth model for estimating what a stock should be worth but mostly because it allows investors to get their "dividend" when it is convenient to do so.

No, companies switched to stock buybacks because managers running the companies generally hold options, not stock. Options don't collect dividends so managers have no incentive to pay them. If instead they channel income into stock buybacks, their options become more valuable. Buybacks instead of dividends works to the advantage of managers, not shareholders, directing a bigger share of company income into managers pockets.
posted by JackFlash at 4:15 PM on May 15, 2012 [4 favorites]


So, corporations are not sentient entities, but instead groups of people acting in their rational self interest, which may not always align with what's best for the corporation's long term viability?

Fascinating.
posted by mccarty.tim at 5:08 PM on May 15, 2012 [1 favorite]


The Harvard Business School piece by Clayton Christensen linked below has a five paragraph case study on how Netflix took out Blockbuster with disruptive innovation even though Blockbuster was a huge resourceful company run by really smart guys who were focused on their next quarter's financials.
posted by bukvich at 5:14 PM on May 15, 2012


Corporations should pay dividends for the ownership of their stock. It keeps them honest to their owners. One of the worst parts of corporate America today is how the shareholders actually don't get a lot of the value. All wrong.

Why? If a company's marginal return on capital is greater than my marginal return on capital I'm better off having them re-invest in the business.

Sort of. A lot of companies switched to doing stock buybacks. Partially because it confounds the dividend growth model for estimating what a stock should be worth but mostly because it allows investors to get their "dividend" when it is convenient to do so.

I really really really want to hear how it "confounds" a valuation model. Shares go down, if the you bought them back for less than they were worth then you have more cashflow to dividend out on a per share basis. The problem with buybacks is that corporate management is always terrible at valuing their own business.
posted by JPD at 6:10 PM on May 15, 2012


Blockbuster could have been run by the smartest guy in the world for the long-term and it was still screwed.
posted by JPD at 6:11 PM on May 15, 2012


So the first firm in a market to divert resources away from short-term competitive advantage will lose relative market share. The last one to so divert resources will gain relative market share. So long as the incentives support this state of affairs, long-term interests will lose out.

Until the short-term market is gone and the company that hasn't invested in a long term strategy or other short-term strategies, like Blockbuster, is done. Apple seems have been able to execute on short-term goals without losing out on long-term interests, so far. Though I don't see that there is anything necessarily wrong with a company or investor pursuing short term strategies only.

The nice thing about free markets and open competition is bad ideas and bad strategies get a chance to fail quickly and be replaced by better ideas. It would be nice if this kind of natural selection could be applied to financial regulations, so many of which seem to prove ineffective and unable to react quickly enough to the rapidly changing business environment. It seems like a lot of what Wall Street is doing these days is exploiting inefficiencies created by government regulation.
posted by Golden Eternity at 6:59 PM on May 15, 2012


Capitalism is built on short-term bubbles.
posted by deathpanels at 7:49 PM on May 15, 2012


JPD,

Blockbuster could have bought NetFlix. Or it could have partnered with Amazon Prime. Or it could have lent out hard drives with their entire collection, and charged per view. Or it could have entered the delivery/pickup business, partnering with local food establishments. Or any of a number of strategies to leverage their storefronts. It's not at all obvious that NetFlix had to win.
posted by effugas at 12:25 AM on May 16, 2012 [1 favorite]


Nope do the math on the fixed costs associated with their store fronts and the long-term lease liabilities they had. It's really really really hard to shrink a retail chain and with the wrong real estate strategy virtually impossible. Businesses just die sometimes.
posted by JPD at 4:15 AM on May 16, 2012


Capitalism in the U.S. is crumbling simply because our Founding Fathers didn't foresee the concept of "regulatory capture" and create protections against it. They were used to oppression from monarchs, so the idea that plutocrats could be equally dangerous to personal freedom never crossed their mind.
posted by wolfdreams01 at 5:42 AM on May 16, 2012


> So, corporations are not sentient entities, but instead groups of people acting in
> their rational self interest, which may not always align with what's best for the
> corporation's long term viability?

Ditto any and all groups and collectives, particularly including "the human race."
posted by jfuller at 5:57 AM on May 16, 2012


The nice thing about free markets and open competition is bad ideas and bad strategies get a chance to fail quickly and be replaced by better ideas. It would be nice if this kind of natural selection could be applied to financial regulations, so many of which seem to prove ineffective and unable to react quickly enough to the rapidly changing business environment. It seems like a lot of what Wall Street is doing these days is exploiting inefficiencies created by government regulation.

Man, I want to live wherever you live.
posted by gauche at 7:33 AM on May 16, 2012


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