There is not a single day that passes that I don’t hear some of my Wall Street peers complain about the state of capitalism in America today – and how different it is from only a couple of decades ago.
Is capitalism broken or what, exactly, has happened to this “fountain of money and growth” to draw such irritation among Wall Street financiers today?
I don’t believe that capitalism is broken but it is a fact that capitalism requires freedom to work. It frankly is not and has never been designed to work in an environment dominated by market controls, regulations, artificial barriers to entry, monetary manipulation and a myriad of other government interventions. To the extent that these things are present, I am afraid capitalism will appear broken. It is a wonder that what little capitalism that remains can still tug us along the path of progress as much as it does.
By the same token, it is clear to everyone by now that the U.S. is a more mature economy with lower growth possibilities and decreasing marginal returns. So I guess it all depends on what kind of capitalism we are talking about.
Modern market capitalism has shifted recently with the emerging supremacy of money markets and the financial system over the actual trade of goods. Under this, you’ll make more money trading in derivatives than actually physically trading in commodities. Capitalism, or the recent move into financial market dominated capitalism, works very well for a small percentage of the developed world. Bankers, hedge fund managers, derivative traders … and the rest would argue that it works well but having taxpayers bail you out when it goes wrong simply means the risk has shifted from corporation to state, or you and me. Many would say that means a broken model.
The second part is to look at trade … specifically manufacturing. What has happened here is a fundamental shift in where we make things. Corporations have outsourced their manufacturing base to China and India, or, more often than not, those bases are Chinese or Indian owned. The garment industry is a classic example of this shift where Bangladesh garment workers make a huge amount of clothing for big Western brands.
The effect is twofold, a decline in the manufacturing base in the developed world and a reduction in income from industry (the direct result is a broadening trade deficit). Another example is car manufacturing where the U.S. ran a trade deficit in 2013. It imported $160 billion worth of cars, trucks and auto parts, while only exporting $81 billion, running a deficit of $79 billion.
Add other industries and spread out the time period and it reveals a serious problem. Outsourcing also negatively affects ROA as does a shift from manufacturing to a service based economy. Factors that, among others, create a vicious circle of deepening budget deficits. Protectionism is one solution but so is paying everyone in the world a living wage and encouraging people to buy U.S. or British. The problem is we don’t make anything anymore.
Again the state has to fund the deficit by borrowing. Add to this the byproduct of modern market capitalism. Pollution, decimation of fish stocks, land grabs, reduction in health and safety, poisoning of land, massive waste, lack of sustainability, open cast mining, the pushing out of small independent retailers by big box retailers, tax evasion, fraud, illegal dumping and removal of workers’ rights are all expensive byproducts the state has to pick up or face irreversible shocks to the ecosystem, none of which are taken into account on a profit and loss sheet. As a fair and effective way of trading in goods capitalism is definitely broken, as a way of making a small elite incredibly rich it’s as utopian as you can get.
Bottom Line: I believe capitalism is still alive and well. It is based on Competition, Progression, Innovation, and Advancement. And it rewards those who are willing to take the risk. We should all have the right to take a risk and win…or lose everything … this in theory. But in reality, when the “new capitalism” is based on mathematics rather than trade; credit default swaps over goods and services; when odds are stacked in the favor of big banks because of hedging, derivatives and CDS’s; when there is little to no penalty for market manipulation by investment banks, power brokers, Ponzi schemers … these inefficiencies in the market cause redistribution of wealth to the people in power who design the system.
Market inefficiencies like greed, fraud, and manipulation aren’t factored in with philosophical debate on whether capitalism works or not. And because some economics students (and certainly the big banks) would say that we must leave the market unregulated, and that capitalism wasn’t “designed to work in an environment dominated by market controls, regulations, artificial barriers to entry, monetary manipulation, and myriad other government interventions” the theft, manipulation and scheming will continue.
Had the government not “intervened” some five years ago with the collapse of the financial system, most major banks in the U.S. would have gone under … by their own hand.
So I guess the answer to the question “What is wrong with capitalism today?” is dependent on who you ask. If you ask Goldman Sachs, they may give a different answer than if you ask the people picketing Wall Street.
Capitalism works for capitalists. Problem is 90 percent of Americans are not capitalists, they are employees. Most of their “capital” is tied up in housing, the rest in non-performing stocks. Median household net worth is the same now as in 1990 – $77,000. Since 1979, average income of the bottom 90 percent declined $900, while that of the top 1 percent increased $700,000.
We are quickly reaching the tipping point where growth in GDP in any particular country comes at the expense of growth in GDP of another. We do not have global organizations capable of managing these tension points nor are societies willing to curb growth and consumerism. Capitalism as currently practiced is simply not sustainable.
Mr. Odoni is a Dubai Financial Market Index (DFMGI) financier, president & CEO of Ipocampus Holding Odoni Partener.