Vested interests are on trial, not capitalism

To the Financial Times:

Sir,  Sebastian Mallaby’s spirited defence of capitalism (“Shortsighted complaints about short-term capitalism”, August 6) highlights one of the main difficulties facing the global economy: how to recapture the dynamism of markets without being at their mercy. The issue of under-regulation is perhaps best seen in the financial markets, where, contrary to Mr Mallaby’s argument, the actions to maximise share prices are not the antidotes to inefficient markets, but rather reveal the dominance of short-term greediness and corporate myopia.

Very few CEOs see themselves remaining at corporations for a lifetime; hence, what happens in the future concerns them less than their bonus today. The logical antidote to short-termism should of course be corporate boards of directors; however, governance of boards remains flawed and CEOs can use current shareholder returns as a convenience to pursue self-serving strategies

The argument that advanced economies are crisis prone because of excessive corporate debt is wrong and the corollary view that increases in equity values provide a needed stabilisation function to capital markets is unproven. One does not have to share the views of radical economists to see the flaws in financial markets. Academic notables, such as professors Robert Shiller and Joseph Stiglitz, have amply demonstrated how markets misbehave, and the costs that societies bear for this malfeasance.

Even taking politicians such as Hillary Clinton out of the equation leaves us with many mainstream observers wondering what has gone wrong in the current version of capitalism that puts the profits of manipulated markets in the pockets of financiers and the risks of failing markets on the shoulders of the citizenry. Outright corporate tax avoidance, customised tax expenditures and underpriced bailouts are prevalent in corporate America. The solution starts with rigorous supervision, regulation and enforcement of market misbehaviours. It is not capitalism that is on trial, but rather the way in which its oversight has been manipulated by vested interests.

Danny Leipziger,     Managing Director, Growth Dialogue and Professor of International Business,  George Washington University,   Washington, DC, US

He says it so much better than I do.

 

2 Comments

  1. Professor Leipziger is brave, stating his point so bluntly and publicly. The unaccountable group of CEOs , choosing their own boards and writing their own rules to make the company owners (shareholders) powerless to remove them, have to be put intheir place as mere managers of enterprises serving the public. Just as banks should be there to serve their customers, not to rob and cheat them. Epicurus would no dobt ask how we have allowed these jumped- up company politicians to get so powerful and arrogant.

  2. Thank you for posting Professor Leipziger’s superb essay. We have reached the point where simply stating truths clearly is, indeed, a “brave” act.

    I’d nudge the professor into a wider lens in assessing where reform has to start. It is impossible to enact his solution of “rigorous supervision, regulation and enforcement” of market excesses unless you acknowledge that ALL economics is political economy because no economy has ever existed outside a political and social system. This has been true all the way back to Mesopotamia, Egypt, or Classical civilization.

    This means that capitalism is on trial in that its strong drive for profits within price structures easily masks other economic essentials such as distribution of goods, services, and income, production of goods and services, a rational monetary system, and above all, the need for “domestic tranquility.” The focus on only profit or only a monetary system that can be controlled by a small segment of actors can and has crashed the system.

    The supervisors, regulators, and enforcers are political creatures which inescapably leads you back to the old question: who chooses and holds the regulators and enforcers to account?

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