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Is Capitalism broken?

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As I was driving along, I had a flash insight into a problem that had been troubling me for some time. I had found it hard to provide convincing evidence that the economics that underpin the modern market economies of the developed world is badly broken. My insight was this.

The origin of capitalism lies in the use of capital (invested money) to provide plant and stock for businesses to make them more productive. When the demand for capital exceeded the resources of the proprietors of the businesses, the notion of "investors" who provided their savings to business proprietors as capital in return for dividends was developed.

One of the arts of running an efficient enterprise was to balance the costs of capital and labour in the most efficient way.

Turning to today's world, most share purchases consist of investors buying shares from other investors in a share market. In these markets, prices are set by investor expectations of either adequate dividend return or adequate capital gain on the sale of the shares.

Considering the expectation of adequate dividends, whereas in the original capitalist model the dividend was seen as a fair return for the money invested in the business. In today's world the dividend must be a fair return on the price paid for the shares which might be many times greater than the origin capital raised by the business when the shares were sold by the business at the face value.

Because of this disparity, if a business wants its shares to be highly valued by the market, it must pay higher dividends than would be necessary if a fair return on the original capital were the objective. In today's world, where business managers are remunerated in a way that encourages them to seek to drive the share price on the market upwards, it is not surprising that these managers arrange for the business to pay higher dividends. They do this by forcing the business to achieve higher profits by keeping product prices high and product costs low. The result of this is that the section of the population who are both labour and consumer suffer a double whammy by having their wages depressed and their cost of living increased. Thus those whose efforts underpin the enterprises are treated as slaves. Those who profit most from this situation are those whose remuneration is set not by their contribution to the production process but by their ability to conspire with their fellow managers to keep their share of the gross profit of the business as high as they like. There are of course limits to this and we have examples of businesses which failed because this process went too far.

The best example I can quote is AWA. During the stewardship of Sir Lionel Hooke, the prime objective of the company was to satisfy all the nations needs for expertise in research, design, development, manufacture and service of electronics products of all kinds. The matter or setting dividends was seen as paying a fair return on the original capital raised and the balance between the cost of capital and labour was managed with great care so that the business flourished. After Sir Lionel's death, his son John Hooke took over the stewardship of the company and the prime objective changed to making the company on of the nations top one hundred companies by market capitalization (this is code for the aggregate price of all the shares in the company valued at the current market price - this figure reflects investor expectations rather then the company's productive capacity). The operation of the business underwent dramatic changes with decision making driven by market expectations rather than practical realities. The end result of this was the effective extinction of the business. I note that the "company" still exists but this really means that the name still exists but the productive resources put together and nurtured by Sir Lionel with the capability to satisfy all the nations electronic needs no longer exist. I regret that I will be unable to attend the next meeting of AWA Veterans Association which will be addressed by the current CEO of AWA. A single example does not prove the theory but it is illustrative.

The other share buyer's expectation, adequate capital gain, is the seed of another of the failings of today's economies. The numbers on the pieces of paper have ascendancy over the real value of production which is to provide "utility" to the participants in the economy. An example of this ascendancy comes from an interview on the radio recently of a lady who was a well qualified and successful scientist who informed us during the interview that she could no longer works as a scientist though this is her true vocation because she needs the higher income that she receives for "shuffling numbers" in a fund management company.

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Created: 17/7/07 and last revised 17/7/07
Author: Robin Chalmers Copyright in all the material on this site is asserted by the author
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