Capitalism in the Dock  

Capitalism in the Dock  
Debate Continues Over Effects of the Market
NEW YORK, FEB. 18, 2006

(Zenit.org <http://www.zenit.org > ).- After the  collapse of communism and the adoption of free-market policies by just  about all countries and political parties, market capitalism should be  triumphant. But recent books highlight the shortcomings of the free  markets.

In "The Battle for the Soul of Capitalism" (Yale University Press), John  Bogle analyzes what he considers to be crucial failings in the financial  markets. Bogle, former chief executive of the Vanguard mutual fund  group, wants the system to be run in the interests of the shareholders  and owners, rather than the managers.

Bogle argues that the last couple of decades have seen serious erosion  in the conduct and values of business leaders, investment bankers and  money managers. A staunch defender of capitalism and free markets, Bogle  nevertheless laments the excessive attention given to stock market  prices, instead of the intrinsic values of corporations.

Drawing on his own experience in the mutual fund sector, he looks at how  this sector has contributed to current problems. These funds not only  siphon off very large sums of money in the form of fees and their share  of profits on stock market gains. They also serve to isolate managers  from any form of control by stockholders, Bogle contends. Institutional  investors in general, such as retirement funds and mutual funds, now own  two-thirds of all U.S. equities. In fact, the largest 100 funds account  for no less than 52% of equities.

Another factor adversely affecting financial markets, Bogle notes, is  the concentration on short-term gains. A few decades ago mutual funds  saw around 15% of their stocks turn over in a year. By the late 1990s  this had risen to 100%, or more, as fund managers chased quick returns  in the booming market. This trend from investment to short-term  speculation in stocks means that funds are less likely to be interested  in pressuring companies to improve their ethics or management.

As well, corporate directors, auditors, and legislators have all too  often failed to ensure sufficient oversight of how companies are being  run, leading to the scandals of recent years.

Values needed  

"Capitalism requires a structure and value system that people believe in  and can depend on," Bogle argues. This includes trust in the word of  others, and an assurance that the system will function with equity. And  for a long time this worked; capitalism delivered remarkable economic  benefits.

By the late 20th century the system changed and turned into a form of  "manager's capitalism." In extreme cases, it saw companies being run to  benefit the managers, not the owners or shareholders. Proof of that is  the soaring level of remuneration given to company executives in recent  years, a trend Bogle strongly criticizes.

Shareholders have benefited too, Bogle acknowledges. Even counting the  "bubble burst" in 2000, the U.S. stock market rose an average annual  rate of 13% from 1982 to early 2005. (He adds, however, that a large  proportion of shares that were sold before the bubble burst were those held by corporate executives.)

Bogle proposes a variety of reforms to overcome the deficiencies he  outlines: performance-based compensation for executives; better  corporate governance; improving accounting standards; a return to a  long-term focus; and a clearer separation of ownership from management.

Another book that has drawn attention to how financial markets are  causing serious problems is "Capitalism's Achilles Heel" (John Wiley &  Sons). Written by Raymond Baker, ex-businessman and current guest  scholar at the Washington, D.C.-based Brookings Institution, the book  draws attention to problems such as bribery, money laundering, tax  evasion and income inequality.

Baker is, he stresses, in favor of capitalism. But he worries that too  many people today cater to its weaknesses rather than build on its  strengths. He is particularly concerned that the defects he outlines are  contributing to the enormous gap between rich and poor, which, in turn,  is undermining the future prospects for prosperity.

Ethical market  

The market also has many positive aspects. One of its defenders is John  Meadowcroft, deputy director of the London-based Institute of Economic  Affairs and author of the book "The Ethics of the Market" (Palgrave).

He argues that the market is an important school for virtue, and that  participation in a market economy strengthens rather than weakens  institutions such as the family. The market does not impose a specific  set of values. The market mechanisms as such, Meadowcroft observes, can  be used just as easily by selfless altruists as by selfish hedonists.

The market system does allow individuals to make choices that are  morally questionable, he notes. Yet he argues that it would be a mistake to try to force morality on people. There is good reason to believe,  Meadowcroft argues, that where the role of the state has expanded it has  crowded out the institutions of civil society and diminished their  possibility to contribute to the moral capital of society.

The ethical justification for the market lies in its being the most  efficacious mechanism for helping people of whom we have no direct  personal knowledge. As well, it gives individuals the greatest possible  scope for determining their own destiny.

In the marketplace, people pursue their own ends and the market is able  to regulate economic activity and ensure the greatest efficiency through  a freely operating price system. This is not just an individualistic  system, Meadowcroft argues. The market is, rather, a social process in  which individuals learn that their own ends can be achieved only if they  are reconciled in some way with those of other people.

By requiring people to continually review their ends in the light of  information about others, communicated through price signals, the market  coordinates a myriad of competing ends and values into coordinated  economic activity.

In this sense, it is not correct to think of the market operating, as  Adam Smith described it, through self-love. It is not selfishness that  drives the market. Rather, individuals are motivated to respond to the  price signals generated. Economic coordination depends on people being  alert to these signals, whether the ends they seek are selfish or  altruistic.

And what about the accusation that the market system leads to an unequal  distribution of wealth? Meadowcroft replies that this is simply the  result of the value of economic contributions as determined by the  perceptions of consumers and producers. Inequality is a part of how the  market works. Moreover, it is part of a system that brings with it  benefits for all members of society. He does, however, contend that the  state should guarantee a minimum income to ensure that no one be left in  absolute poverty.

Wider view

The Compendium of the Social Doctrine of the Church has an ample section  dedicated to the economy. It recognizes (in No. 347, for example) the  positive role played by markets, which allow economic potential to be  developed efficiently.

Yet, the Compendium urges that people also need to remember aspects such as ensuring justice and solidarity. They must avoid the error of seeing  the accumulation of material goods as the only end of their activity.

Moreover, economic activity is only one facet of human activity and it  needs to be placed within the wider context of the person. Keeping  things within this wider perspective is, in fact, a key point raised by  the Compendium. That's a hard sell for some, but one that would go a  long way to fixing deficiencies in the way the market works.

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