Capitalism and its need for reform
In the 1987 Hollywood classic Wall Street, Michael Douglas’s character, Gordon Gekko, addresses a shareholders’ meeting of a fictional company. After extolling the virtues of American capitalism, <g data-gr-id="63">Gekkko</g> ends his address with these immortal lines: “The point is, ladies and gentleman, that greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit.”
British economist Eve Poole, however, would vehemently disagree with such an assertion. In her book titled, Capitalism’s Toxic Assumptions, Poole challenges some of the most basic views held about the forces that allegedly guide a market-based economy.
Despite the arrival of one financial crisis after another, many ordinary citizens do not question the current economic system because most of us are unable to understand the terminology behind which major financial entities hide their blunders. The book, one could argue, educates the reader into seeing through the cloud of commonly held beliefs about the state of a market-based economy. The initial reference to Christianity is particularly <g data-gr-id="119">relevant,</g> since it was the world view through which Capitalism emerged, especially with the emergence of the much vaunted Protestant ethic. The reference to religion, one could argue, is particularly relevant, considering that economists, like clerics, have been slow to challenge their assumptions about the way the market functions.
The first basic assumption of capitalism which Poole challenges is the notion of competition, which some have perpetuated, as every man for himself; existing in a State of Nature. However, she argues that it does not make sense to be secretive and competitive above all <g data-gr-id="65">else,</g> when effective business is really about building and maintaining positive relationships. In his seminal work on the subject of Game Theory, the recently deceased Nobel laureate John Nash presented a similar hypothesis, which is called the “Nash equilibrium”.
It refers to a position in a situation of competition, in which both sides have selected a strategy. Neither side, however, can then independently change their position without finishing up in a less desirable position. The emphasis, therefore, must be towards building positive relationships for better outcomes. No side has anything to gain by changing only their own strategy. It is a position many people end up in on a daily basis. Such positions are also common occurrences in the lives of businessmen, politicians and nations. Poole’s work, as she admits in the book, draws a lot of inspiration from Nash’s ideas on Game Theory.
Another “toxic assumption” that Poole tackles is the “invisible hand”, a concept often bandied about by proponents of free market economics. In economics, the invisible hand is a metaphor used by <g data-gr-id="76">18th century</g> economist Adam Smith to describe unintended social benefits resulting from individual actions. Extend that notion to the markets, and it believes that governments should provide only minimal market regulation because there is an “invisible hand”, which governs its flow. The assumption of self-regulating markets, Poole argues, is a myth. One only has to understand the consequences of the 2008 financial crash, besides previous market crisis, to bust the myth that minimal government regulation leads to positive outcomes. Following this, we arrive at the “agency theory”, which suggests that since most of us driven by individual interests, managerial interests will diverge from those of the shareholders’, which Poole argues, only creates a toxic atmosphere, bereft of trust.
Probably the stand out <g data-gr-id="81">segment</g> of the book deals with the concept of shareholder value and the consequent notion of “limited liability”. The majority of shareholders in the modern age, according to Poole, are in fact computers and the average time a share is held is 11 seconds. The invisible “shareholder”, Poole suggests, has been used by businesses as a means to justify their decisions. She argues that there needs to be more transparency about how mechanised the process really is so that, “we can immediately dispense with the caricature of the shareholder as a loyal, tweed-suited old man who stumped up his hard-earned cash to prop up the business when it needed him, and who can therefore not be left out in the cold in his dotage”. Poole further goes <g data-gr-id="77">onto</g> argue, “the vast majority of an organisation’s ‘shareholders’ are probably hunched in front of a spreadsheet, monitoring share prices for their customers, and switching stocks if movements threaten the integrity of the portfolio as a whole.”
Following the need for such disclosures, Poole then argues against the concept of limited liability, wherein as an investor one can only lose the value he/she <g data-gr-id="70">holds,</g> when a financial enterprise goes bust. 98 <g data-gr-id="66">per cent</g> of companies in the United Kingdom, Poole argues, follows the limited liability model, which she declares is a “monopoly of this type of company structure”, which is not healthy for the system, since it leaves no room for alternatives. Considering the manner in which actual shareholder patterns exist, such a model of corporate governance can have disastrous effects on businesses.
There are segments of the book, where one comes out unconvinced. For example, the link Poole establishes between gender and behaviour in the context of a competitive business environment is slightly bizarre. According to Poole, a competitive environment is more suited to instinctual responses of men (“fight or flight”) than women who take a more collegiate approach when they “tend and befriend”. Besides such odd moments, the book is very lucid and clear in its argument that there is a need to reform capitalism into a more ethical and just system.