Capitalism Failure?

Link para versão em Português

"Capitalism" is an economic system in which privately owned capital is invested, traded and in which the owners decide how to best invest it.

As a comparison, it is attributed to Former UK Prime Minister Margaret Thatcher the quote that “the problem with Socialism is that eventually you will run out of other people's money", in a reference to the inefficiency of the State in managing enterprises or every major economic sector.

Such comment pointed out that it is not capitalism, but a distorted economic model – allow me to qualify it as “semi socialist” – that has been causing recent crises and that needs to be reformed.

“Semi Socialist” not in above quoted sense of the public sector owning and managing enterprises. Not so much either by the major government intervention with tax payer money to save the big banks and corporations in 2008 and now, with the unlimited access to credit being offered to European banks.

But in the sense of an economic model in which the capital holders, those who actually fund the system and have their assets at risk - shareholders, depositors and investors - are too far apart from the control of their companies or financial investments. And in which, such as in socialist regimes, an "elite" has been disastrously managing the society's (other people's) money.

In corporations, for example, the capital owners have delegated control to asset managers (investment or pension funds, among other), which in turn delegate to boards of directors – usually with no quota holders presence - and executives. These have their own interests, much to gain if successfully incurring large risks and disproportionally less to lose from failure.

The control and delegation structure for asset management in the banking system is very similar. To make matters worse, in an environment of low transparency and poor risk disclosure. The consequences have been dramatic!

Has the recent crisis shown that the free market is not efficient? This has been known since the dawn of capitalism, when society understood that it was necessary to establish limits to human ambition, for example, through labor right laws or antitrust systems.

The required adjustment is not abolishing capitalism, but incentives for responsible management of capital and better governance, with visibility and control of risks that managers and executives are incurring with other people’s assets - including appropriate compensation systems.

The role of government in this field is of minimal regulation, but with strict limits to avoid systemic risks, particularly in the financial system, preservation of free competition, protection of the environment and humane working conditions, in a regime of transparency, free press and right of speech.

And a legislative and judicial system that penalizes, even criminally, managers who do not properly disclose risks, who violate their limits of authonomy or who fail in their fiduciary responsibilities.

Capitalism needs some regulation. But in its origins, in which the entrepreneur, motivated by the prospect of profit, uses its capital and other partners to innovate and build a product that generates value for society, is still the best-known economic model.

Is the World facing a dead end?

(Para Versão em Português, clique aqui)

The challenges before humanity seem so insuperable and there is such a lack of confidence in our political leaders that the world seems to have encountered a dead end.

We are experiencing serious socioeconomic problems (see my post "our society needs more entrepreneurs"). There is a live debate about the need for a new economic model and even about the failure of capitalism.


Governments have been unable to resolve such issues. Instead, they are co-responsible for the recent crises. Political interests seem to be above social demands, and popular manifestations arise in the four corners of the world. There are no leaders with relevant support and there seems to be no political will to implement the due reforms.

Developed countries are in a period of stagnation in the midst of unsustainable debts carried by government and by individuals. There is no consensus on whether the solution is stimulating consumption to generate growth or promoting austerity to reduce debt.

There is still a lack of transparency and a systemic risk in the financial markets. So far the response has been to "provide banks with unlimited access to credit", without seriously addressing required regulations and restrictions.

Our societies are still disregarding the lack of resources to pay for health and social security costs of a growing elderly majority, a certain future crisis for several countries, even some with lower debt.

The growing consumption from the emerging societies, added to the major economies’, pushes our planet to its ecological and energy limits, causing pollution, global warming, shortages of water and other natural resources, negative economic consequences and danger for our lives and health.

Energy is competing with food, causing cost increase and contributing to world hunger. Or leading to unacceptable environmental risks to extract oil and generate nuclear power, with potential damage costs not accounted for nor charged to producers and consumers (the economic impact of the Gulf oil spill was estimated at US$15 billion, according to a Canadian Journal of Aquatic Sciences study).

The growing concentration of wealth in the big Western economies and the resulting social unrest – in the 2008 crisis, financial executives were still getting their high salaries and bonuses, while the middle class were losing their homes, jobs and even pension funds.

In our democracies, the population is upset with the corruption in the developing countries’ governments or with the action of lobbies in the Congress - oligopolies, oil companies, big banks and other corporations influencing law makers and making the political system inefficient even in the most stable democracies.

In the Middle East and North Africa some dictatorships were overthrown, but uncertainty and political tensions are accentuated. The risk of a nuclear bomb is back to the headlines.

"Where are our governments? We want change!" - Protests, such as "Occupy Wall Street" or the so-called Arab Spring are becoming frequent.

How to overcome this dead end? As previously stated, there are no clear solutions or political system with credibility and popular support to define and implement the effective and imperative changes.

But this is not Apocalypse. Economic crises, social differences, wars and bad governments are constant throughout our history. Sometimes fatigue and rupture are necessary for breakthroughs to occur. And there is much value being generated in the current model.

I will return to these topics in upcoming posts.

Our society needs more entrepreneurs

Link para Versão em Português

The world is undergoing a radical transformation. Not only due to the technology revolution, particularly the Internet disseminating information, changing “traditional” business models, destroying companies considered icons, and reducing the life cycle of products and companies.

But also caused by serious socio-economic factors impacting the majority of the world population:

• The Debt of developed countries and societies, reaching unsustainable levels - some now being considered of “high risk” - and the related crisis of social democracy (the model of some Western European countries)

• The financial system of these large economies, its lack of appropriate regulation, uncontrolled and excessive leverage that caused the 2008 crisis and contributes to the uncertainty that we still live today, with risks of a new recession, its social costs, government intervention and other consequences

• The tens of million people from emerging countries that get in the consumer market each year - in China, for the first time in history, the urban population exceeded the rural contingent and, less publicized, the industrial workers of that country are beginning to demand for "social benefits"

• The aging world population, caused by better living standards and medical developments, such as the relevant genetic medicine cycle and, soon, applied nanotechnology

• The growing need for agricultural products for food production, and competing with that, to meet the demand for the also necessary biofuels

• The ecological and environmental impact of such increased consumption (and disposal), putting the planet close to its sustainability limits

• The geo-political changes, the new balances of power being established. The risks and costs of security caused by war and by fundamentalists on both sides of the world.

It is not the first time. Social and economic revolutions have always occurred in human history. From fire and wheel to the industrial revolution. Whether in ancient Egypt, Eastern empires or new Western powers - greed, the exploitation of other humans, political corruption ... our ability to create crises, for self-destruction in wars and also to adapt / overcome is huge! The human being is the same, since the dawn of history.

What's different about this cycle? For sure, the extent and speed that we are impacted, given the size of the world population (the planet itself has not grown) and the "distance and time" reduction, caused by technology.

 Where are we heading? Where will we be in 10, 20, 50 years (yes, I count on being here by then!)? It would be interesting, but I will not try to speculate. However, some elements are important, particularly for people just starting their careers.

• The last century models, the security and stability of ("for life") employment in government agencies or large companies seem to be vanishing. Planning retirement based on pension from these companies became riskier

• The ability to keep a growing debt, whether by governments or individuals, is reaching its limit. People should not take a loan just to spend in consumption. The deleveraging of some major economies has already begun and is extremely costly. It should lead to periods of recession and/or high volatility

• Countries cannot afford the social demands of an aging population that stops working when reaching 60-70 years old. It is no longer safe to rely on government pensions or healthcare system

• Brazil still has a reasonable debt level. But also an aging population and a social security budget deficit that, such as public spending, keeps increasing despite already having one of the largest tax burden, worldwide

• The global demand for agricultural commodities should keep rising. And it is unknown what will happen to food supply (volumes, production costs and prices).

More than ever we must find innovative solutions to these challenges.

Unveiled the "false sense of security" from governments and large companies, when faced with such crises and need for changes, it should become more apparent that each individual is an entity that needs to innovate, realize, seek self-sufficiency to survive and differentiate him/herself.

That entity must develop its individual practice on how to generate value to society (its sustainable source of income), build its "client base" (even if this "client" happens to be the current employer)! And earn its remuneration from that value.

Income not only for the active and professional life period, but invest to put together a net worth from which he/she will live in times of crisis and in the possible 30-40 years that most of us may well live after retirement.

Our society needs this entrepreneurial attitude and innovation capacity. The crisis shall encourage such attitude. From such model, solutions to current challenges will emerge. And from this path, identifying opportunities to start your own business, to build a larger base of customers and to accumulate wealth, becomes more feasible.

The number of entrepreneurs should increase. The article in the attached link indicates that we may be moving in that direction http://www.ft.com/cms/s/0/a910938a-42b7-11e1-b756-00144feab49a.html