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.