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.