Recent Read: “Capitalism Without Capitalists”

I have written in the past about the harmful disconnect between capitalism and ordinary individuals. On the same theme, there is an excellent essay by and in the new American Affairs that should not be missed. Some highlights:


We do not have to go much further in order to understand the economics of political anger. This is what it is all about. Western “money-manager capitalism,” to use a term coined by the late Hyman Minsky, has changed the patterns of incentives and rewards in the economy, leading to stagnation in productivity and wages by reducing the capital investment that supports their growth. This capitalism has unfairly skewed the rewards to investors versus labor because, with corporate capital allowed to be idle, money has flowed to those seeking rents and skimming the cream off the money-circulation machine—and not to the entrepreneurs, to those taking risks, or to those providing better productivity. Firms are increasingly focused on safe, “risk-free” forms of profitmaking. Neither investors nor competitive markets have forced them to spend more capital and energy on long-term investment and innovation. Capitalism has become a “safe space” for firms that want to shield themselves against market disruption—an economic system characterized by competitive and innovative change that is too slow, rather than too fast, for economic opportunity to grow. While corporate leaders advertise their outsized appetite for innovation and disruption, the reality is that, for several decades, they have been protecting themselves against these forces of competition and have become complacent.

Because these companies are large and dominate many markets globally, the effects of these owners are felt outside their firms and sectors. Ultimately, they impinge on the health of markets and entire economies, and they create a capitalism that is dull and hidebound. With no direct influence on operations or corporate development, institutions have put their emphasis on a few parameters that are mostly designed to restrict the choices of management. One such parameter is limiting discretion over the cash flow of firms. Businesses retain a much smaller part of their earnings today because absent owners have no effective way of controlling management and therefore cut its access to the company’s own cashbox. Retained earnings in American firms have moved from about 50–60 percent of net income in the 1960s to less than 10 percent today. All big investment decisions are therefore done in a way that relies more on the judgment of people outside the firm. Funding for investment has to be raised via external capital markets, which of course are not always capable of properly evaluating the investments that a company may need to undertake. In money-manager capitalism, key decisions about the future of a firm are routinely outsourced to people with little knowledge of the firm or its strategies to meet future competition.

Capitalism in America and Europe is approaching a crisis. Like most other economic crises, it is growing from the inside out—and it has not been forced upon us by others. It is always tempting for market economists like us to blame governments and regulators. It is also easy because it is obvious that regulations increasingly have hamstrung firms and made markets less competitive. But the crisis of capitalism now is far more about the transformation of ownership and the effects that this silent takeover of firms by institutions is having on corporate behavior and the economy at large. To work better, modern capitalism has to correct its ownership problem.

Capitalism’s ownership problem cannot be fixed unless grey capital and institutions are prevented from taking complete hold of corporate ownership. Grey capital already represents a significant share of corporate ownership, and no company of size, nor one aspiring to grow, can neglect its role. Given current demographic forecasts, institutions appear poised to continue their growth and take an even greater ownership role in Western capitalism. On current trends, institutions will squeeze out those capitalist owners that remain, and their portfolio approach to investment will make the problems of absent ownership even greater.

Carlos Alvarenga

Founder and CEO at KatalystNet and Adjunct Professor in the Logistics, Business and Public Policy Department at the University of Maryland’s Robert E. Smith School of Business.

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