23 Things They Don't Tell You About Capitalism

Topics: Poverty, Free market, Economic inequality Pages: 9 (2967 words) Published: December 4, 2012
Dr. Hopkins
EC 4350
11 September 2012
Reading Journal #2
23 Things They Don't Tell You About Capitalism
Chapter 2
What they tell us: Shareholders are not guaranteed any fixed payments. What they don’t tell us: Shareholders really only care about the short-term profits instead of long-term investments which in turn reduces the growth of the firm in the long-term.” …the L word, that is limited liability, is what has made modern capitalism possible.” (12) -Karl Marx defends capitalism

Adam Smith was against LLC because “…it cannot well be expected that they would watch over it with the same anxious vigilance…” (13). LLC’s were granted (royal charter) to bigger companies of national interest at first but as bigger industries came on board (railway, steel, and chemicals) LLC’s became more generally available. In Britain suspicion about LLC’s lingered on even as late as the 19th century but it was Karl Marx who saw its potential calling it “capitalist production in its highest development”. Of course Marx had an ulterior motive calling LLC’s a “point of transition” to socialism because it did actually did what he wanted, separate ownership from the managers without compromising production. (14) -Death of the capitalist class-

This dream did not come true but it advanced capital accumulation and technological progress. Although there was a risk of manager’s playing with other people’s money most of the managers (leaders) were charismatic entrepreneurs (Henry Ford, Thomas Edison, Andrew Carnegie) who were largely vested in the company so making ill-advised decisions would hurt them too. Eventually the companies got too large and the professional managers were deciding how the companies were run. Many feared that these new professional managers were career bureaucrats and had their own personal agenda to maximize sales and not profits to see bigger to boost their egos. Joseph Schumpeter saw this coming and said it …”reduce[s] the dynamism of capitalism, but thought it inevitable.” (16) John K. Galbraith thought the only way to reduce the power of the professional managers was to “…through increased government regulation and enhanced union power.” (16). -The holy grail or an unholy alliance?-

Finally, it was discovered, the principle of shareholder value maximization. Professional managers being rewarded based off of the amount they give to the shareholders by cost cutting and then by dividends and share buybacks, Jack Welch (GE) made the term “shareholder value” famous in 1981. US corporate profit went from 35-45% to 60% and the new practice soon began to find its way to countries like Britain. “Now this new unholy alliance between the professional managers and the shareholders was all financed by squeezing the other stakeholders in the company…” (18). Lower wages were being paid with fewer benefits, jobs were outsourced (or threaten to be) and the government was in a way forced to lower tax rates and provide more subsidizes while income inequality soared. This led to high consumer credit lending at unprecedented rates. We have learned that savings turns into investments but unfortunately that did not happen, “Investment as a share of US national output has actually fallen, rather than risen, from 20.5 per cent in the 1980s to 18.7 per cent since then (1990-2009).” (19) Furthermore, the growth rate per capita income fell 2.6% per year in the 60s and 70s to 1.6% (1990-2009). William Lazonick, estimated that if GM didn’t spend the $20.4 billion in share buybacks (1986-2002) it would’ve had the $35 billion it needed in 2009 facing bankruptcy. Chang gives his reasons for why maximizing shareholders value hurts the company and the economy overall. One being that shareholders can simply leave whenever they want, all they have to do is sell their shares. Doing this decreases the amount of workers, increasing work intensity “...which makes workers tired and more prone to mistakes.” (20) One thing leads to another and eventually...
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