In true capitalism (without central banking, fractional reserve banking and massive government intervention) a company just has to worry about making a profit. Because that is the signal that it is performing an activity which is valued by consumers. The activities of companies thus reflect the overall values of a society. Long-term perspective, ethical foundation and social value will be promoted, if the consumers do wish that.
Problem – a flawed capitalism creates problems
To briefly summarize the Long-Term Capitalism Challenge’s three basic issues with capitalism:
- narrow self-interest without a strong ethical foundation (principled)
- short-termism without vision and perseverance for value creation (patient)
- profits and shareholder return as the only measures of a company’s value-added (social)
Most of these problems are amplified by the current system, which distorts Capitalism through fiat money, fractional reserve banking and government intervention.
The key elements of Capitalism are freedom and individual rights (e.g., property rights). Both have not fared to well in a time of massive government intervention and central banking.
Flaw A – Government intervention
Huge government taxation, government spending, government bailouts, government regulation and taxpayer financed stimuli without worrying about how much lasting value is actually derived from those "investments", how efficiently capital is allocated, what the side effects of these interventions are and how sustainable and fair such borrowing from the future is.
Flaw B – Central Banking – Fractional Reserve Banking
Just as bad as government interventions are the Keynes and even Friedman inspired economic macro theories, which assume that a selected steering committee of a central bank knows what is best for the economy and that monetary interventions can actually make economic activity more stable and sustainable. Furthermore do these schools attempt to convince us that there is a gap between the macro and the micro economy. The same rules do apply to both of them and they are deeply interconnected as Ludwig van Mises, Murray Rothbard and others have beautifully shown.
Problems caused by flawed Capitalism
FED and Government arranged bailouts have actually rewarded unethical behavior and the lack of a long-term perspective, while the marketplace has punished these shortcomings. In a properly functioning system businesses that took adequate risks and ethical should have been rewarded and should now benefit from a reduced amount of competitors.
These adverse effects are not limited to the financial industry but also present in the broader economy. In manufacturing for example, Toyota Motors should have benefitted from the bankruptcy of much less farsighted competitors. Toyota is actually managed based on the values: respect for people and continuous improvement. Toyota uses economically sound principles and has adopted a long-term perspective and invested in the development of environmentally friendly technology. The long-term vision of Toyota is to build a vehicle that can cross the United States with 1 gallon of gasoline. Furthermore, they actually do create well paying jobs in the United States.
Eliminating FED and government intervention would give more power to the real boss, the consumers.
In his book Human Action (1949) Ludwig von Mises developed the theory of the 'sovereignty of the consumer' in a free-market economy; in his view, the consumer ultimately dictates everything that happens.
“The direction of all economic affairs is in the market society a task of the entrepreneurs. Theirs is the control of production. They are at the helm and steer the ship. A superficial observer would believe that they are supreme. But they are not. They are bound to obey unconditionally the captain's orders. The captain is the consumer. Neither the entrepreneurs nor the farmers nor the capitalists determine what has to be produced. The consumers do that. If a businessman does not strictly obey the orders of the public as they are conveyed to him by the structure of market prices, he suffers losses, he goes bankrupt, and is thus removed from his eminent position at the helm. Other men who did better in satisfying the demand of the consumers replace him.” (Mises, 1998, 270)
In a properly functioning Capitalism the consumers vote with their dollars for the products that shall be produced. Based on these demands the capital is allocated to production capacity and profits of companies reflect the degree to which their contribution helps to satisfy the demands of the consumer and how sensitive they are to anticipate consumers’ demands. The actions of companies are a reflection of consumer behavior.
It is actually really simple a company just has to focus on making money. How socially beneficial the service or product is, is judged by society.
The level of awareness of a society is reflected in what companies do. Capitalism IS the best currently KNOWN way to achieve sustainability, long-term perspective and a strong ethical foundation, IF that is what the masses value and want. The people do have the power.
Educate people. Improve resilience of organizations. Develop Human Potential.
Probably a massive deflationary or inflationary shock is inevitable at this point. Depends on government and FED policy. Important is, that people are educated and ready for the day X. Further improving our organizations and abilities to cooperate will help.
My reflections are based on the ideas of the Austrian Economic School, which Ludwig van Mises, Friedrich von Hayek, Murray Rothbard and others have laid out in great detail. (This year is the 100 year anniversary of Ludwig van Mises’ first book “The Theory of Money and Credit” (1912) and there are great resources available for the interested readers, e.g. www.mises.org).
i apologize in advance for all potential distortions and misinterpretations. I strongly recommend to read the original sources.
Human Action - mises.org/books/HumanActionScholars.pdf