Market capitalism is broken

The  book is all about market capitalism and how it’s broken.  I haven’t read it, but I will.  I’ll write about it later but here’s some extracts from an interview with its author, financial journalist Rana Faroohar:

“I believe that the reason for that is that our system of market capitalism is broken. The capital markets and Wall Street are no longer serving business or the Main Street economy that you and I live in.

If you think about it, capitalism as defined by Adam Smith was a system by which the capital markets would take the deposits that you and I put in the bank, and invest it in real businesses that create real jobs and growth.

But only 15 percent of all the money flowing through financial institutions today ends up in businesses. The rest of it is staying within the closed loop of the market itself. It’s being traded.”

Basically, the argument is that the finance system is trading with itself.  Actually, it is trading itself.  Risky, but offering the chance for big returns.  And relatively less risky that investing in businesses.

“The other part of it is the securities market. The securities market is stocks, bonds, collateralized debt obligations and so on. They’re all the things on paper that the financial system trades in a closed loop.

Again, those are assets that are not creating real growth. In the last few years, you’ve seen this disconnect with the stock market at record highs, and yet income growth being flat, and overall GDP growth being flat.

Markets now create these asset bubbles, but the money going into new businesses — the hairdresser down the street, my dad starting a small manufacturing company in Indiana — that’s 15 percent of what comes out of financial institutions right now. That is totally a broken system.”

“The entire model has switched. Finance, as envisioned by Adam Smith, as it existed for the most part until the 1970s, was a helpmeet to business. It was not the main event. We have since gotten this idea that finance is somehow the natural highest point on Maslow’s hierarchy of the economy.

You’ve gotten 40 years of policy decisions that have encouraged that, that have protected this industry, and that’s one reason why this industry creates 4 percent of jobs and takes 25 percent of the corporate profit pie. That is just breathtaking. If you need one number to sum up where the problem is, it’s that.”

Management has been geared to this since the 1970s.  Robert McNamara’s obsessions infected a generation and remain influential, according to Fahoohar,  straight from his losing approach to the Vietnan war:

“I started digging into this. What I found was fascinating. Indeed there was a period in time exemplified by Robert McNamara, who unsuccessfully led the Vietnam War effort, in which the Pentagon decided that they could come up with a metric for everything to win the war, and lost sight of how screwed up the overall mission was.

He brought that same sort of checking the box, CFO‑type thinking to Ford, and later to a number of other companies, including GM. His disciples went out into much of corporate America.

That led to people looking at organizations within silos, rather than looking at underlying mission, the technology, the innovations that are really driving our economy. It’s the opposite of Steve Jobs”

“One of the things I wanted to do in this book was get away from a culture of blaming the bankers, blaming the CEOs, blaming the one percent. I cover these people on a daily basis. Nobody’s venal here. They really are doing what they’re incentivized to do. It’s just that over the long haul, it doesn’t happen to work.”

Are there solutions?

“…it’s really about acknowledging that the corporate social compact of the post‑war era is at an end. It’s been frayed for some time. I think we can say that it’s been totally Uber-ized.

The way in which we work, who pays for the social safety net, at a time when there’s more government debt than ever, and more corporate profit than ever, the effects of technology in disrupting jobs, all of that is in the mix here.

The old model is broken. We need a new one. There isn’t really a silver bullet. One of the things that we can certainly start with is the tax code, and what it is subsidizing and incentivizing, and what it isn’t.”

And the system is drained of trust…

“That’s a problem. There are surveys showing that elites trust each other more than ever before, but the mass populations in every single country trust the elites less than ever before. That reminds me of pre‑revolutionary France.”

And the real answer? We made the rules.  We can change the rules.

I imagine confidence in that outcome might be a little thin at the moment.