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Reforming the theory and practice of capitalism

Started by Dr Shann Turnbull, April 21, 2007, 01:09:48 pm

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Dr Shann Turnbull

Comments are invited on my attached article on the "Seven Deadly Sins of Capitalism".

The need to reform the theory of capitalism is described in the paper I presented at the University of NSW in December 2006 to the Fifth Conference on Heterodox Economics on"Grounding economics in commercial reality: A cash flow paradigm" as posted at  http://papers.ssrn.com/sol3/papers.cfm?abstract_id=946033

Kind regards


Tony Budak

Admin Note: Shann's article is provided here on-line below. He welcomes your comments. I look forward to reading them as well.  tb

The Seven Deadly Sins of Capitalism

Shann Turnbull*sturnbull@mba1963.hbs.edu    New policies are required to cure the seven deadly sins of capitalism that make it:
      1. Inefficient
  2. Inequitable
  3. Exploitive
  4. Covert
  5. Alienating
  6. Insensitive
  7. Undemocratic
Most of the sins could be cured by a tax incentive for shareholders to convert corporations to being owned and controlled by local stakeholders.  This would remove much of the concern over global corporations.

The first and most ironic sin of capitalism is that it is inconsistent with the fundamental assumption that justifies a market economy.  The assumption is that capitalism is efficient because competition will control the creation and misallocation of profits.

  However, the current form of corporate capitalism is highly inefficient because it allows the insidious creation of surplus profits that are not measured by accountants and so not noticed by economists.  Surplus profits are the cash flows captured by investors after the time period that they require to obtain a return of the money that they invested plus profits to cover the risk of losing their investment.  Further details are posted at http://ssrn.com/abstract=946033.

  Because investors are not fortune-tellers they will not rely on obtaining any cash back after the foreseeable future, described as their investment "time horizon".  Direct equity investors generally have time horizons of less than ten years and it is usually much less.  The time horizon gets shorter as perceived risks increase. But in any event, any cash expected after ten years is discounted at a compound rate to diminish its value into insignificance.  

  For investments that have an operating life of say 20 years, the surplus profits generated in the last ten years could have a value greater value than the investment!  It is by this insidious process that wealth gets concentrated and/or permits corporate executives to cream off so much for themselves with excessive salaries, shares and options.  The value of options alone has been estimated to be worth over 25% of the value of all shares in the Standard & Poors New York Stock Exchange Index.

  The solution is to transfer the ownership of corporations after ten years to the citizens on whom enterprise depends to sustain their operations.  In this way, voting citizens who are corporate stakeholders as workers, management, customers, and suppliers could acquire ownership and control.  This would phrase out foreign ownership and control of the productive wealth of a country as well as democratising it.  This could provide the basis for a global "Community Investment Code" as proposed in my essay on 'The case for creating stakeholder corporations" posted at http://ssrn.com/abstract=436400.

  To encourage shareholders to agree to change corporate constitutions to create stakeholder shares, a tax incentive could be introduced.  Because investors discount the value of distant uncertain cash so much, only a small tax incentive is required to provide shareholders with a bigger, more certain quicker profit in return for giving up long-term ownership.  Ironically, government tax revenues would increase as corporate ownership transferred to voters who pay tax at a higher rate than the current owners who are mostly institutions, corporations and alien investors.

The second sin of capitalism is that it is inequitable.  The overpayment of investors with surplus profits is but one example.  The solution is not to tax these profits but distribute them through the private sector as explained above.  The system of owning real estate is also inequitable.  It allows taxpayers money invested in infrastructure services to create private windfall gains for property owners.  However, the gains are not shared with the tenants who create the consumer demand to push up prices for the owners.   In 1999 the Jubilee underground train line was constructed in London at the cost of 3.5 billion pounds sterling to create windfall gains of 13 billion pounds for those who owned land within 1,000 yards of each of its 11 stations.  The solution is not to tax the windfall profits but to change the land tenure system to separate the ownership of private investment on sites from the ownership of the site held by all residents.  How public investment in infrastructure can provide half cost housing is presented in my article at http://www.henrythornton.com/article.asp?article_id=4254.  Additional details are provided at http://ssrn.com/abstract=649642.

The third sin of capitalism is that it is insidiously exploitive.  The most blatant costly example arises from governments licensing private banks to create public money for private profit.  While governments creates notes and coins this represents only around 5% of the money supply, the other 95% is created by the banking system. The value of the special profits obtained by private banks from this privilege was between 4.5% to 15% of the total tax revenues collected by central governments in OECD countries in 1998 as reported by Joseph Huber and James Robertson, refer to http://www.neweconomics.org/default.asp?strRequest=pubs&strContext=pubdetails&intPubID=81.  As a result, in Australia only half a dozen banks create one third of the value of all the companies listed on the Australian stock exchange!

The fourth sin of capitalism is that it does not create fully informed or fair markets.  Owners of wealth hide their identity behind nominee companies and trusts and so become socially unaccountable for any harms and problems their wealth may create.  Shareholders can unwitting purchase second hand shares from insiders or sell their shares to someone willing to pay a higher price to take over the company.  The government should withdraw the licence for any stock exchange to operate that does not disclose to the public the ultimate beneficial owners of any shares traded.  The present system protects covert exploitation of insider trading and creates costly complex ineffective laws and monitoring systems.  What is required is "sunlight" share trading as proposed in my submission the Australian Senate Economic Reference Committee on February 5th 2001 available at http://www.thecorporatelibrary.com/special/turnbull/turnbull3.html.  

The fifth sin of alienation arises because corporate owners and controllers are not accountable to the employees, customers, suppliers and host community whose lives they affect.  This alienation is aggravated when corporate owners and controllers reside outside the host community, region or nation.  Stakeholder ownership and control as described above provides a way to cure this problem on a localised democratic basis.

The sixth sin of capitalism of being insensitive would likewise be mitigated with stakeholder ownership as this would make corporations accountable not only to their employees but also to their other strategic stakeholders on whom they depend for their existence and profitability.  There is no need to change director's duties, only the way they are appointed and evaluated as proposed in my submission to the Australian Joint Parliamentary Committee inquiry into the social responsibility of corporations that is posted at http://ssrn.com/abstract=800904.

The seventh sin of capitalism is that it is undemocratic in many ways.  First, corporate voting is plutocratic.  Second, the separation of ownership from control denies the ability of local stakeholders to make corporations directly accountable to them.  Third, the ownership of corporations is held largely through superannuation funds for members who cannot vote.  Refer to my paper on 'Agendas for Reforming Corporate Governance, Democracy and Capitalism' posted at http://ssrn.com/abstract=546942.

  The distribution of corporate ownership to stakeholders in their host communities would allow citizens to directly participate in the control of corporations.  Citizen ownership would democratise corporate governance.  This would enrich democracy and eliminate a number of concerns about globalisation.  Stakeholder governance would also underpin political democracy by countering superannuation fund socialism.  Just as importantly it would also align corporate constituencies with local political constituencies.  Refer to my article on 'Citizen or Superfund Capitalism?' posted at http://www.fabian.org.au/924.asp.


   *Dr. Shann Turnbull is the author of Democratising the Wealth of Nations available at http://cog.kent.edu/lib/TurnbullBook/TurnbullBook.htmA New Way to Govern: Organisations and society after Enron available at http://ssrn.com/abstract_id=319867.  Many other writings on reforming the theory and practice of capitalism can be located by placing "Shann Turnbull" in a Google search.
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