Business & Investment

Capitalism for Everyone-7 Circles

Today’s post features a new report from Joachim Klement called Capitalism for Everyone.

inequality

Joachim states that criticism of capitalism has become very popular.

1% share since 1980

The standard argument is that capitalism must collapse as inequality is now so great and growing.

  • The top 1% (although defined because, for example, the top 1% of income is not the top 1% of net worth) has more slices of pie.

It’s hard to argue with the wealth created by entrepreneurs, or even those who grow their inheritance.

Successful families ensure that wealth is managed for many generations and that children and grandchildren do not become children of spoiled trust funds. Instead, all generations must contribute to society and the family business. However, not all families are so enlightened.

1% share since 1910

Back at 1%, starting the charts in 1980, the inequality trend looks worrisome.

  • But back in 1910, we can see that inequality is much greater, without capitalism imploding.

Russia had a revolution, but British, American, and French capitalism survived unharmed.

The reduction of inequality in the United States was driven by the Great Depression, the collapse of trust under President Franklin D. Roosevelt, and the introduction of an improved social safety net as part of the New Deal.

Decrease in ine in France and UKQuality was driven by two catastrophic World Wars and the loss of the empire.

Joachim states that the only thing that reduces inequality is a bad shock: wars, revolutions, natural disasters (earthquakes and volcanic eruptions) and plagues.

Peaceful social reforms and improved educational backgrounds have had little to do with a lasting reduction in inequality.

Return value

Real return

The current impetus for inequality is the return to “excess” capital above the actual risk-free rate (which itself is at historically low levels).

  • It’s arguable how big this gap is, but it seems to me that we will all receive risk-free returns unless there is a reward for taking risks.

And if the gap is positive, the rich own the assets at risk and the poor do not, which can increase inequality.

  • Until the limit is reached.

I’m afraid history will tell us that things really get very ugly at that limit. Fortunately, history also shows that this limit may be decades away.

Globalization

Revised elephant chart

Also, since 1980, capitalism, the “bad” part of the original chart, has rescued billions of people from poverty, especially in Asia.

  • Global inequality is shrinking, despite growing inequality in certain countries.

Nothing in human history has produced more wealth, health and happiness than capitalism.

That said, the US economic system in particular seems to have become less comprehensive during the same period.

Joachim is German and he is a fan of the German system.

In Germany, the law requires workers to be represented on the board of directors of all companies larger than a certain size.And it doesn’t lead to these Workers’ representatives are constantly blocking progress and painful cost savings.It leads to better understanding and increased cooperation Among various stakeholders.

To me, this doesn’t seem to be true.

  • If the workers haven’t interfered with management to some extent, what does it mean for them to sit on the board?

Joachim supports his argument with strike data. This shows that Germany has one of the lowest strike rates in the world.

Capitalism for everyone

Joachim’s new treatise was co-authored with Michael Falk, a friend of the Focus Consulting Group. And Available on the CFA Institute website..

Michael S. Falk, CFA is a partner of the Focus Consulting Group. He is the Chief Strategist of the Global Macro Hedge Fund and the CIO of Due Diligence for the Manager. Assets Allocation to multi-billion dollar advisories.

Two important recommendations from the report are:

  1. Transition from shareholder value to stakeholder capitalism, and
  2. Use of sovereign wealth funds to promote a more comprehensive form of capitalism.
Externalities and agency issues

This treatise begins with a famous citation from Milton Friedman.

The sole social responsibility of a business is to use its resources and engage in activities designed to increase profits, as long as they are within the rules of the game. That is, deception and fraud.

I understand this puts me in a declining minority these days, but I’m rather obsessed with that definition.

  • The fact that the owners of a company are usually not their owners and their interests do not naturally match the interests of the owners is consistent with the agency’s problem.

Simple goals, such as maximizing shareholder value, can support that adjustment.

  • Also, if a company goes bankrupt, it makes sense to prioritize their goals, as shareholders have less legal protection than debtors and employees.

Shareholder value is compatible with approaches that address externalities (such as CO2 emissions) through pricing mechanisms.

  • And such externality pricing will naturally go down to the government.
Stakeholders

Shareholder value may appear to have recovered if externalities are priced. But there are other problems.

  1. Long-term adverse effects on customers
    • Who should pay for the long-term health effects of tobacco and fast food?
  2. Optimal salary level for employees
    • And for the employees of the supplier
  3. Necessary infrastructure support from the community
    • Is this subject to a tax increase? Also, do jurisdictions need to compete for new company locations?
  4. Employees who are also shareholders can be in conflict
  5. Shareholders want to maximize the value of their portfolio, not just a single stock / company.

The author reviews four questions to the company.

  1. Is the company responsible for all costs, including externalities?
  2. Do they know what those costs are?
  3. Can they afford them through their current income or potential price increases?
  4. Are potential price increases acceptable?

These questions can only be answered by including stakeholders in the flow of information and the decision-making process.

Jensen

The author moves to Jensen’s “Maximizing enlightened shareholder value”.

  • They reject his idea that by optimizing multiple simultaneous goals, management can avoid accountability and exploit stakeholders (I’m not very sure).

But they agree with itSociety will benefit most if the total long-term corporate value is maximized.

  • This happens when a company produces goods or services that are highly valued by its customers (after considering externalities and exclusivity).
Maximize stakeholder value

The next section of the paper describes various attempts to implement. Maximize the value of stakeholders in the UK and Germany.

strike

As discussed above, the author likes the German system, which leads to low-level strikes. But they admit that it may not work for all:

The German model for stakeholder participation probably cannot be implemented everywhere.
Due to cultural differences and lack of trust among various stakeholders.

If a company pays workers a minimum wage for decades and exploits employees and suppliers as much as possible, speaking under management supervision can lead to retaliation rather than cooperation. ..

It certainly feels like a risk to me.

Sovereign wealth fund

The authors are also keen on the sovereign wealth fund, which they consider to be a “national shareholder.”

SWF is a society
Capitalism while preventing hostilities from destroying the company.

SWF is normally used budget Surplus to achieve intergenerational equity and other long-term goals of society (usually, but not necessarily, due to the export of goods).

The author lists five SWF goals.

  1. Economic stabilization through investment liquid Assets uncorrelated with the source of national wealth
  2. Saving profits by exporting limited resources
  3. Pension reserve
  4. Development of local infrastructure
  5. Invest to protect domestic companies from foreign interference (may include “domestic economic champions”).
Stakeholder “what-ifs”

The last section of the report has some detailed recommendations on how to improve stakeholder capitalism.

  • Redesign government to harness “crowd wisdom”
  • Limit acquisitions and share buybacks of companies with a 10% or greater market share in the economic sector
  • Give long-term (5 years or more) free “participation share”
  • Use SWF to give society partial ownership of a company
Conclusion

This is an interesting treatise and I highly recommend reading it completely.

One of the problems with this kind of top-down improvement on capitalism is the international coordination of approaches to implementation.

  • Meanwhile, the climate crisis, the transition to renewable energy, and the rise of ESG generally provide opportunities, and Biden’s election to the White House will bring Europe and the United States closer together on these issues than in recent years. It means that.

But China is keen to take global leadership, and the submergence of Western capitalism could offer them their own opportunities.

Capitalism for Everyone-7 Circles

https://the7circles.uk/capitalism-for-everyone/ Capitalism for Everyone-7 Circles

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