Issue #43
Last Update December 24, 2005
National Capitalism’s Enemies by Sten Grynir Capitalism and our free market economy are under attack, and strenuous efforts will be needed to save them Ironically, the attack comes from within the ranks of the capitalists. For its success, capitalism depends on three things: non-monopolistic market conditions, capital markets that are fair to the investor, and effective corporate control by shareholders. It is precisely these three areas that have been placed most at risk by those who profess to be capitalism's greatest defenders.
Market concentration is the inevitable tendency of mature markets. The larger companies buy out the smaller ones, or inherit their market share when the smaller ones fail. The cost of entry into the marketplace becomes higher and higher, while margins become smaller and smaller, discouraging new entrants. As competition is reduced, monopoly pricing and policies become the norm. Free market economics ceases to apply. This state of affairs continues until new technology or replacements products undermine the monopolies, or government action acts as a counterweight to restrict the unbridled exercise of monopoly power.
The fairness of capital markets depends on several factors: timely availability of relevant information to the investing public, regulatory structures to keep the game honest, and few restrictions on the flow of capital. While in fact there are few restrictions on the movement of capital (other than anti money-laundering regulations), the availability of timely and accurate information has been severely compromised and regulatory protections are under attack.
In theory, the shareholders of a corporation, its actual owners, control the corporation's destiny. Corporate executives, unless they are also major shareholders, are supposedly employees reporting to a shareholder board of directors. The reality of corporate control is quite different. In most publicly traded companies, the shareholders are fragmented and passive. Senior executives make corporate decisions that reflect their own interests, rather than those of the shareholders. The board of directors is often a creature of management; even the outside directors have little independence. As a result, corporate policies relating to executive compensation, mergers and acquisitions, and executive termination are always beneficial to management, and often detrimental to shareholder interests.
One other threat to American capitalism deserves mention. Our economy is largely a consumer economy. The recent recession was moderate only because consumer demand, unlike industrial demand, did not slacken. As economic conditions, governmental policies, technology and international labor pressures continue to degrade the buying power of the American public, the impact of fewer buyer dollars will become evident in decreased demand, mounting deflationary pressure and decreased profits. When this is coupled with a dollar that is weakening against the Euro and other important currencies, the possibility of an American economic collapse becomes real.
A few American capitalists understand that the free enterprise system depends on consumer spending (requiring adequate wages and low unemployment), investor confidence (requiring accurate and timely corporate financial reporting and competent regulation of financial markets), a real role for government in protecting the public and financing research, development and infrastructure that would be uneconomical for private capital to do, and restoration of corporate control to the real owners of the corporation, the shareholders. The business leaders and politicians who promote corporate concentration, gut wages and benefits and starve or enfeeble regulatory bodies are undermining the system they profess to believe in.
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