What new capitalism means

Reuniting capitalism and capital

Capitalism is based on business ownership by private people putting
their money at stake.

When a business, or an investor, borrows too much, it puts other people
money in peril.
This is a deviation from capitalism.
When debt overrides capital it is time to get back to capital and true
capitalism.

Also capitalists are not alone to make a business live and prosper,
the other stakeholders contribute to it and should be given proper
consideration.

sous End of free lunch, use your own wallet

First thing, what is capital and capitalism?

The term capitalism usually refers to an economic system in which
equipment economic investment and
risk probabilityrisk taking are
done by individuals, who commit
their own money (savings...)
as "capital",
which is the (exclusive or shared) legal commit  ownership of
means of production usually in the form of a business.


Long term lending
is often considered also as a form of capital

because of the stability of the funds involved.

In other words capitalism entails that the means of production, which
are key economic factors, are mostly owned as private property.
This is done:

* sometimes by owning directly one's own productive equipments.

But more usually


* via business ownership;
  
either by individuals alone
or by groups (*) of individuals,
    (*) partnership, shareholding in corporation or in investment
    funds.


*
who use "
capital assets instruments", such as company stocks /

    shares to mention the most basic ones.

Avoiding confusion


Since Karl Marx, some confuse under the appellation "capital" (with a
big C ...if not a big K) the economic factor / instrument itself, and a social
"class"
that is supposed to own (or at least to control) the bulk of capital
and as a result controls the whole society.
This social entity is also supposed to "accumulate" the capital.

All this is a denial that
* capital gets born and dies through initiative and obsolescence as
  
Schumpeter described it later.
* the largest potential pool of capital is public savings.

To put economic and sociological notions in the same bag, distorts as
well economic reasoning as sociological reasoning. Both are needed
but the distinction should be clear.


As for capitalism, it is defined above as the private property of
capital without making a sociological segmentation between a few
nabobs or the mass of ordinary investors and entrepreneurs.

When debt overrides
capital and capitalism

Here came the Overleverage & Financialization
brothers!


The importance of savings and of business ownership (equity) as
key economic engines got overridden in the last decades by an
ocean of debt financing (and notably short term debt or variable
rate loans), under the influence of:
  • Keynesian economists
who promoted deficit spending and liquidity easy money.
  • Some "Chicago school" economists (Miller-Modigliani),
They saw equity and debt as equivalent for corporate
financing.
  • The rise of "quantitative financial analysis"
It uses models based on the "modern portfolio theory" and
the "option theory".

Those approaches tend to give not too much attention to

fundamental data linked to the business situation,
performance and prospects and to privilege instead
mathematical financial market models.


Those models assume  that:
dice risk and fog uncertainty  are easy
   to  measure and thuss are trustworthy parameters
    for financial
decision.

* markets are always liquid enough to allow arbitrages
   (simultaneous or near simultaneous buysell sale and
   purchase of assets).

Those theories supported an explosive growth of financial
operations and instruments
(financial derivative markets for
example...).
  • Last but not less, specific official monetary practices 
favoring massive and nearly interest-free money creation
notably in the USA under the presidency of Alan Greenspan
at the Federal Reserve Board.

Capitalism, which is committing one's own money on productive projects,
was replaced by
lever overleverage and financialization. as
ways of
living, playing and taking risks...with other people's money.
Don't open your wallet, drinks are on the house!


This were the excesses that fed the recent
bubble and crash cycle
(
toxic debt and subprime crisis).

New capitalism = back to true capitalism,
with global monitoring added?

Maybe the "new capitalism" that seems to be the current quest of many
thinkers and political leaders can be built on four notions:
  • "Back to capitalism"
It is based on taking responsible and productive initiatives
by risking one's own money,
Although this entails some deleveraging, capitalism does not
exclude credit financing
but stays mainly based on
ownership as its main funding source.

The bulk
of the business
risk risk has to be taken
by the owners
, (again, as individuals or as groups of
individuals pooling their money) not the lenders.
Things must be transparent
about that allocation of risk-
taking between those two categories of funds suppliers:
owners and lenders
.

Innovations are triangles that associate three factors of 
production : initiative, (creative) talent and equity capital

Btw, too low interest rates and excessive liquidity foster
financial speculation and amateurish ventures more than
serious economic projects (misallocation of resources).

  • Some difference has to be done also between
equity trading and equity investing.
Maybe should be reserved to stable shareholders, except
in case of takeover by new shareholders, as it is an economic
investment also.
  • Also better financial monitoring (more than regulation) 
done at the global level.
Finance is a global activity.
It should be tackled globa
lly by world institutions, in a spirit
o
f democratic globalization,
It should not rest too much on nation-states that get tempted
to manipulate money and finance, in a self-centered / parochial
interest
.
Of course, that does not exclude specific (but coordinated)
local monitoring in complement, so as to tackle the issue at both
ends.
  • Without forgetting the other element than the financial structure. 
The financial return criterion cannot be the only
one to judge the economic efficiency
of a business.

* The first goal of a business is to give the best satisfaction to

    customers
,
profits should only be a reward for that feat.

* Also it should have a balanced attitude toward its staff
   and not transfer it all the risks when things turn bad (let
   us remind 
that capitalism entails the main risk to be taken
   by the investor).
   Also the personnel's
opinions should be as far as possible
   taken into account.


* Last but not least, a business is responsible for its behavior
  
towards the whole society, it should not earn its bread
   by
taking advantage of the plight of any segment of
   population
(perverse effects, collateral damages also called
   "negative externalities" by economists).

   This is an application of the cursor
cursor theory in economy,
   a roughly 67-33 balance between the parts respectively
played
   by individuals and by society.
An economic priority:
finding new capital and capitalists

To emerge from the current recession, to insure a long term growth, and
also to "deleverage" the economy, the needs for new capital are
going to be huge
.

Short term liquidities abound, but capital, based on stable commitment,
is scarce.


To direct savings towards such true capital, and above all to orientate
them towards equity financing, will have to be a massive process in
order to:
* Replace excessive debt (deleveraging), if only as overleverage
   is a business killer.

* Bolster business investment in general.
* Finance bulb innovative projects
   (venture capital, as credit is not well adapted to finance bets).

   Here there is an evolution in the nature of productive
   capital
: knowledge, talent, innovation, as "soft' kinds of capital
   are becomin
g the key factors of production and of economic
   value.
Trust will be needed to convince people to inject their money in the
economy in this "normal" way
.
This requires an effective financial global monitoring as said above.

Some see a risk of diminishing returns.
Who knows, as economic conditions are always changing, the economy
is an always moving
dynamical dynamical system, every day capital is
created and destroyed
in a "Schumpeterian" way.
But an hypothetical general lowering of returns is hardly a cause for
the demise of private investment and capitalism. Well, a confiscating
fiscal
policy in which investors take the risk and the State grabs
the gains can be the
death of investment and economic developement

"Tilted" capitalism

Also, when left totally by itself, capitalism tends to create economic
and social imbalances, whence the need for political counter powers.
This
is the "tilted capitalism" notion.

Reference and further reading

What are economics, markets, finance...

Discussion


Discussions are needed on some of the issues used as assumptions
in this proposal.
One of them is leverage.
Where was /is the excessive leverage in the recent / current
system? Mostly in financial firms, or also in non-financial firms?

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M.a.j. / updated : 22 July 2015
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