Tuesday, January 10, 2012

When it rains it pours (or in defence of Capitalism) ...

... the title could refer to this being my second blog post in less than a fortnight and also to the flood of criticism of capitalism being highlighted by many - you be the judge.

Came across an interesting FT Article - Capitalism in Crisis. Recommend a read but at the same time request that we collectively think back a few years - say to the late 1980s, and the state some major economies were put in by socialism and quasi-socialism - think of Russia/USSR, China and India. Socialism clearly was a system that was too ideological in its assumptions and inconsistent with the frailties of humanity.

These three economies have all been driven to a new growth phase by their economies becoming more capitalist. There have certainly been abuses and resulting inequality but in each of these countries you could make the case that the abuses have generally been because of their Governments continuing to exert more influence on their economies than is necessary.

A significant advantage of capitalism is that it works with what several consider a failing, but one that all of us have, perhaps to varying degrees - namely greed, and channels that into resources necessary for productive economic activity. There is something quite fair and democratic about that and we should never forget that in the post economic crises hyperbole.

Private enterprise needs to assume most of the blame for the crises however and it is important that the right lessons are learned and acted on appropriately, among them:

1) Basic risk management - those in charge of large institutions' finances only need to exercise similar prudence as they would with their own money;

2) Shareholders of companies, people like you and me, need to show companies we invest in that risky behaviour that may drive up profits in the short term won't necessary lead to a flood of demand for the shares and a higher stock price;

3) Business Education needs to move away from a narrow focus on the stock price and hence profits and faster growth;

4) Boards of Directors have a much more important role to play and some examination of how boards are appointed and function may be appropriate

5) Finally, but by no means lastly, Governments need to eliminate distortions to the extent possible with efficient and transparent systems that govern dealings with private enterprise.

Have a good week!

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