Capitalism Has Changed For The Worse

John owns an IT consultancy. He built his business from scratch through hard work, long hours, and good service. He learnt how to program from some online courses as his formal education was not that great. After a few contracting jobs, he became a good programmer and he started to build his business with like-minded people. His business is not large, but he can bid for mid-sized jobs in the IT services market.

What’s wrong with capitalism?

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Capitalism at its core is not an evil system. It rewards those who work hard, helps provide goods and services at a cheaper price, and most importantly it allocates the world’s limited resources more efficiently than any other system we know. The drive in a competitive market to be profitable means that producers and service providers are forced to better understand what people want to purchase, and be the best at providing such a good or service at the lowest cost.

Usually we find that the complaints people have of our capitalist system is not to do with the base functions of the system, but about:

1) the abuses of the system,

2) the excesses, which are not curbed by governments, and

3) the constant brainwashing from marketing that turns us into a consumption focussed society.

An IT job came to John’s attention: to install and customise a new system for a FTSE 250 company. It would be a big job for John’s company. The exposure would allow John to bid for even larger jobs. He knew he had a good chance to win the project because he had done the exact same job on a smaller scale for another client on budget and on time, so he could demonstrate he had good credentials.

Ultimately, John’s company did not win the bid. He was sent a letter thanking him for his time, but the client had decided to go another way. The bid was won by a larger competitor. Though John’s competitor had done similar jobs in the past, they had not done this exact type of work. John assumed that his larger rival was seen as a safer option considering the resources they had at hand.

A few months later, John bumped into an employee of the client, Alan, at an event. John asked Alan how the project was going. He said it was proceeding well, but they were slightly delayed. John asked about the bidding process and why his bid wasn’t accepted. Alan said that the larger rival was just seen as a better fit and there was confidence in their project manager that had worked with Alan’s MD previously at another company. John understood that this type of “insider networking” was something he could do little about. His bid was good and maybe better than his rival’s, but it had to be a lot better to overcome the ties at the higher echelons of his potential clients.

What can we do about the abuse of capitalism?

Abuse can be widespread especially in developing nations, where governments leave corruption, cronyism and nepotism unchecked. This creates an unfair playing field where social mobility is limited and core functions of asset allocation and producing efficiently at low cost are lost. Though our narrative is about a small infraction, at its most heinous human rights are trampled upon and slavery, torture and even death persist.

Detection and punishment of petty crime is far more effective than detection and punishment of “white collar” crime, which effects countless more lives. Even when detected, prosecution of perpetrators of “white collar” crime is woefully difficult. While petty crime is unacceptable, there can be extenuating circumstances which at least provide reasonable rationale for people’s behaviour. Few would have sympathy for the corruption that robs millions of their opportunity to improve their standard of living, and in some situations to rid themselves of the threat of violence, or escape slavery.

Unfortunately, the best resolutions for these ills lie with the politicians who act in unison with “captains on industry” to find illegal and sometimes legal avenues to hold onto power and wealth. Better detection is possible, but desire to prosecute with sentences that are commensurate with the damage caused is lacking. Only until politicians agree to put the voter before their re-election or other funds will we see the type of rules we need to rid ourselves of corruption.

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John was looking to expand. He wasn’t able to get a loan as many banks were not lending to SMEs. The economy was not doing well, and banks were not prepared to take risks. Therefore, John’s only remaining option was to raise money from people who would buy into the business. After talking to some potential investors, he was amazed at the returns that were being asked. In order for him to provide such returns, either he would have to give a huge part of his business to the investors, a business he had spent years building, or he had to push hard on costs, which would mean reducing pay rises, as people were the largest part of his cost.

John was sure of a gap in the market and needed money to service that gap. He decided to take on the new partners and promised to keep the company lean while growing the business. John was right and the company did grow. The hard work of his employees was part of that success, as they served clients well. With the growth, John was seen as a good investment by his partners, who agreed to give him substantial pay rises and stock options.

Over time, John’s employees’ salaries had not increased by much. Little perks they used to receive such as free coffee and biscuits were replaced by vending machines. They were pushed harder by bosses, who seemed to reap all the rewards. There were few other jobs in the market, so leaving to go work somewhere else was not possible. Employees became despondent and their productivity dropped. Eventually John’s company’s growth stagnated or showed slow growth. However, John was still paid handsomely.

How can we stop excesses?

Over the last decade it seems that real wages have stagnated, while the returns provided to owners of capital has increased. While it may be true that wages have not increased, returns on capital have also fallen. A more accurate way of looking at it may be to say that while both labour and capital are in challenging environments, capital is increasing its share of the overall pie. Indeed, in his book Capital in the Twenty-First Century, Thomas Piketty points to the natural inclination of wealth to claim increasingly greater portions of the benefits of production compared to labour. In his thesis, he suggests that capital will continue to gain a greater share of the benefits of production, a process that has only been halted in the past by great disrupting events such as war.

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The difference between salaries at the top of a company versus the bottom have increased. Whereas the top always made multiples of the salary earned by the bottom, the difference has increased substantially. In the US where the disparity is likely at its greatest, Natalie Sabadish and Lawrence Mishel state that “CEOs earned 20.1 times more than typical workers in 1965, 383.4 times more in 2000, and 231.0 times more in 2011”. If performance warranted such multiples then fine, but “from 1978–2011, CEO compensation grew more than 725 percent, substantially more than the stock market”. During the same period worker compensation grew “at a meagre 5.7 percent”.

Redistribution of wealth by the government has been the natural method of dealing with inequality. This means increasing taxes, which is deeply unpopular especially in certain Western countries. Whilst this will remain the primary method of wealth distribution, shareholders also have to ensure that executives are not overpaid and their pay is linked to performance. After all, it is their money and why overpay executives for poor or average performance.

John has a couple of children. They constantly ask for bigger TVs, a new phone each year, the latest football shirt, the latest items from fast fashion lines. John acquiesces and buys his children what they want. His children go to school with other children, who also want the latest gadgets, clothes, video games, etc. Some parents can afford it and others can’t, but the children get most of what they want. It leads to an easier life for parents, but parents can see a lot of the “stuff” they buy is not necessary.

How to stop the brainwashing?

People buy more things they want than they ever have. It is natural to purchase items you want rather than need as you get richer, but people seem to buy things they want and make do without necessities. The shift in buyer habits may be directly attributable to the aggressive marketing campaigns companies carry out. We have all become consumers, not people. We crave for the latest gadgets, fast fashion line and pampering services, which we don’t really need.

All of this means that companies generate more profits for which executives are congratulated. But if you look closely, they are being congratulated for their marketing prowess. A lot of these companies outsource a lot of their production, so they are basically marketing entities. You don’t need a lot of the things they sell. When you buy an upgrade of a phone or an item of fast fashion, they are likely no less useful than the items you already have, and the old ones invariably end up in a landfill.

No amount of governance is going to help on this one. People need to wake up and see that buying more and more useless items or replacing old items that are perfectly usable is making a small group of people wealthy, not really increasing their happiness, and killing the environment.

The solutions to the broken capitalist world are difficult, multi-faceted and require a huge effort from billions of people. It can all start will small steps such as recycling, purchasing only the things you really need, and purchasing them from vendors that produce sustainably and ethically. The narrative we provide only scratches the surface. Millions of lives act out these issues every day in a myriad of ways, some more severe than others. We can’t wait for governments to come up with solutions, so we have to push them into solutions. In the meantime make your hard earned money count.

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About the Author

Sukhdev is a British Indian, who has lived and worked in a number of cities including London, New York, Boston, Vilnius, Bogota and Dubai, where he resides with his wife. He currently works to help start-up companies that have a social impact. His latest venture is Chanzez, which will produce (not source) clothing ethically and use profits generated in the production countries solely to fund social impact projects such as school scholarships. Sukhdev is a CFA charter holder with an MBA with top honours from Columbia Business School in New York, an MSc from The London School of Economics and a BSc (Hons) from Aston University in Birmingham, England.

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