Poor Richard's Junto: management science, entrepreneurship, business ownership, management

This blog dares leaders to do better. We encourage those managers with the wits to change and we exchange ideas in management science to mutual benefit and personal development. This is the place for those leaders who admonish folly and hubris and yet are devoted to continuous mental development, entrepreneurship, business ownership, & business management. As such, let this be a forum for thought leaders, CEOs, and business owners as Ben Franklin once did with the Junto and his almanac.

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Thursday, October 7, 2010

The Fundamental Flaw of Capitalism – Authored by a Capitalist

There’s a lot of blame to go around in our Nation’s financial crisis. In my humble opinion, a lot of blame has been thrown around with a bit of a myopic viewpoint that fails to account for the underpinnings of a capitalistic system and the psychology of its participants.  Now keep in mind, this is written from an ardent capitalist and in no way suggests a “progressive” or socialist agenda; merely something that patriots of a capitalistic society should focus on.

I wanted to write this after seeing so many politicians use the age old fallacy of false dichotomy to push through their hidden agendas. An example of arbitrarily reducing a set of many possibilities to only two is, “if we don’t pass this bill right now with our solution we’ll have financial Armageddon”. Some would argue that this thinking results in rash actions with many unintended consequences. Yet, this is not what I’m taking issue with here. What I take issue with is that Republicans, Libertarians and capitalists have not succinctly articulated the core issue at hand; the one issue, that without it, all other measures will have diluted impact. We don’t hear about the many options available to us and we don’t hear the conservatives speaking-out against dichotomy fallacies; they use such fallacies as masterfully as anyone for their own agendas. What we do hear from “fiscally conservative” leaders is that socialism is wrong and, if they offer a solution of any kind, it is often a compromise of regulatory reform or a call for further deregulation. I just think this falls short; I want one simple message that guides decisions in an ever changing market system. I don’t want the kind of deregulation that leads to Enron or the overregulation that creates so much legalese that no human can possibly synthesize the information. I want a smart and simple solution that hits the nail on the head.

So what is the fundamental flaw of a capitalistic system? Well, it starts with the psychology of incentive based bias.  This means that an industry with perverse incentives to make short-term profits will likely have at least one participant do so and wittingly or not, will sacrifice long-term stability. But that’s not the problem. The systemic issue is that if the sound and reasonable competitors do not follow, they may very likely face going out of business themselves. We saw this in the mortgage industry; if you did not offer low doc, adjustable, Alt-A, or subprime loans – you simply were not relevant or competitive in the marketplace. You can blame the greed and behavior of consumers, mortgage brokers, banks, and Wall Street all you want – and you’d be right. However, the overarching theme is; if all the incentives run the wrong way through all of the industry participants, who can put an end to the madness?  The simple answer is the regulator.

The notion that an industry will police itself is ridiculous to me. Try to call your competitor who’s making more money than you (even though jeopardizing his long-term viability) and convince him that he should stop what’s working so well for him; good luck. I’d love to see some capitalistic leaders calling for a truly independent regulator (not financed by the industry participants) that is sufficiently staffed with high caliber, richly rewarded employees that have the authority to stop short-term practices dead in their tracks. Such a solution merely requires the enforcement of ending practices that are foolish in the marketplace and a regulator that will be accountable and sign-off on appropriate practices. We don’t need thousands of pages of reform that lead to loopholes and uncertainty as to what are legal practices. I realize that this is an “ideal” proposal set against a backdrop of political compromise but, as a capitalist, complacency isn’t my strong suit. In a world of “progressive” solutions being enacted with thousands of pages of regulatory reform, I have to ask – where’s the common sense mission statement that can stand as a litmus test to ensure we’re on the right track? Where are the leaders who can provide a simple core message that all the participants can rally behind? Have we not learned our lesson?

1 comment:

  1. Blogbate: See my response at --


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