Vested interests are on trial, not capitalism

Sir, Sebastian Mallaby’s spirited defence of capitalism (“Shortsighted complaints about short-term capitalism”, August 6) highlights one of the main difficulties facing the global economy: how to recapture the dynamism of markets without being at their mercy. The issue of under-regulation is perhaps best seen in the financial markets, where, contrary to Mr Mallaby’s argument, the actions to maximise share prices are not the antidotes to inefficient markets, but rather reveal the dominance of short-term greediness and corporate myopia. 

Very few CEOs see themselves remaining at corporations for a lifetime; hence, what happens in the future concerns them less than their bonus today. The logical antidote to short-termism should of course be corporate boards of directors; however, governance of boards remains flawed and CEOs can use current shareholder returns as a convenience to pursue self-serving strategies.

Even taking politicians such as Hillary Clinton out of the equation leaves us with many mainstream observers wondering what has gone wrong in the current version of capitalism that puts the profits of manipulated markets in the pockets of financiers and the risks of failing markets on the shoulders of the citizenry. Outright corporate tax avoidance, customised tax expenditures and underpriced bailouts are prevalent in corporate America. The solution starts with rigorous supervision, regulation and enforcement of market misbehaviours. It is not capitalism that is on trial, but rather the way in which its oversight has been manipulated by vested interests.

The argument that advanced economies are crisis prone because of excessive corporate debt is wrong and the corollary view that increases in equity values provide a needed stabilisation function to capital markets is unproven. One does not have to share the views of radical economists to see the flaws in financial markets. Academic notables, such as professors Robert Shiller and Joseph Stiglitz, have amply demonstrated how markets misbehave, and the costs that societies bear for this malfeasance.

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The following article was first published on Financial Times, August 10, 2015.