Tuesday, 25 November 2014

We’re all capitalists now

The six pillars of capitalism – private property, profit motive, free markets, rule of law, joint ownership and limited liability – allowed this economic system to be the most productive as well as the most equalitarian system ever tried by humanity. Nevertheless, this result was neither procured nor foreseeable from the outset.

For example, one of the widest off the mark forecasts in history was Marx’s prediction that under capitalism the greater part of the middle-class would constantly sink into the proletariat leaving the population divided into a small bourgeoisie and a large proletariat. Indeed, exactly the opposite has happened. Although the wealthiest one percent has increased its share of total income the number of proletarians (those without any assets other than their labor) dwindled to a small number. So, instead of all becoming proletarians now we are all capitalists.

The explanation for Marx’s failure resides in his erroneous theory of wages and employment and from unforeseen developments in terms of labor organization (unionization), welfare state and compulsory savings through retirement, unemployment and health insurance.

Furthermore, apart from the number of capitalists in society, there were other developments that also changed the perception and the role of capitalists.

In fact, under capitalism the social structure no longer is based on breeding but on work and merit. Social mobility is now achieved mostly through education while the social standing of business people as well as that of wealthy and poor capitalists is now at par with the traditional higher classes of nobility and clergy.

Popular capitalism, a term used to describe the rise in shareholding by individual investors, may occasionally hit the headlines but it should not be confused with the process through which people are now simultaneously workers and capitalists. Whether people choose to own shares in a company directly or indirectly through institutional investors depends simply on their perception about which is the best way to manage their capital.

The role of the capitalists investing in equity has also changed in the sense that most of them do not participate in the life of the company into which they invested or simply monitor its development. Indeed, some do not even want to know much about the company where they invested except its price so that they do not become sentimentally attached to the stock.

Nevertheless, although day trading based in technical analysis is a popular approach among some investors, the majority of investors still follow an investment approach based on event or portfolio investing which require a good knowledge about the company. Thus the signs they transmit through their buy and sell orders cannot be ignored by company managers, even when they are not part of the small group of investors that have or might exercise the control of the company.

So, although trading plays an increasing role in today’s capitalism, we cannot identify the kids gesticulating in a modern trading room with a Rothschild standing at the door of the London Exchange in the XIX century. Mostly because they are just agents, while Rothschild was simultaneously agent and principal. So, traders cannot be used to symbolize modern capitalism. Nor should the wealthy be confused with capitalists whenever they invest only in government debt.

As I said elsewhere, 100% leveraged companies cannot exist in the capitalist sector. In this sector, shareholders are indispensable to preserve the profit motive and profit maximization indispensable to a capitalist system. So, although consumers are the main beneficiaries of capitalism with an unequivocal interest in free markets (another pillar of capitalism) they cannot play the role of capitalists and force managers to pursue profit maximization because they would have an interest in securing lower prices at the expense of profits.

Then, since most people are simultaneously consumers, workers and capitalists, how can they achieve at the same time lower prices, higher wages and more profits? This is a false conundrum easily solved in a capitalist system through competition and profit maximization. To pursue profit maximization firms have to optimize their labor/capital mix while investing more in physical and human capital to increase productivity and wages. Through free and competitive markets corporations are at the same time forced to take good care of their customers and try to offer the best service at a lowest price.

In conclusion, as more people becomes capitalist they improve their wealth and income, and, most importantly, they play a role in keeping the system alive and efficient.

In general, most of us, including those with more than a million invested in securities, cannot live on capital earnings alone. Therefore we do not recognize ourselves in the old stereotype of an idle capitalist with a top hat living on investment income and spending only a few hours a month monitoring or trading his securities. But, generally, now we are all capitalists (whether directly or indirectly) despite not fitting into a stereotype. This is clearly an important civilizational advancement of capitalism.

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