10 thoughts on “A tale of three capitalisms”

  1. Posted 18/10/2010 at 13:46 | Permalink

    Some thoughts arising from this very important piece.
    1) It needn’t necessarily be FS – automotive manufacturers have often wielded similar influence e.g. – and cronies can often be organisations like the TUC or CBI (1970s corporatism). As I see it, the contemporary prominence of FS is the product of government manipulation of money which is probably the most interfered with market that there is.
    2) ‘Classical capitalism’ is indeed the ‘best and effective’ for the whole but not for the few who seek to adapt it into their own special interests, often by co-opting large blocs of voters and/or politicians. The question is, whether the shift from one form to another is an inescapable result..

  2. Posted 18/10/2010 at 13:51 | Permalink

    … of democratic constitutions or not, as all democracies have to a varying extent gone down this path? Of course, that’s not an argument against democracy as other systems usually do worse, but it does seem to beg the question of whether democracy can really support something close to classical capitalism, especially given the huge system of vested interests we now see.

  3. Posted 18/10/2010 at 15:10 | Permalink

    […] A tale of three capitalisms By Andy Duncan, on 18 October 10 Professor Kevin Dowd has penned an excellent article for the Institute of Economic […]

  4. Posted 18/10/2010 at 15:15 | Permalink

    I would also think it is important to add that the short termism of the second form may be, in part, down to the listing and thus liquidity of the shareholdings, and the volatility that can accompany it.

    If shares are illiquid or not listed, but still held by the same players, the motivation to get stuck in and kick out bad management will be stronger.

    If management is also remunerated/targeted by share price, then what do you expect – management is acting “rationally”.

  5. Posted 18/10/2010 at 16:42 | Permalink

    I appreciate the agency problems caused by limited liability. But if liability were unlimited for companies (as with partnerships) would it not be almost impossible to find very-high-risk capital for new ventures?

    At present that may sometimes be forthcoming from wealthy individuals, who may be prepared to risk what to them is a small amount. But if their liability were unlimited, surely they would be unwilling to put any money in?

    It would be interesting to know how much of the equity capital of large companies today has come from money invested by shareholders and how much from retained profits. The calculation would be tricky, because of the need to allow for inflation.

  6. Posted 19/10/2010 at 03:15 | Permalink

    I am with DRM on the unfortunate necessity of limited liability, but I took Kevin’s point to be that the exposure to risk and reward of shareholders under individual shareholder capitalism, even if their liability is limited to the loss of their business, is so much greater than under dispersed and intermediated forms of shareholding, that their incentives to take care and control, and to invest for the long-term are significantly greater. I thought the article was bang on.

  7. Posted 20/10/2010 at 09:53 | Permalink

    I believe that DRM is wrong to worry about where “venture capital” for risky new ventures would come from under unlimited liability; the price charged for such funds would merely reflect such risk – and with modern information-discovery processes, it would not be as much as it was when people were financing East India company spice ships… At present we have a system that has evolved to deter such investment, because of the way risk is embraced, without penalty for failure. That safety net needs to be removed at once, and then the true value of an investment can become clear.

  8. Posted 23/10/2010 at 06:50 | Permalink

    1 Make all Directors and above of corporations fully liable and vested, as in Capitalism #1. They are owners by proxy. In bankruptcy cases, make the judge’s personal wealth hang in the balance if he shows preference regarding management owners’ attempts to hide or transfer their assets.

    2 PE has repaired at least some of what regulation and governments have botched.

    3 The 17th Amendment must be abandoned if there is any hope of devolution of federal power. The people can not do it alone.

    4 Bank leverage and counterfeit money is bankrupting the country. The practicality of fixing that is beyond me.

    Saving the banks may have irreparably damaged the country given ensuing wealth transfer.

  9. Posted 31/10/2010 at 20:13 | Permalink

    […] I think the benefits of limited liability exceed the costs. […]

  10. Posted 05/11/2010 at 17:57 | Permalink

    Yes, managers (agents) feather their nests rather than run shareholders’ companies properly. Worse, shareholders are now often agents too, eg fund managers, and/or don’t have big enough stakes. The current crisis is different but connected? It is another credit bust, caused by bad public policy – allowing fractional reserve banking, central bank money creation, fiat money and deposit insurance. Bad monetary systems create inflation as well as crashes. Inflation makes bonds unsound compared to shares, creating widespread retail investment in shares. And over-taxation of directly held investments hands these shareholdings to state privileged ‘City’ agents – pension or other fund managers.

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