How to fix capitalism

The recession and the crisis and banking are the least of the reasons for thinking that we need reforms. the crisis of capitalism goes much deeper: the influence big business has on governments (and the warped policies this leads to), increasing central control of the economy and the general move away from free markets.. I have some modest proposals on how to fix capitalism.

Break up monopolies and oligopolies

Under existing competition (anti-trust in American) laws, it is necessary to prove abuse of the monopoly. This allows a business to avoid competition, because it has not been proved to have used particular practices. Competition may be locked out (for example, by network effects) and consumers may suffer from a lack of innovation or product quality, but none of that is illegal.

The solution is to assume that monopolies are harmful and should be broken up. Either this should be an invariable rule, or it should be up to the monopolist to prove that the monopoly is somehow beneficial. An exception should be made for natural monopolies, but the price of that should be tight regulation, nationalisation, or (best of all) mutualisation.

That still leaves the problem of olgopolies. The answer is simple: break up any company with enough market share to have a noticeable influence on prices — say more than 5% nationally or 10% at a city/county level. Again, they would need to make the case of exceptions.

Doing this would also mean that there would be no “too big to fail” banks, so a financial crisis would be easier to solve: let them go bust and nationalise the assets and liabilities.

Remove barriers to entry

  • Abolish patents. They have not been proven to speed progress: the evidence seems to be to the contrary. They definitely increase costs, are an inefficient way of funding R & D and allow oligopolists to block competition.
  • Reduce the copyright term to the optimal length suggested by research of about 15 years. It ought to be obvious that works produced in the reign of Queen Victoria should not be in copyright in the 21st century.
  • Exclude works distributed with DRM from copyright to ensure that copyright works do fall into the public domain when the copyright expires.
  • Reduce the copyright term on computer software to two years, and make copyright contingent on disclosing source code (so others can alter the software when it comes out of copyright).
  • Abolish region of origin rules. It should be legal to describe a Cava (when selling it) as having been made in the same way as Champagne.
  • Abolish unnecessarily restrictive licensing. Many US states require people to be licensed to work as interior designers or hairdressers. I can understand requiring doctors or auditors to be licensed, but these are just barriers to entry.

Reduce bureaucracy

The best example of the problem (or opportunity from his point of view) that I have heard, is something Ted Tuppen, the founder and CEO of the huge British pub chain Enterprise Inns, said. I may not have got the wording exactly right, but, as I remember it, it was:

There will always be pubs available to buy because owners of free houses are driven out of the business by the amount of bureaucracy.

Small businesses cannot cope with tight regulation. Big businesses can hire teams of lawyers and paper-pushers. This is one of the many problems with patents. The government, far from discouraging oligopolies, is actually encouraging their formation.

Stop being “business friendly”

People seem to be thinking much less clearly about this now than they did in the 18th century. Back then, the business friendly ideology was called “mercantilism”, and it was this was the primary source of opposition to free markets. Now, governments profess to be in favour of free markets and “business friendly”.

Of course, businesses sometimes want free markets, for example they do not want to regulated. On the other hand they also want to minimise competition, reduce costs, receive subsidies and form cartels. Businesses are usually in favour of free markets in general, but not in the specific case of their own industry.

The new mercantilism is the root cause of the problems most of my other proposals seek to solve. It has also lead to a failure to regulate properly. The obvious examples are the clear failures in the regulation of banks (such as allowing deposit takers to have high risk investment banking operations), but there are others: the US broke up Standard Oil and AT & T, but failed to break up Microsoft, reflecting the general trend towards letting businesses do as they like.

New mercantilism has dropped the one aspect of the 18th century form that I find has some redeeming features: economic nationalism. Democracy is compromised by the economic pressure tyrants can bring in a globalised economy. I also find it extremely odd that governments will minutely examine an applicant for a holiday visa, but allow a dubious foreign tycoon to gain great influence within their country by buying influential businesses.

New mercantilism is dishonest. It does not openly oppose free markets. Instead it relies on conflating free markets with capitalism.

Financially penalise large businesses

This idea is simple. Tax big companies more. This will discourage mergers except where there are clear gains. British tax law already has lower rates for small companies, but this does not go far enough. The rates should keep increasing as companies get larger (at the moment there are no further increases on companies with profits greater than £1.5m: I would suggest bands at say £15m, £150m and £1.5bn as well). Obviously, we would need similar systems in all major economies.

The size criteria should not be based on profit. It should be based on value added: so a big company that has a bad year would not see its tax rate reduce (obviously taxes paid would do down in proportion to profit).

Give shareholders control

Shareholders are supposed to the owners of a company, but in the case of large listed companies this control is limited. This does lead to problems:

  • Shareholders have to resort to expensive and disruptive means such as accepting hostile takeover bids to replace incompetent management — this also tends to encourage consolidation where there is no real economic benefit.
  • Management have an incentive to focus on the short term. They can take their bonuses and leave, while accumulating problems for the future.
  • Management tend to overpay themselves. As J.K. Galbraith said: “The high salary of the chief executive of a large corporation is not a market reward for achievement. It is frequently in the nature of a warm personal gesture from an individual to himself.”
  • Management indulge their egos, buy engaging in exciting takeovers, and risky businesses, rather than getting on with the humdrum but reliably profitable. It is impossible to prove what people were thinking, but it is hard not to believe that this contributed to the destruction of GEC/Marconi

Reject the corrosive “greed is good” ideology

Adam Smith never intended that the idea of the “invisible hand” should be interpreted as meaning that people should pursue their own interests, and that this would lead to an optimum outcome. He wrote extensively on morality.

The reason for those troublesome bonus schemes for directors is that it is assumed that they would not run the company as well as they could unless they were “incentivised” with payments for success. This contradicts management theory: Herzberg classifies pay as a “hygine factor”, a poor motivator compared to, for example, job satisfaction.

What is even worse is that by telling people that they are expected to be selfish, they become more selfish. Economics students become more selfish because they are repeatedly taught to expect that people are rational and selfish: the association between the two can only strengthen the effect.

Society is permeated, especially in business, politics and economics, with the idea that is people pursue their own interests, this will automatically lead to the best outcome, and that, therefore, people should be selfish. This cannot be fixed by endless incentives to align interests: life and business is too complex for that to work. A free market is not a substitute for integrity.

Break the loop

What matters most is the rejection of the new mercantilism, which will at least stop things getting worse, but we still need to undo the legislation and the structures that have been put into place at the behest of the mercantilists. The two go together: the rise of the new mercantilism is partly the result of the lobbying power of large corporations. Break them up and reduce their power and they lose their influence.

Education is also important. Most people cannot, at the moment, distinguish between capitalism and free markets, or see the parallels between the original and the new mercantilism.

Edit 23 Nov 2009: I have fixed some typos and written a follow-up that addresses some of the points that have come up in discussion.

28 thoughts on “How to fix capitalism

  1. Thanks Charles and Alan. Please note that it is under a Creative Commons attribution non-commercial no derivatives license so it can be reproduced by most blogs and other websites as long as you link back here. Commercial is OK as long as people do not have to pay to read it.

  2. Nice article. I can’t really find anything solid I disagree with. I’ve been indoctrinated with more extreme views (like no copyright at all), and this system would be a much-welcomed slide toward those and a hell of an improvement on the current system.

    [paragraph removed because it referred abusive comments that I have now deleted so no longer made much sense]

  3. I agree with that as a one line summary. Another is “make the real economy work like the textbooks say it should”. The problem is that if you say that, everyone who matters will claim they are doing it already.

    I am also suggesting some regulation: the market fundamentalists claim that breaking up even blatantly abusive monopolies is excessive regulation.

  4. Why not come up with a new label other than capitalism? It’s going to be hard to convince people that fixing capitalism isn’t reinforcing new mercantilism when many have made the two synonymous with each other for the last century.

  5. The problem with abolishing patents is that people who develop physical goods are going to have serious problems. Look at the history of the intermittent windshield wiper. If there are no patents we go back to industrial espionage and small inventors of physical objects get shafted. A reduced length of patents and a restriction of scope would probably be better.

  6. Jason, you have a point, but can it be done? I think we have a better chance of re-labelling “bad capitalism” neo-mercantilism. At least there are some historical associations to build on.

    Sebastian. Thanks for mentioning the wind shield wiper example. I did not know about it. I am open to the idea that it may be worth retaining patents for mechanical inventions, but I think its up to the advocates to show that the benefits (the extent of which is unproven) will outweigh the costs (which are very clear). Impeding competition is not justified without a clear proof.

    If we are to just restrict scope, the minimum needed is an end to patents other than on mechanical devices: on software, pharmaceuticals, business methods, DNA, manufacturing processes etc.

  7. Why make a difference between copyright on software and all other copyrights by reducing copyrigt for software to two years and the rest to fifteen years?

    And what about open source software? Do you want to put them to public domain after two years? Why? What is wrong with Open Source licensing for software? Where did it fail? It must have since you make no difference.

  8. The reason I suggest a shorter copyright term for software, is that it has a shorter useful life: people want to read books that are 15 years old, but people rarely run 15 year old software.

    I do not think the shorter copyright term will make much difference to open source. I propose that all software covered by copyright would have the source disclosed anyway, and I do not think that it is practical to distinguish between open source and non-open in legislation (is Affero GPL open? is MS shared source open? BSD license with the no-advertising clause? Non-commercial use licences?).

  9. Breaking up any company with over a certain small percentage of market share is going to imply the need for strong standards for inter-op. Consider Microsoft, part of their strength is the common platform they provide for application developers to release their software. While Linux provides the same, it doesn’t have the market share, requires a greater mental investment.

    Furthermore, does regulating the “maximum size” of any one company imply regulating the use of ideas? Consider google, built on the idea of search linked with ads. By regulating their market share a company like google would probably not exist.

    You make some interesting board points, but it’s a minefield.

  10. Nicholas, it is a minefield, but so is current competition law. Google and internet services in general need to be dealt with differently as I acknowledge in the follow-up post.

    If MS was broken up, the resulting companies would have an strong incentive to maintain inter-operability. I think Linux demonstrates that multiple non-dominant players (i.e. Linux distros) remain inter-operable.

    If you also take into account my proposals on copyright, it will be very hard for anyone player to block inter-operability.

    I am not sure what you mean by Linux “requires a greater mental investment”. Do you mean that Windows developers need to learn a new platform? That is a one-off cost, and would not apply to a fragmented Windows.

    Ani, my problem with anarchism is that I do not believe it would be stable.

  11. I think we should bring back time-limited corporations. Part of the problem these days is the immortality of these things. They should die, and a particular date of death should be agreed upon in advance, and should only be amended to be sooner.

  12. This “fixes” Capitalism in the same manner as “fixing” a cat. Pretty much ensures it won’t reproduce. Capitalism is the only moral option available when it allows people to freely determine exchanges with other free people. Government intervention should be strictly limited to supporting intellectual property rights (arguably not in the present manner of a broken patent & copyright system), enforcing contracts, protecting against fraud/use of force and NOTHING ELSE. The rest of what you describe only increases government intervention, reduces freedom, and therefore, reduces moral options. These extra interventions basically created the very mercantilism system you’re complaining about. Get rid of the government intervention and see Capitalism restored – or actually given a fair shot for the first time in a century.

  13. What I suggest will create and maintain vigorous competition. How do you propose to prevent the formation of cartels and monopolies?

    I would say that the US economy was very successful at the time it vigorously enforced anti-trust law: a long period that runs from at least the break up of Standard Oil in 1911 to the breakup of AT & T in 1984. It had certainly ended when Microsoft got a slap on the wrist for blatant and extremely harmful abuse of monopoly.

  14. @Christopher

    There was a time when it was a real PITA to find commercial software support for distributions like Debian. Without a standard, whether created or implied, it is hard to be efficient. Give the section in “False Ecomony” by Beattie on standardies containers a read.

    Personally I think we should side step the issue and focus on new concepts. Concepts like disposable computing.

  15. Nicholas, I think you are replying to my comment, not Christopher’s (names are above comments).

    I can see that you need a certain critical mass for things like commercial support: but I think that if MS’s share of the OS market was split among ten players each would have enough critical mass. Not having a single dominant supplier would also encourage standardisation though agreement and adoption of de fact standards (especially if it as all open source).

    Beattie’s book looks worth a read. Thanks for the recommendation.

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