Why the current model of free market capitalism is failing SMEs

synbol of capitalism for the richIn the late 1970s the then UK Prime Minister Margaret Thatcher and US President Ronald Reagan both espoused the idea of minimal state regulation and of allowing free market capitalism to reign relatively unchecked in line with the theories of the Nobel prize-winning US economist Milton Friedman and The Chicago School, as it was called.

The assumption was that the weakest businesses should be allowed to fail and only the strongest would survive, which would benefit businesses, consumers and result in strong economies. It also assumed that the private sector would provide everything from energy to transport infrastructure to education at a lower cost than if they were state-funded.

Since then we have seen the 2008 global financial crisis, the introduction of a programme of austerity in the UK, central banks reducing and keeping interest rates artificially low, productivity in decline and a widening of the income inequality gap with increasing wealth concentrated in the hands of approximately 1% of the population while wages have barely risen for the majority.

In March the former governor of the Indian Central Bank warned, in an interview on the Radio 4 Today programme, that capitalism is “under serious threat” as it has stopped providing for the masses.

“It’s not providing equal opportunity and in fact the people who are falling off are in a much worse situation,” he said.

It should be no surprise, therefore, that so-called populist and nationalist movements, largely seen as extreme right or extreme left, have been on the rise across Europe as much reported in Italy, France, Germany and UK and also in the “Make America Great Again” USA.

Indeed, as the columnist Bagehot had reported in the Economist the previous June, that something is wrong with the current model has begun to be recognised in Conservative circles, notably by Michael Gove, who, he said, was lamenting: “the failure of our current model of capitalism to deliver the progress we all aspire to”.

The implication is that there is both “good” and “bad” capitalism and that the current situation is far from good.

What are the implications of “bad capitalism” for SMEs?

Top investor, influencer and author of Principles, Ray Dalio, Co-Chief Investment Officer & Co-Chairman of Bridgewater Associates, L.P. in New York, has produced a detailed analysis of the effects of what has gone wrong and how capitalism should be reformed.

He says: “Over these many years I have .. seen capitalism evolve in a way that it is not working well for the majority of Americans because it’s producing self-reinforcing spirals up for the haves and down for the have-nots.”

Dalio also argues that while necessary in 2008 the results of the Central banks’ actions have been to drive up the prices of financial assets focusing investors on financial returns in the short term at the expense of investing for the longer term.

While his focus is on the USA, much of his argument applies to the UK also, in the outcomes being a rise in rent-seeking investment, which puts nothing back into businesses, the economy and society, a race for higher and higher CEO pay, short-termism and a marked lack of highly-educated and skilled young people coming into the workforce.

All of these make it increasingly difficult for SMEs to thrive and grow.

What is needed, he says, is a re-engineering of the capitalist system, to better and more fairly divide the economic pie and to have a system of accountability that makes clear whether individuals are net contributors or net detractors to society. It also needs income redistribution by taxing the richest and using the money to invest in the middle and the bottom primarily in ways that also improve the economy’s overall level of productivity.

One Response to “Why the current model of free market capitalism is failing SMEs”

  1. Chris Grunsell

    Tony, I’ve read the article with great interest. It all makes sense, particularly the net contributors and the net detractors,
    Fraudulent trading, Directors responsibilities and a better understanding of basic business economics are all subjects close to my heart. It’s far too easy to hind behind the corporate veil, set up a business on a wing and a prayer and hope it will succeed. As we all know many loose their shirts, and screw creditors, the largest one being HMRC who help pay for doctors and nurses, etc.
    So wanting to be a Net contributor, my suggestion to the debate is to require all company directors to deposit or insure against business failure. All business directors should hold a certificate of basic business understanding and ensure it is is kept up to date and noted at Companies House, as such. Should the business fail then then each director has something at stake and will share the pain of failure with creditors.
    I suggest £5,000 per director, per company, otherwise the corporate veil will not be protection against unpaid creditors.

    Reply

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