Martin Wolf on Capitalism

Give Bill Gates, Mike Kinsley, and Conor Clark credit: if their Creative Capitalism project achieves nothing else, it has certainly brought into being one of the most interesting, diverse, and provocative group blogs on the internet. And Martin Wolf's tour de force this week, hidden under the bland title "Profit-maximization as the sole goal of a corporation", is one of the best blog entries I think I've ever read.

There's nothing very new here. But in the space of barely more than 1,000 words, Wolf manages to digest and clarify an astonishingly broad range of thought about what capitalism is, can be, and should be, under different systems around the world. I wouldn't dare try to summarize Wolf's essay any futher, so just go and read the whole thing. But here are some excerpts, to give you a taste:

By creating a competitive market for corporate control, we more or less force companies to maximize shareholder value, or at least behave in ways that the market believes will lead them to do so...

A company is viewed in the Anglo-American world as a bundle of contracts. But companies are also social organisms created by a highly gregarious mammalian species with a unique capacity for large-scale co-operation over time and space. Companies have cultures and histories. For many of those most closely associated with them, they also have (and offer) a certain meaning. Committed workers in successful companies do not work in order to maximize shareholder value or even to earn the largest possible living. Indeed, it is impossible to direct most companies solely by the goal of profit-maximization. (Goldman Sachs may be an exception.) ...

The idea that a company is an entity that can be freely bought and sold is culturally specific. It is the view, above all, of Anglo-Americans. It is not shared in most of the rest of the world...

In this perspective, shareholders are not genuine owners. They contribute nothing of value to the competitive strengths of the firm, enjoy the benefits of limited liability and are well able to diversify the risks they run. They are merely an (ever-shifting) group of people with a claim to the residual incomes. Those with the biggest (undiversifiable) investment in the firm -- and thus the greatest exposure to firm-specific risks -- are not shareholders, but core workers. The interests of the latter are, therefore, paramount.

As Wolf himself admits, none of this is particularly relevant to Gates's conception of "creative capitalism", beyond the simple fact that you can't think clearly about creative capitalism without knowing what capitalism is. As such, this blog entry demonstrates one of the key strengths of the Creative Capitalism blog: It isn't confined to discussing Gates's ideas, but ventures much more broadly than that. It'll be very interesting to see how many of these excellent but arguably off-topic entries make it into the published book version of the blog.

 

Comments

[Shareholder...:]

To be honest, his views are hardly unique (the come from an approach that emerged in the 1980s known as the resource based view of the company, and his fellow countryman John Kay has expounded these earlier, for instance). But Wolf does make a very good short summary.

It might be somewhat surprising that we agree (we run a website called shareholdersunite), but that market for corporate control is not working very well, and management greediness is really endangering those hard to enforce relational contracts with the employees, threatening to destruct much of the social capital that enables smooth cooperation and coordination with it. Shareholders have a role to play here, keeping managers in check.

shareholdersunite.com

2008 Aug 19 05:34 PM

[bbzz24:]

... and herds are being formed by the ones who can't survive on their own: the chance of being hunted in a group is statistically smaller than when on your own...

2008 Aug 20 02:26 AM

[notsosmart:]

all a joke. im sure bear sterns had many good hard working employees who as much control as the shareholders(or suckerholders as i call them).capitalism may be the best system but its far far from perfect. not even close.as it gets more infiltrated by scammers & crooks(who know they wont be caught) it will erode.how it will end i dont know.

2008 Aug 20 10:43 AM

[Alex Filonov:]

Well, in Anglo-American world we at least didn't have 19 years (and counting) of depression... Scammers and crooks are always here (and there, too), just read O. Henry. My approach is from self-regulation. Any self-regulating system needs negative feedback. That's market. Everything else is just frothing. Yeah, losing a job can be tough (been there), but to work in Japanese-style company, with lifetime employment? Hell no, thank you. But it's just me.

2008 Aug 20 10:31 PM