Free Marketers under threat from the left

8 Dec 2015

Numbers that are likely to change in the world in the light of rapid change (Taken from The Economist 3 – 9 October 2015 in the Schumpeter column headed “Capitalism and its Discontents”)
Political parties on the left have gained prominence. Jeremy Corbyn a hard-left leader now leads the Labour Party in Britain.  In Greece Syriza has won two successive elections under the leadership of Alexis Tsipras ; in Spain Podemos is set to make big advances in the December general election.
No numbers are being recorded in the above, however, the numbers of votes will be evidence of change.
Discontent with capitalism is the reason given, for the move to the left:
  • Free market is being criticized as an illusion.
  • Big companies are acting as rent-seeking monopolies with politicians being lobbied for special favours and tax breaks.
  • Huge pay packages paid to the boss class regardless of success or failure.
  • Martin Winterkom, the departing CEO of VW after the nitrous oxygen emissions debacle, is rumoured to be receiving a pension plus severance package worth €60m, ($67m).  In discussion with Germans recently they flatly deny that this could happen in Germany.
  • Power of ownership – in a Gallup poll of confidence in American institutions, big business came second last only beating Congress.  Only 21% expressed confidence in big business.
Free Marketers fought back
  • The problem is with corporatism rather than capitalism.
  • They argue the best way to solve the problem of bad capitalism (monopolies and cronyism) is to unleash the virtues of good capitalism (competition and innovation).
  • They give the following evidence of change:
  1. The average time a company spends on the Fortune 500 list has fallen from 70 years in the 1930’s to 15 years today.
  2. The average job tenure of the Fortune 500 CEOs has gone from 10 years in 2000 to five years today.
Speeded-up creative destruction and its consequences
The challenge for good capitalism and the consequences of the speeded-up creative destruction.
  • This speeding up has been the result of globalization and digitalization
  • Successful firms emerge from anywhere around the world, e.g. Skype from Estonia and Inditex from Galicia….many from Silicon Valley, Google, Facebook etc
  • Digitalization allows firms to become huge overnight, e.g. WhatsApp reached 500 million users in five years.  There are many others – Facebook, Google, Uber, etc.
  • The reality of these modern champions ( Start ups) is that they are light on both people and assets.
  • The basic reason for this is digital services which are highly automated and services are outsourced, for example:
  1. 10 years ago Blockbuster had 9 000 shops in America with 83 000 employees, Netflix ( provider of on demand videos and music through the internet) employs just 2 000 people and rents the computer power  for its streaming videos from Amazon.
  2. Of the 1 200 firms that have gone public in the USA since 2000, each firm created an average 700 jobs worldwide.  These firms are ruthless in reinventing and reconfiguring themselves.  This to avoid what happened to AOB and Nokia…..Google’s holding company is now “ alphabet”  Google’s founders’ answer to keeping a broad view on future opportunities.
Rapid change
This causes prosperity on the one side, but job insecurity on the other.  It is a cause for anxiety. Good capitalism argues for employability and not employment as to what matters. This anxiety might cause the shift to the left in politics.
Pro-capitalists argue that the creative side of the new developments outweigh the destructive side.  The power of innovation is being unleashed and competition hopefully prevents monopoly and stagnation.
The following are the positive developments in the new era of globalization and digitalization.
  • The search engines of Google and the likes provide instant knowledge.
  • Smart phones mean we carry a super computer in our pocket.
  • People who do not work regular hours can use Uber or Taskrabbit.
  • Temporary accommodation is being made accessible and reasonable by apps like Airbnb. This is an additional source of income while the cheapness of the price is an encouragement for tourism, combined with Uber – increasing opportunities.
  • MOOC (Massive Open Online Course) is democratizing access to an Ivy League education.
The article ends with pro-capitalists should remember two things:
  1. Good and bad capitalism is not distinguished by the people – they see uncertainty being unleashed while some are wallowing in luxury.
  2. The forces sweeping through the capitalist economy are also sweeping through politics and the old party machines are imploding- old parties can be taken over and new ones built.

    The free marketers, the good capitalists cannot relax  anti- capitalism forces may be on the rise.