There have been many criticisms of capitalism in recent years. These were mainly attempts to get rid of neoliberalism that relied on the solving power of the free market.
In practice, many neoliberals have distanced themselves from the idea of a “natural” free market. For these neoliberals, the market exists thanks to a government that regulates property rights, makes provisions for international trade and also fuels the competitive spirit. Everything and everyone has to compete with each other, even in terms of utilities and the welfare state.
However, it is not easy to fully liberalise the market mechanism. This is because the market has been transformed by monopoly positions and cartel agreements, something that is precisely where the government does not intervene enough. Also, people do not act rationally at all and need to be protected from themselves more than once. For instance, it takes a government to guarantee a pension for everyone.
Since the rise of neoliberalism in the 1980s, the size of government has grown spectacularly. According to Keynes’ original idea, the government should save extra during good times so that it could be spent during recessions. While that spending succeeded, saving did not. Thanks to government deficits, the economy was constantly stimulated. Rising debts made the government dependent on the “free” market. After the 1987 crash, the central bank first came to support the market and it became less free as a result. In the following years, this escalated further until, in 2008, interest rates could not be cut any further and central bankers had to resort to unconventional monetary policy.
Just more rules
Neoliberals also regularly talked about deregulation, but on balance, only more rules have been added. As a result, we are now far away from the original capitalism. This also means that the criticism of capitalism is more a criticism of the consequences of too much government, too many rules and a non-functioning free market. And that is more reminiscent of criticism of socialism or, if you like, communism.
The strength of capitalism is the prosperity it brings. That capitalism - like democracy - deserves to be nurtured. The crisis of capitalism now lies mainly in an overactive government. The major shortcomings of this new interpretation of capitalism - such as slower growth, which is also less equitably distributed - are growing. Fed chairman Greenspan prided himself on flattening the cycle, but with the prevention of a recession, the subsequent recovery also flattened. The result was a slowdown in productivity.
The cause must be sought mainly in an environment where companies are surrounded by lots of regulations and high debt. An environment where large monopolies and oligopolies are rampant because of their relationships with the government. Three out of four industries today are oligopolies, and then again those of the bad kind, which survive by lobbying regulatory bodies to eliminate competitors instead of innovating.
Zombies
Government is now there for everyone and everything. Welcome to the communist holy state. With all these deficits and mounting debts, companies are kept afloat that do not earn enough to even cover the interest payments on their debts. They can only survive by taking on new debts. Until the turn of the millennium, such companies - under the guise of zombies - existed only in Japan. Now, one in five listed companies in the United States is a zombie. They are weak and unprofitable, yet they get in the way of rivals in the same sector. Such an environment with big monopolies and oligopolies on one side and zombies on the other is not one in which creative destruction can do its work. There is no longer a market and hence no capitalism.
Unfortunately, this process is reinforced by passive investors. For passive investors, it does not matter at all whether a company innovates or can start earning much more. All that matters is the company’s weight in the index and thus they benefit from the work of active investors. But those active investors have less and less influence on the composition of the index. Zombies, monopolies and oligopolies are mostly maintained by passive investors.
Free again
It is now up to governments to free up the market again. During a recession, governments may well help the unemployed and ensure that capital markets continue to work, but they should then stop stimulating during recovery periods. Companies should simply be allowed to go bankrupt again. Stop searching for the utopia of endless growth. Less regulation, less government and let the invisible hand of the free market do the work again.
Han Dieperink is chief investment officer at Auréus Asset Management. Earlier in his career, he was chief investment officer at Rabobank and Schretlen & Co. His column originally is published in Dutch on InvestmentOfficer.nl.