Harry Geels: The crucial fallacies of capitalism's criticasters

April 9, 2024

^{This column was originally written in Dutch. This is an English translation.}

By Harry Geels

Last week, economist Michael Jensen, who, together with William Meckling, wrote the most cited 'corporate finance paper' ever, died. A paper praised by its supporters, but abused by capitalism's criticasters. Those criticasters make three errors.

A lot is being written about alternatives to the capitalist system nowadays. It is said to no longer be sufficient, or indeed, to be the root of all evil, the cause of both inequality and the climate crisis. For example, a few months ago De Volkskrant started a series of interviews with critics of capitalism with the main question: 'Is there an alternative to capitalism, or can it adapt to the needs of a new time?' A storm of 'capitalism bashing' is also raging on social media.

For instance, in recent years there has been regular reference to the YouTube video Life After Capitalism, which claims that people are brainwashed by capitalist propaganda and that capitalism merely pursues growth and profit at all costs. Anti-capitalists have been targeting Michael Jensen for years. His paper, co-written with William Meckling, is said to have caused the 'dissemination of immoral profit strategies [of large corporations].'

However, 'capitalism bashing' is built on loose sand for three main reasons.

1) Capitalism is not well defined (it doesn't even exist anymore)

The first omission of capitalism's criticism is that they have a narrow view of it. As previously argued, there is a Babylonian confusion surrounding the term 'capitalism'. There are actually different forms. Some of them, like 'crony capitalism', aren't even capitalism. The current system can rather be described as a 'corporatocracy' or 'corporate welfare state', in which (too) large companies set the agenda. We are even approaching an oligarchy. We currently have a socialist rather than a capitalist system.

2) Then the (supposedly capitalist) system is attacked for unintended effects or excesses

It is a frequently used strategy in debates: appointing a guilty party (scapegoat) for the many problems, because it seems so easy and plausible. Usually it is much more complicated. Fortunately, Michael Jensen's work was rehabilitated by a number of analysts before they died. For example, it is not wrong to maximize shareholder value, provided we properly define it as long-term value and not as short-term profit based on stock prices. With a long horizon, the company must take good care of its employees and the planet.

Other things that help combat the excesses of corporatocracies or oligarchies are: stricter anti-competition rules (countering oligopolies), making directors owners for the long term, using non-financial targets, 'proxy voting', using maximum factors for pay differences between top executives and employees at the bottom of the company, better (accounting) reporting (not only financial numbers, but also qualitative data and narratives), and the abolition of 'rulings' between large corporates and tax authorities.

As an aside, interested parties should also read Alex Edmans' long-read about Jensen, entitled 'What Stakeholder Capitalism Can Learn From Jensen and Meckling'.

3) The case is turned around ('fallacy of the wrong cause')

The third omission of the critics of the current system is more political-philosophical in nature, namely that the major social problems that we know, for example inequality, are from all ages, as also explained in Plato's Politeia. The famous Greek philosopher also describes the concept of the threefold soul, which consists of the rational, the animated and the desiring parts, and that the rational part must control the other two parts, including the desiring part, which controls our desires for different pleasures.

Plato suggests that as human civilization advances and individuals gain greater control over the outside world through technology and material progress, the opportunities to satisfy our desires also increase. Although political-economic systems as we know them did not exist during Plato's lifetime, the ideas from the Politeia can be applied to the way people in modern societies deal with material prosperity, consumption and competition.

If people are primarily guided by (increasing) satisfaction of needs, this can lead to depletion of the earth and inequality, which in turn causes all kinds of other social problems, such as social unrest. It is therefore man himself, not the system that arises from human nature, that is the root of the problems, problems that are becoming more acute nowadays due to the enormous growth of the world population, with the associated problems that are expanded through social media.

The spirit of capitalism is not inherently wrong

The much-discussed system change not only requires (as described in point 2) measures to combat excesses, but also a political-philosophical view of how humanity works. Not only Plato had already understood this, but also the founder of capitalism Adam Smith. In The Theory of Moral Sentiments, Smith describes the importance of moral principles, emphasizing empathy and temperance in guiding human behavior and promoting the well-being of society. Capitalism and 'humanity' can go well together.

This article contains a personal opinion from Harry Geels

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