Capitalism


I want to talk today about capitalism, the
economic system we all participate in. The economy is probably the biggest single influence
on how we live our lives. So, imagine that you live in a society where you practice slash
and burn agriculture meaning using hand tools like machetes and axes you chop down a forest
and then burn everything that is left until you have a rich soil in which you grow your
own food. Another dominant mode of economy is pastoralism in which people get their food
from animals, and the job here is to move the animals around finding adequate food and
water. In intensive agriculture with hand tools like what we see practiced still very
widely today in Asia, people very intensively farm large plots of land in order to grow
enough food. Unlike slash and burn where you move from plot to plot, you essentially burn
the forest down and it is regenerated, in intensive agriculture you stay in the same
place and so you need highly labor intensive methods to get productivity out of the soil.
Moving ahead we then moved production into factories so now people are not growing their
own food or producing their own goods. Things are mass produced, and in today’s world we
have designed machines to do much of that labor. A good definition of capitalism comes
from Benjamin Franklin who said, “Money can beget money, and its offspring can beget more.”
Now, this sounds a little obscure, but what Ben Franklin was saying was that capitalism
is a process. It is a matter of accumulating wealth. It is a lively ongoing dynamic system.
It’s not a thing or an object. One of the benefits of capitalism is that it has been
able to provide goods and services to a lot of people. Now, we still have a lot of poverty
in today’s world, but compared to feudalism or Soviet Russia or pre-capitalist China,
millions and even billions of people can share in the wealth and it is no longer only small
numbers of elites who have things like consumer goods, easy access to transportation, a varied
diet, central heating and a cheap means of communication. Now this is much more widespread.
However, today’s capitalism is experiencing some problems, and I think they are illustrated
nicely in this graph. So, you see that kind of almost flat straight line on the bottom?
That is wages since 2008, the date of the Great Recession, and above that you see the
wiggly ascending line and notice that there is more and more white space between wages
on the bottom and the profits on the top. So, wealth is not being shared as much as
it could be. We see symptoms of these problems of capitalism all around us. So, there are
payday loans. These are loans where you are charged about 500% interest and people only
use them out of desperation, and they often try to pay them back or part of them on their
payday hence the name payday loans. There are lots of student loans. Probably many of
you are quite familiar with that. When I went to UC Berkeley it was much, much cheaper than
what you guys pay. The education I think was basically the same as what you’re getting,
but it cost a lot less. Even when my two oldest children went to UC Berkeley and UCSD I paid
a lot less for them than what you guys are paying now. So, this is a problem of capitalism
that we are not able to reinvest our wealth in fundamental services like education the
way we were in the past. If you look at household net worth, you see that in the graph there
on the left, it is declining and so this is a pretty serious symptom of what our capitalist
system is going through right now. Now, I think the main problem of capitalism is not
production, but distribution. We are pretty good at producing things, and we’re getting
even better with more sophisticated forms of automation and with robotics, but we can’t
seem to distribute the wealth in a way that is equitable and this is a recipe for a major
global disruption. One of the problems is that capitalism is hard to control. Its strengths
are also its weaknesses. So, it’s flexible, it’s energetic, it’s dynamic, it’s innovative,
but this means it’s hard to intervene in capitalism when problems start to arise. There is no
simple point at which you can make a change because capitalism is moving very fast. That
is its very nature. Now, we have what I call “winner take all” capitalism. There are different
varieties of capitalism. We’re going to talk about a few of them. What we have now is where
the winners, or the owners and the managers of the corporations, are pretty much taking
all of the profits. We’re not reinvesting them in education as much as we should. We’re
not sharing it with the workers. That’s what we saw with that graph where we saw the divergence
between wages and the profit. There is a new book called “Capital in the Twenty-First Century”
by Thomas Piketty. You may have read about it online. It has gotten a lot of press. I
probably wouldn’t actually try to read it. It’s 700 pages and it’s a whole bunch of data,
but he makes a very good case for this continuing economic income disparity noting that wealth
is concentrated in fewer and fewer hands. Now, in the IT sector we especially find this
“winner take all” kind of situation. You know these companies. We all use their products
every day and there are fewer and fewer of these companies controlling more and more
money, and also collecting more and more power. So, if you are Google you can afford to acquire
YouTube. YouTube used to be pretty big just on its own. If you are Microsoft you can afford
to acquire Skype. So, the wealth and power tends in our current system to concentrate
in the hands of a few big companies. But, there are other forms of capitalism. There
is something called the Public Benefit Corporation or B-corp. You still have profits and you
still have shareholders, but there is a different legal basis for this type of corporation.
We also have employee-owned corporations where the employees share in the profits as well
as sharing in the risks. So, in conventional capitalism what we mostly have, the corporation
is accountable primarily to the shareholders and the goal is to maximize the value of the
shares for the shareholders, and this is actually a fairly new idea dating only from the beginning
of the 20th century. If you noticed on the Ben Franklin slide he was actually talking
about the beginning of capitalism which occurred in the middle of the 18th century, and at
that time shareholders and providing value for them were not such an important aspect
of capitalism. It was more about finding ways to produce and distribute goods widely. Now,
in the public benefit corporation the corporation is accountable to the shareholders as in conventional
capitalism, but also the people who are affected by the corporation’s activities. So, if you
remember the lecture on fracking and the impact of fracking on the local communities, this
is the kind of thing that were the fracking companies to be B-corps they would be responsible
for, and each B-corp has a specific public benefit purpose that it is accountable for.
So, the goal here is to monitor and be accountable for the impact of the investment the company
is making, and not just the return on investment. The idea is to use market forces to solve
problems. Now, in employee-owned corporations employees are given shares in the company
and they are therefore motivated to do as good a job as they can, and they’re also looking
out for the risks that the corporation may be undergoing because they will share in that
risk as well. A company could be a B-corp as well as employee owned at the same time.
Now, the consequence of taking your company to a B-corp or to an employee-owned corporation
is that it tends to distribute the wealth among more people instead of consolidating
it in the hands of a few. So, I see these as important future means of reorienting and
reconfiguring our economic system if we want to stay with capitalism which probably most
of us do. These kinds of companies can be profitable, they’re just not as radically
dramatically profitable as in conventional capitalism. So in conclusion, a greater mix
of different kinds of capitalism, different forms of capitalism could mitigate some of
the problems of income inequality that we’re seeing in our current “winner take all” capitalism.
For reading, as I said Piketty’s book is about 700 pages, but there are a lot of really good
reviews online and I urge you to read them. Thank you.

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