The problem with capitalism is democracy
The rich and powerful at Davos debated capitalism today with a defense that invoked Winston Churchill’s famous dictum on democracy. “Democracy,” Churchill told the House of Commons, “is the worst form of government, except for all those other forms that have been tried from time to time.”
Carlyle Group Managing Director David Rubenstein suggested in his historical comparison is that capitalism is not perfect but it’s the best we’ve got.
While the Time Davos panel, entitled “Is 20th century capitalism failing 21st century society?” acknowledged a desire to reduce inequality, there was a shrug of resignation about the way forward and an absence of solutions.
Indeed, one business member of the panel, pressed by a question from the audience, acknowledged there was only so much they could fix in a 90-minute panel. That may go to the heart of the World Economic Forum annual meeting itself: while it admirably raises the attention of complex issues by debating them with the media world watching, it can’t be expected to resolve them in this snow-capped Swiss town.
And it couldn’t in a forum like this which was, as Alcatel-Lucent CEO Ben Verwaayen grumbled, a “battle of nostalgia.”
It was an outdated debate which started in spirited form when Sharan Burrow, general secretary of the International Trade Union Confederation, accused business leaders of “losing their moral compass” and urged them to “stop the greed”.
“The right debate is about how we get the innovation and creativity we need,” Verwaayen countered. “We need to talk about innovation, real sustainability and reforms – not about corporations and greed. It’s about decision-making. We have to go for transformation. We have to talk about job creation, not job security.”
The only consensus, in fact, was on the need for enhanced education to provide the skills necessary to compete in the global marketplace for talent.
Is more regulation the answer? Needless to say, the business response was no. Rubenstein insists that capitalism doesn’t have the ability to modulate risk and reward and that it has not solved economic disparity in boom and bust cycles. The answer, then, he said, is not the need for more regulation but rather more clarity on what exists. Case in point: the taxes paid by U.S. presidential candidate Mitt Romney, whose rate is below that of most Americans. Rubenstein says Romney, and the rest of the 1%, is paying what he should. The problem is with the tax rate and not with its application. If you don’t like the law, change the law, he said to the applause of several in the hall.
There are only two options, according to Raghuram Rajan, professor of finance at the University of Chicago: one is western-style capitalism, which stumbles in countries like Spain and Greece when incumbent businesses and commercial frameworks are too protected to be competitive. While state-run models can be effective at creating jobs, as in the case of China, state corporations tend to be “miserable” at executing capitalism efficiently. While western countries have a large number of innovative companies, demand is shifting toward the emerging markets. And activity will start to move there, Rajan said.
Finally, Rajan complained the “too big to fail” argument for banks was a “travesty of capitalism”. But Brian Moynihan, CEO of Bank of America, argued that the fortunes of banks reflect the fortunes of the broader economy as they are the conduits of capital. That said, Moynihan did acknowledge some errors in the ways of bankers. “We’re running institutions differently,” he said. “We bear the scars and will bear the scars for a long time.” However, he added that he couldn’t predict whether that would keep banks from engaging in risky practices any time soon.
A bit of contrition — but no guarantees. Future Davos panels may well invoke the same Churchillian dictum to say capitalism is not perfect, but it’s the best we’ve got.
PHOTO: Visitors attend the World Economic Forum (WEF) in Davos, January 25, 2012. Picture rotated 180 degrees. REUTERS/Christian Hartmann