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Shareholder Capitalism vs. Stakeholder Capitalism
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OAW
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Jan 13, 2012, 04:18 PM
 
In a presidential primary season distinguished so far by the absence of substantive debates, the controversy over whether Mitt Romney and his partners at Bain Capital should be considered job creators or job destroyers raises a profoundly important issue.

Beyond the concerns about the loss of American jobs to off-shoring or automation and the food-fight tactics of Romney's rivals is a legitimate question about what kind of capitalism 21st century Americans should want.

The choice is between "stakeholder capitalism" and "shareholder capitalism." According to the theory of stakeholder capitalism, corporations are and should be quasi-public entities with responsibilities to the nation-state and to the communities in which they are embedded. The corporation should make a profit and provide a fair return to investors. At the same time, workers who contribute their labor to the company have a legitimate interest in it as well as investors who provide capital. Managers serve the company and the country, not merely the investors.

In the theory of "shareholder capitalism," the corporation exists solely for the purpose of the investors, whom the managers serve as agents. In shareholder capitalism, short-term profits are the only goal, and if that means laying off workers instead of retraining them or reassigning them, breaking up the company and selling the assets to enrich private equity partners and shareholders, so be it.


The stakeholder conception of the firm is still the norm in Europe and East Asia, as it was in mid-20th century America. But beginning in the 1970s, the shareholder conception of capitalism prevailed in the United States.

From the perspective of shareholder theory, private equity firms like Romney's are promoting efficiency, even as they make short-term profits by dismantling or destroying companies and laying off their workers.

From the different perspective of stakeholder capitalism, the emphasis on short-term profits for investors at the expense of all other considerations, including the well-being of employees and local communities, has been a tragic mistake.

What are the implications? If America continues to favor shareholder capitalism, there is no guarantee that policies to favor American business will preserve or create jobs or help anyone other than investors. On the other hand, if the United States were to move away from shareholder capitalism toward stakeholder capitalism, the law might limit hostile takeovers of companies or require workers and even local governments to have a say in corporate decisions. In some cases this might preserve jobs and factories at the expense of innovation and efficiency.


As a practitioner of the shareholder capitalism of the last generation, Mitt Romney as president would probably support policies that assume that the short-term interests of investors like Bain are identical to the long-term interests of the economy. By the same token, he would probably resist policies that increased the influence of managers, workers and local communities over companies at the expense of shareholders and financiers.

Nominated as secretary of Defense by President Eisenhower in 1953, former General Motors CEO Charles "Engine Charlie" Wilson, a symbol of old-fashioned stakeholder capitalism, told the Senate that "I thought what was good for the country was good for General Motors and vice versa."

Does Mitt Romney, today's symbol of shareholder capitalism, believe that what is good for Bain is good for America? If he wins his party's nomination and this year's presidential election, Americans will find out.
What kind of capitalist is Romney? - CNN.com

I thought this was a very intriguing article. Personally I gravitate more toward the "stakeholder capitalism" model because if the US as a nation is to prosper then a strong middle class is a necessity. Yet a strong middle class is threatened when businesses only concern themselves with how the next fiscal quarter's earnings report will look to the investor class. It's short-term thinking that will eventually threaten businesses themselves because a stagnant or shrinking middle class is less able to purchase the goods and services that they are selling. "Stakeholder capitalism" is more likely to led to increased standards of living in American society than "Shareholder capitalism" which will inevitably lead to a "race to the bottom" of living standards given the wage disparities between the US and Europe and emerging economies like China and India. Thoughts?

OAW
     
turtle777
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Jan 13, 2012, 04:36 PM
 
Originally Posted by OAW View Post
"Stakeholder capitalism" is more likely to led to increased standards of living in American society than "Shareholder capitalism" which will inevitably lead to a "race to the bottom" of living standards given the wage disparities between the US and Europe and emerging economies like China and India. Thoughts?
I would like to see some data and research on that.

My personal opinion: not necessarily true.

The greatest period of standard of living increases in the US have taken place when shareholder capitalism was least restricted and at full force.

Also, mentioning China: their standard of living has been rising over the past decades with INCREASING levels of shareholder capitalism, in almost total absence of stakeholder capitalistic ideas.

I'm not saying stakeholder capitalism doesn't have some intriguing ideas and features. But I definitely don't think that the LACK of it is a reason for our declining standards of living, and that MORE of it will fix it.

The main problem in our country is the LACK of capitalism in the first place.
What we have today is corporatism, and increasingly faschism. That's what's killing our standard of living.

-t
( Last edited by turtle777; Jan 13, 2012 at 04:43 PM. )
     
OAW  (op)
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Jan 13, 2012, 05:11 PM
 
Originally Posted by turtle777 View Post
The main problem in our country is the LACK of capitalism in the first place.
What we have today is corporatism, and increasingly faschism. That's what's killing our standard of living.

-t
I'm curious as to what you mean when you say "corporatism". Because in my mind, the first thing I think of when you say that is "shareholder capitalism". The notion that what's good for big business or corporate shareholders is automatically good for the country as a whole. I figure that's not how you meant it which is why I ask.

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turtle777
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Jan 13, 2012, 05:58 PM
 
Corporatism is Capitalism gone awry.

It's lip-service to capitalism, while it's really cronyism between banking and government elites.

Example: GM bailout. Traditional first-in-line ("secured") creditors were booted out in favor of unsecured, second-in-line creditors (Unions) in order to reach greater government control. Decades of bankruptcy law trashed in an instance.

-t
     
OAW  (op)
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Jan 13, 2012, 06:37 PM
 
^^^^

I found this with a little Google Fu:

Capitalism vs Corporatism

Capitalism is a social and economic system which recognizes individual rights, including the right to own properties and the possession of goods for the individual’s personal consumption. Corporatism, on the other hand, is a form of economy that was created as an option to socialism and intends to achieve social justice and equality without the need to take away private property from individual members of society. It stresses the positive role that government has in ensuring social justice while restraining social unrest as people look after their self-interests.

The key player in a capitalist economy is the individual or a groups of individuals. They are given equal opportunity in competing as buyers or sellers of property or goods in a free market without the intervention of the government except for rules and regulations that maintain a level playing field. The trading of goods and services are independent actions of the individuals. There is no room for aggression in a capitalist society. The heart of a corporatist economy, on the other hand, is the political community that must reach its full potential to enable individuals of society to attain self-fulfillment and happiness.

Capitalism allows individuals unlimited opportunities in creating wealth for themselves and own as much properties and goods that they can afford to buy. This results in inequality that can eventually motivate individuals to work for more wealth to catch up with other individuals. Individuals are, however, to respect the rights of other individuals and avoid coercion. All forms of aggression against another individual are considered illegal.

In comparison, corporatism is a collectivist society just like socialism. Corporatism, however, only nationalizes private property in fact and not by operation of law. It blends capitalism and socialism in governing society and the economy. As such, it allows private businesses to operate within tolerable limits while prioritizing and promoting major projects of the state. The government justifies the creation of public ventures claiming that there are no takers of certain projects that are essential to the people from the private sector because the projects are huge and require a large amount of investment that the businessmen cannot afford.

In terms of labor issues, capitalism resolves labor questions through collective bargaining where representatives of management and the labor union sit together to reach an agreement on the issues. Corporatism, on the other hand, organizes labor and management into major interest groups or corporations to negotiate problems including labor issues through their representatives.

Both capitalism and corporatism are still practiced today and even co-exist and are adopted by politicians as advocacies.
Difference Between Capitalism and Corporatism

That about sum it up in your view?

OAW
     
turtle777
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Jan 13, 2012, 09:24 PM
 
No, it's too benign.

It doesn't adequately address the fact that in corporatism, there is a ruling elite that takes advantage of the system and picks winners and losers.

In capitalism, it *should* be purely based on merits. Everyone should have the same chance to play and succeed.

-t
     
OAW  (op)
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Jan 13, 2012, 09:46 PM
 
I see. I'd like to delve into this a little deeper with you and anyone else who wishes to chime in. The only thing is it's a total PITA to try to post on an iPhone. One of these days Macnn might actually implement a mobile version of the forums right? I'll respond more when I'm on my laptop. But here's a little food for thought. I think we can both agree despite our differences in worldview that the economic system we have in place in the US today is a far cry from what Adam Smith envisioned in Wealth of Nations? We simply don't live in a society where all of our critical industries have many consumers as well as many suppliers so that no one segment of society dominates the market. So my question for you is does "laissez-faire" capitalism start out how Adam Smith envisioned it ... but inevitably leads to more and more industry consolidation that results in corporatism? Absent any external force (I.e. government regulation) to restrain it?

I'm genuinely interested in your thinking on this. And of course I always look forward to my man ebuddy's view. And anyone else who'd like to join the discussion. In that spirit I hope we can exchange our thoughts about the question without all the typical "partisan rancor for the sake of partisan rancor" that's so often the M.O. around here. This is about all I can stand to do on an iPhone so I'll check in again later.

OAW
     
finboy
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Jan 14, 2012, 08:53 PM
 
Originally Posted by turtle777 View Post
I would like to see some data and research on that.

-t
There's plenty out there, just look under the topic of "corporate governance" and try to avoid all the propaganda.

Here's the problem with pure "stakeholder capitalism": all of the stakeholders except for shareholders have wonderful, complete contracts that protect them from sudden layoffs, the selling of secured assets, firing after a corporate takeover, etc. As with most of this stuff, it's been politicized to the point that not rolling over and letting the union run away with the firm is going against "stakeholders." Bah.

The shareholder contract is simple: risk your money and get a higher share price and/or dividends. No guarantees of any kind. There is no way that effective managers can build share value effectively by ignoring or short-shrifting the needs of other stakeholders, it just can't happen. So, they factor in OTHER stakeholders, but make sure that shareholders are ultimately the most important in the chain because they have the weakest (riskiest) contract. The idea that the shareholder model leaves out other people is insane, some kind of theoretical situation built on ignorance.

I'm a financial economist. This is what we research for a living. What we've found, historically, is that pure stakeholder capitalism (that the politician's espouse with other people's money) produces situations akin to what we saw with GM, on average. Don't look at the successful stakeholder advocates b/c they aren't a true accounting.

Bain's going to be the bane of Mittens. But we already knew that. The Left wants Mittens to be the candidate so they can trash him. Add the Mormon thing to that and - poof - four more years! Four more years!

Folks on the right may not want to hear it, but that's how it will play out. Why, oh why can't the Republicans find a decent candidate (meaning "a conservative candidate")?
     
   
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