Debate Continues Over Effects of the Market

NEW YORK, FEB. 21, 2006 (Zenit) - After the collapse of communism and the adoption of free-market policies by just about all countries and political parties, market capitalism should be triumphant. But recent books highlight the shortcomings of the free markets.

In "The Battle for the Soul of Capitalism" (Yale University Press), John Bogle analyzes what he considers to be crucial failings in the financial markets. Bogle, former chief executive of the Vanguard mutual fund group, wants the system to be run in the interests of the shareholders and owners, rather than the managers.

Bogle argues that the last couple of decades have seen serious erosion in the conduct and values of business leaders, investment bankers and money managers. A staunch defender of capitalism and free markets, Bogle nevertheless laments the excessive attention given to stock market prices, instead of the intrinsic values of corporations.

Drawing on his own experience in the mutual fund sector, he looks at how this sector has contributed to current problems. These funds not only siphon off very large sums of money in the form of fees and their share of profits on stock market gains. They also serve to isolate managers from any form of control by stockholders, Bogle contends. Institutional investors in general, such as retirement funds and mutual funds, now own two-thirds of all U.S. equities. In fact, the largest 100 funds account for no less than 52% of equities.

Another factor adversely affecting financial markets, Bogle notes, is the concentration on short-term gains. A few decades ago mutual funds saw around 15% of their stocks turn over in a year. By the late 1990s this had risen to 100%, or more, as fund managers chased quick returns in the booming market. This trend from investment to short-term speculation in stocks means that funds are less likely to be interested in pressuring companies to improve their ethics or management.

As well, corporate directors, auditors, and legislators have all too often failed to ensure sufficient oversight of how companies are being run, leading to the scandals of recent years.

Values needed

"Capitalism requires a structure and value system that people believe in and can depend on," Bogle argues. This includes trust in the word of others, and an assurance that the system will function with equity. And for a long time this worked; capitalism delivered remarkable economic benefits.

By the late 20th century the system changed and turned into a form of "manager's capitalism." In extreme cases, it saw companies being run to benefit the managers, not the owners or shareholders. Proof of that is the soaring level of remuneration given to company executives in recent years, a trend Bogle strongly criticizes.

Shareholders have benefited too, Bogle acknowledges. Even counting the "bubble burst" in 2000, the U.S. stock market rose an average annual rate of 13% from 1982 to early 2005. (He adds, however, that a large proportion of shares that were sold before the bubble burst were those held by corporate executives.)

Bogle proposes a variety of reforms to overcome the deficiencies he outlines: performance-based compensation for executives; better corporate governance; improving accounting standards; a return to a long-term focus; and a clearer separation of ownership from management.

Another book that has drawn attention to how financial markets are causing serious problems is "Capitalism's Achilles Heel" (John Wiley & Sons). Written by Raymond Baker, ex-businessman and current guest scholar at the Washington, D.C.-based Brookings Institution, the book draws attention to problems such as bribery, money laundering, tax evasion and income inequality.

Baker is, he stresses, in favor of capitalism. But he worries that too many people today cater to its weaknesses rather than build on its strengths. He is particularly concerned that the defects he outlines are contributing to the enormous gap between rich and poor, which, in turn, is undermining the future prospects for prosperity.

Ethical market

The market also has many positive aspects. One of its defenders is John Meadowcroft, deputy director of the London-based Institute of Economic Affairs and author of the book "The Ethics of the Market" (Palgrave).

He argues that the market is an important school for virtue, and that participation in a market economy strengthens rather than weakens institutions such as the family. The market does not impose a specific set of values. The market mechanisms as such, Meadowcroft observes, can be used just as easily by selfless altruists as by selfish hedonists.

The market system does allow individuals to make choices that are morally questionable, he notes. Yet he argues that it would be a ...