Tag Archives: capitalism

Mutation of Medieval Feudalism Into Modern Corporate Capitalism: The Rise of Neofeudalism in Corporate Governance…

Feudalism is still alive and well in today’s modern corporate world, in spirit and intent… Question: What is the most enduring and stable system of economic and social order the world has ever known? It’s not capitalism, or socialism, or dictatorship: It’s feudalism… 

Feudalism was primary political system of the Middle Ages (9th to 15th Centuries). The system came about, for the most part, because the reigning king had two major woes; he couldn’t keep the people from rebelling and he couldn’t take care of all his land. In order to solve these problems, the king created the feudal system, in which he would give sections of land, called fiefs, to his most important nobles, barons and bishops in exchange for their services and their loyalty…

Peasants or ‘serfs’ were considered to be the lowest of the lower class, and rather than being given land in exchange for loyalty, they were forced to work the land, and the lord of that land would offer them protection… The brilliance of this system is that it ‘killed two birds with one stone’, solving both of the king’s problems– he now had control over both, people and land…

Though brilliant in its conception, feudalism was a biased hierarchy of authority, rights, power… that extended from monarchs downward, creating an intricate network of obligatory situations that infringed on almost every basic human right…

Thus with growth of commerce and industry, feudalism gradually gave way to the class system as the dominant form of social ranking…  Feudalism means different things to different people and its origins depend on its meaning: Narrowly defined, feudalism is a system in which a weak central government distributes its power to people who support it…

The strength of such a system is that a problem that develop at a local level can be dealt with faster than it could be if the central government had to mobilize to deal with it… According to Dredd blog; feudalism– feudal society was a military hierarchy in which a king or ruler offers a fief, a unit of land to control in exchange for a military service…

The feudal society was constructed for one reason: Security… The nobles wanted the security for maintaining control over their far-reaching kingdoms, and like wise the peasants who worked the land for the nobles wanted security from robbers, marauders, barbarians. However all this came at great expense for the common man: He gave up his many freedoms for security… 

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According to JacobSloan; everything old is new again– make note of the growing belief that modern sociopolitical structures increasingly resemble those that were found in feudalist societies– a concept called neofeudalism: Among the issues claimed to be associated with the idea of neofeudalism in contemporary society are class stratification, globalization, immigration, open borders policies, multinational corporations, and ‘neo-corporatism’…

According to Scott Powell; the fundamental feudalism relationship was the basic form of barter, which defines every feudal relationship– ‘land for loyalty’… In this barter arrangement, a vassal was granted territory (a fief or feud) by his lord in exchange for various expressions of loyalty. Whenever the lord required an army in defense of broader objectives, the vassal was to provide a levy of knights and fighters from his land, and in exchange the vassal’s claim to his land was sanctioned and protected by his lord.

If one landholder’s claim was threatened by another it was the lord’s obligation to arbitrate the relative claims of his vassals and to interpose his military might when needed. This type of relationship existed at every level in the medieval social hierarchy, from serfs and farmers to knights, barons, counts and dukes, all the way up to kings and emperors…

In the article Modern Feudal State? by Aglaya writes: Feudalism is the system whereby political and economic power is held by a relatively small group of capital owners who permit their capital to be worked or used by the large majority of landless people for subsistence. The landless have little or no political power of their own, but in a stable system are guaranteed a basic set of rights… Europe through most of its history, since the Dark Ages, was a series of feudal states, which remained remarkably stable for hundreds of years, until power was slowly devolved to larger and larger groups of people… Also, the very stable Asian societies in Japan, and especially China have long been feudal in nature…

The basic contract in the feudal state is the majority of the population will be content to remain relatively uneducated, unsophisticated, and unambitious. They will demand little more than a job through which they can feed, clothe and house their families. They will expect a basic level of fairness within their class, guarantees of protection by their lords, and perhaps some government entitlements, e.g.; healthcare, free education, and the ability to retire before death (although these last three are mostly represented in a modern feudal state, they are not historically traditional one).

In return, the holders of capital are allowed to be wealthy, comfortable and separated from the majority, so long as they provide the basic measures of subsistence to the landless… Although to most people’s psyche this social contract may appear grossly unfair and extremely repressive, it has, nonetheless, proven unequivocally to be the most successful in history, in terms of pure longevity…

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In the article Corporate Feudalism: The End of Nation States by Steve Lovelace writes: Feudalism developed in the medieval ages when communication and transportation were both scarce and unreliable. Kings had little control over the day-to-day affairs of their kingdoms, and most of the power was held by the lords and barons. Borders, as we know them, did not exist and instead there was property and allegiances… Then over time, advances in technology allowed nation states to form, and national borders became much more rigid. To this day, people still think in terms of nations and borders, but times are changing…

The same technological advances that built the nation-state are now leading its demise. The Internet and modern communications allows companies to have employees and suppliers anywhere in the world. Container shipping allows goods to be made in the cheapest places possible. Air travel allow people across the earth to have the same cultural experience, the same points of reference.

This means that a company can incorporate in Delaware, design goods in California, produce them in China, ship them on a Norwegian ship registered in Liberia, and sell them all over the world. Tech support can be based out of India, and the executives making the money can keep their money in Switzerland and the Cayman Islands.

This kind of thing happens everyday, and the ramifications are just beginning to be felt. Ultimately, this will lead to the return of feudalism… As the power of multinational corporations grows, you will find a weakening of nation states: Corporate oligarchy will be the new norm…

In the article Feudalism in America? by absurdistan dan writes: The term ‘feudalism’ elicits images of kings in their vast, fortified castles, knights in their armor defending the land, and poor peasants working their land from dawn to dusk. Feudalism was a strict social hierarchy in Medieval Europe and was certainly an oppressive political and economic system from the tenth century that disappeared after the fifteen century…

Except that it hasn’t disappeared: Feudalism’s success wasn’t due purely to the strict separation between different social classes, but rather the fact that the population accepted their class standing in society… The American dream’s selling point is that hard work over a long period of time allows people to support their family and allow them the benefits of home ownership… Except serfdom was often defined as serfs who were bound to the land which they worked to pay taxes to their lords…

Then fast forward to modern times; as an intelligent person I keep asking myself: Why do I work as I do? A part of me knows that the only reasons I’m still working is because of the large bonus everyone in the industry looks forward to at the end of the year. The bonus that one day will release me from the tyranny of corporate slavery and allow me to do something more enjoyable like running my own business or investing in other people’s businesses.

Basically, it will grant me the freedom to one day be able to live my life on my own terms, and not be stuck in the office late into the early morning, on weekends and be subject to menial tasks… Little did we all know that we were actually signing our lives away to serfdom. But if anything, this was the job that gave me the best chance to one day free myself from modern-day serfdom… A prominent politician once said; in today’s modern world corporation is the lord and master, and most of its employees have been desensitized much as were the medieval peasants who never knew they were serfs…

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In the article Corporations Are Feudal Manifestations by Russ writes: Contrary to popular belief, there’s nothing modernistic about the corporation. On the contrary, they’re a carryover phenomenon from feudalism… The corporation originally arose out of medieval guilds and the monopoly charter. This charter was also called a ‘searching and sealing patent’ and it had nothing to do with production of goods or services. The charter-holder, who generally was some royal crony, did not produce or do anything…

So corporations were one form in which elites tried to continue their feudal prerogatives into the 19th century… According to Ted Nace;  what is not as well-known is that, long after ratification of U.S. Constitution and the adoption of the Bill of Rights, most aspects of employer-employee relations continued to be regulated by a common law legal structure that continued to enforce the principles of privilege and hierarchy derived from the feudal society of the late Middle Ages…

As explained by political scientist Karen Orren; The original, mainly landholding, masters had long since been overtaken by business owners and managers; however, their privileges remained and passed on to their successors largely intactThe power of employers over their workers was considered a private relationship, where normal constitutional rights did not necessarily apply. Thus, common law also permitted measures of enforcement that were unacceptable in other social realms… This is the atmosphere in which feudal practices were being carried over into modern age of nominal capitalism and democracy…

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Few political systems have shown the adaptiveness and longevity of feudalism. The system that was based on personal relationships, local administration and defined hierarchies, touched several continents for more than 1,500 years. Feudalism grew out of practice, precedent and code of values and aesthetics that developed into ‘chivalry’ in the West and ‘bushido’ in the East… According to Lynn Nelson; feudalism has transcended many centuries that even in the modern society there are institutions that have retained strong feudal elements… Keep in mind the basic characteristics of feudalism, one can easily observe, is what has passed on to society in modern times…

According to Victor Baines; modern life seems to have ‘de-evolved’ into a strange and difficult to define state of economic existence; if you are wealthy person and or successful business owner, you might be doing well (in economic sense) but, if you are a ‘former member of the working middle class’– it should be easy for you to relate to questions that I raise:

What the F%#K happened to all the jobs? Where the F@*k did they all go to? How the h#$L am I suppose to make a living these days? These are the questions that many people are asking! So much for saving for retirement– people are simply trying to make it week-to-week, and month-to-month! This is the unspoken state of economic existence… its modern-day feudalism… 

Morphosis of Capitalism into Crony Capitalism– The Crony Capitalism Index: The Choice: Cronyism or Open Markets…

Crony capitalism (as distinguished from ‘open markets’ capitalism) is an economic system in which the marketplace is substantially shaped by ‘cozy’ relationship among government, big business, big labor… Under crony capitalism, government bestows variety of privileges that are simply unattainable in open markets…

According to Neil Irwin; if there’s one thing that populists on left and right of the political spectrum both agree on; its disdain for crony capitalism. It’s a distaste for the cesspool of government influence, in which big-business lobbyists canoodle with lawmakers to get their way. It’s anger at corporate welfare enriching the biggest companies at expense of the little guy…

Crony capitalism is a pejorative term used to refer to corrupt business dealings carried out by government officials in a capitalist economy… It refers to success in business based on crony-clot relationship between businessmen, government officials… The word crony means friend... So, what do politicians, government officials… normally do when they become elected? Yes, they show favoritism, cronyism…

According to Nick Sorrentino; realities of crony capitalism and open markets capitalism, if not opposites, are fundamentally opposed to each other… Crony capitalism in the purest form is the marriage of government and private special interests for the benefits of the few… but, however its defined– crony capitalism is phony capitalism, its perverted capitalism. The rap is that many of the problems people face on day-to-day basis, such as; lack of jobs, rising prices, corruption… is a result of capitalism…

When governments and powerful private interests collude the result is a cocktail of market distortion. Crony capitalism takes many forms including; regulatory capture (regulated interests actually using government power to squelch competition), zoning, licensing, bribes, paybacks, and hundreds of other ways. The one thing all of these ‘tools’ have in common, however, is that they are used by the politically connected few to extract money and power from the unconnected many…

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The crony capitalism index is measurement designed by The Economist publication for indicating how the livelihood of people from certain country (includes 23 countries)… with capitalist economy are affected by crony capitalism… However, the index has many limitations hence it’s not recognized international… The index aims to measure increasing trends in the number of economic ‘rent seekers’ (Note: In economics, rent-seeking is the spending of wealth on political lobbying to increase one’s share of existing wealth without creating wealth…

The idea of rent seeking was developed by Gordon Tullock and the expression rent-seeking was coined by Anne Krueger. The word ‘rent’ does not refer here to payment on lease of property, but stems instead from Adam Smith’s division of incomes into profit, wage, and rent)… The assumption is that because of the favorable political policies set by the government, tycoons are increasing their wealth and interest… As a result, they get a larger part of people’s fruits of labor, instead of generating more wealth for society as whole… The index only counts the wealth of billionaires…

According to The Economist; the index is only a crude guide to the concentration of wealth in opaque industries compared with more competitive ones… Also, the index fails to reflect other important industry segments, such as; military-industrial complex… which diminishes its accuracy… According to Nick Sorrentino; to go completely down the (anti) cronyism path and examine cronyism in all of its aspects, it would inevitable exposes the insidious ties with government…

In the article Our Crony Capitalism Index; Planet Plutocrat by The Economist writes: Inventing a better widget, tastier snack or snazzier computer program is one thing. But many of today’s tycoons are accused of making fortunes by ‘rent-seeking’: grabbing a bigger slice of the pie rather than making the pie bigger. In technical terms, an economic rent is the difference between what people are paid and what they would have to be paid for their labor, capital, land (or any other inputs into production) to remain in their current use. In world of perfect competition, rent would not exist: But, to test the claim that rent seekers are on the rampage, we have created the ‘Crony Capitalist Index’…

The approach was builds on work by Ruchir Sharma of Morgan Stanley Investment Management, Aditi Gandhi and Michael Walton of New Delhi’s Centre for Policy Research, and others. We use data from Forbes to calculate total wealth of those of the world’s billionaires who are active mainly in rent-heavy industries and compare that total to the world GDP to get a sense of its scale. We show results for 23 countries, which includes; five largest developed ones, ten largest developing ones for which reliable data are available, and a selection of eight smaller ones where cronyism is thought to be a big problem.

In the survey, higher the ratio the more likely the economy suffers from a severe case of crony capitalism… Included are the industries that are vulnerable to monopoly or that involve licensing or heavy state involvement… These industries are more prone to graft, according to bribery rankings produced by ‘Transparency International’, an anti-corruption watchdog. But boundaries between legality and graft are complex, for example; a billionaire in a rent-heavy industry need not be corrupt or have broken the law… Industries that are close to the government are still essential and can be healthy and transparent, without having cronyism…

It’s interesting to note that billionaires in crony sectors are having a great century so far, for example; in the emerging world wealth doubled relative to the size of the economy, and is equivalent to over 4% GDP compared with 2%, 2000. Developing countries contribute 42% of world output but 65% of crony wealth… However, there are shortcomings, e.g.: (1) not all cronies make their wealth public, e.g., drug lords… (2) some sectors characterized as rent seeking are more open to competition in certain countries and vice versa, and some open industries may be more subject to rent-seeking… (3) only the wealth of billionaires are included, whereas, many cronies may not be billionaires but multimillionaires, but it’s still rent seeking and it’s huge…

The index is only a rough guide to the concentration of wealth in opaque industries compared with more competitive ones… Despite the boom in crony wealth there are grounds for optimism. Some countries are tightening antitrust rules and there are a few hints that cronyism may have peaked…

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In the article The Economist Misses the Point on Crony Capitalism by Peter Schweizer writes: The Economist does a fine job of defining rent-seeking, but their bizarre methodology suffers numerous limitations (three of which The Economist recognized), and misses the broader point of what the oft-used phrase ‘crony capitalism’ even means and why lovers of open markets despise its rise…

At ‘Government Accountability Institute’, they define ‘cronyism’ or ‘crony capitalism’ as the instances when government gives certain entities favorable rules, tax monies… that others don’t enjoy… The reason they investigate and expose cronyism is that when government gives an unfair advantage to a politically connected business or other groups, it ends up undermining true competition, which is the heartbeat of economic freedom…

Put simply, when government picks winners and losers it disrupts open markets, doles out taxpayers’ money in the form of corporate welfare, and sets up incentives for politicians and companies to engage in corruption, kickbacks… Unfortunately, The Economist’s index is not constructed to capture the critical moves cronies make. Indeed, a more complete cronyism index would include metrics such as; the number of government-backed loans a company or individual has received, subsidies or set-asides, and the number of concessions scored by so-called ‘offensive’ lobbying efforts…

Part of the problem lies in fact that The Economist has championed certain government causes and environment activities that are the very things that fuel cronyism and corrode true open market competition… Also, the crony capitalism index isolates business sectors like– casinos, oil and gas, and real estate as crony sectors while ignoring markets, like; high-tech, healthcare, entertainment… However, people should be clear on what crony capitalism is, and what it is not. Sadly, The Economist’s methodology misses many of the key variables that drive cronyism…

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In the article Crony Capitalism by Bruce McQuain writes: Crony capitalism has as much to do with real capitalism as praying mantises have to do with real prayer, quote by Donald J. Boudreaux… In fact crony capitalism has little to do with capitalism at all. It’s simply ‘cronyism’ and once you understand what is being described, it can exist under any system that has a government… That’s the one ingredient that is necessary for it to exist.

Under open markets capitalism, the government’s job is to play referee, that is, enforce legal contracts, prevent and punish fraud… And, that requires regulation to exercise those functions… But when it gets beyond those parameters, it has a number of effects which have little to do with capitalism or an open market. When government gives up its role as referee in favor of a reciprocal relationship with those it regulates, then that’s cronyism… But, how does cronyism develop?

According to ‘public choice theory’ the root causes is regulatory failure; when regulatory agencies begin to identify with the interests of the regulated rather than the public they are charged to protect, e.g.; crony capitalism ensures the special access of protected firms, industries… to capital… businesses that stumble but are doing what is politically favored are bailed out, which leads to moral hazard and more bailouts in the future…

According to Donald Beoudreaux; dispels the myth that crony capitalism is a version of free market capitalism or, in fact, has anything whatsoever to do with it… Capitalism, i.e., open markets capitalism– is infused with laws most of which are self-enforcing… The chief problem with crony capitalism is– it injects significant amounts of lawlessness into the economy, transforming capitalism into something that it’s not, entirely different and dysfunctional. 

Under crony capitalism, government excuses the politically influential from capitalism’s laws. Thus unleashed from the impartial discipline of the invisible hand, the politically influential become criminals… So don’t let the enemies of capitalism get away with calling it crony capitalism. It’s ‘cronyism’, pure and simple, and it exist with any form of government… Increasing regulation isn’t going to change that dynamic or curtail the developed system of cronyism, as we currently know it…

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Capitalism, as an economic system, has its origins in mercantilist thought in Europe during the beginning of the 15th century– decline of feudalism– and beginning of the industrial revolution in 1780… According to Vijay K. Mathur; crony capitalism has acquired some of the traits of 15th century mercantilism, in which the wealthy are now engaged in rent seeking behavior that is making them and politicians rich…

Crony capitalism undermines competition in the market, corrupts the democratic process and leads to concentration of income, wealth in the hands of the few… I hope that voters wake up to the insidious development of crony capitalism and demand changes in tax and spending priorities and laws, and rules and regulations from their elected representatives, in order to prevent rampant rent-seeking behavior and concentration of wealth…

According to Devin Foley; the mechanisms of crony capitalism are numerous, such as; bailouts, stimulus, special loans, too-big-to-fail, political appointments, tax breaks, campaign contributions, ‘sole-source’ procurement, connections, grants, government-union cooperation, exemptions, government sponsored enterprises…

Unlike under open markets capitalism, crony capitalism often make it more profitable for business to spend resources lobbying government for handouts in the form of; grants, loans, tax advantages, protections against competition…

in order to increase profits. In turn, the government’s willingness to hand out special privileges; promotes themselves and the politically well-connected rather than those who seek to earn preferences of investors, consumers based on merit… Thus, crony capitalism creates a system of privatized gains and socialized loss…

Age of Casino Capitalism– Unabated Speculation–Unregulated Excesses– Insidious Practices: Temple of Greed or Darwinism…

In common parlance, the term casino capitalism refers to the unregulated excesses associated with the ‘boom and bust’ cycles of large speculative ventures… the kind of high-risk/high-reward behavior indulged in by former banks, financial institutions… which helped lead to the economic crisis…

Its origins in the literature probably lie with John Maynard Keynes and his famous General Theory of Employment, Interest, and Money, first published in 1936 were he refers to the ‘casino capitalism’ embodied in the winning and losing of fortunes on the stock market.

In his book Keynes writes; when the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. The measure of success attained by Wall Street, regarded as an institution of which the proper social purpose is to direct new investment into the most profitable channels in terms of future yield, cannot be claimed as one of the outstanding triumphs of laissez-faire capitalism…

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In the book Casino Capitalism by Susan Strange writes: The Western financial system is rapidly coming to resemble a vast gambling casino… considerable increases in risk and uncertainty in economic markets gave rise to substantial social and political disruptions in the global system.

She links these changes to five major trends: (1) innovations in the way financial markets operate; (2) increased scope of markets; (3) shift from commercial to investment banking; (4) rise of Asian investment markets; (5) government regulation in banking…

Ms. Strange argues for increased regulation and more substantial American leadership, which she believes is required because of the predominant role of the United States in the world markets..

The term casino capitalism also appears in the work of Irving Fisher and Hyman Minsky. Fisher, along with others in the 1930s, was faced with the problem of explaining the tragedy of the Great Depression. The common view among economists of this era was that financial markets were like casinos, rather than ‘markets’ in the usual sense of the word, and that these speculations contributed mightily to the social ills of the day. Fisher, along with John Burr Williams and Benjamin Graham, claimed that the casino metaphor was misplaced.Instead, they argued that asset prices of financial assets reflected ‘intrinsic value’, which in turn could be calculated by deciding the total value of dividends likely to be produced in the future…

In all these cases, the notion that capitalism is essentially speculative and little more than a system of big and small bets in a grand game of chance is at work, and most of the writings around this topic focus on ways to make this irrational system more susceptible to reason and stability…

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In the article Casino Capitalism by Mark G. McLaughlin writes: Wall Street is a ‘casino’ where the dice are loaded in favor of financial institutions and the ultra-rich; according to economist Susmit Kumar in his book Casino Capitalism. Hedge fund managers have ‘squeezed the juice’ out of the U. S. economy, charges Kumar. He argues that, through a variety of insidious practices, they have twisted capitalism into something so ‘evil’ that ‘not only does it destroy its own people, it also creates its own Frankenstein, China…

According to Kumar; in its present form ‘capitalism is not feasible’, although democracy is the best of all ‘-cracies’ but it too has deficiencies that needs major reforms… What hope there is for the future lies in the democratic process… But, democracy requires educated, informed, sensible voters; spread of education is thus of the highest priority…

In the article Casino Capitalism by Robert Reich writes: The so-called attack on ‘private equity’ is neither a personal attack on individuals nor a generalized attack on U.S. business… It’s an attack on a particular kind of capitalism that both practice: Using other people’s money to make big bets which, if they go wrong, can wreak havoc on the economy… It’s the substitution of ‘casino’ capitalism for ‘real’ capitalism, the dominance of the betting parlor over the real business, and financial innovation rather than product innovation…

In the article Casino Capitalism by Patrick J. Buchanan: With the ‘robber barons’ of the early 1900s one could see a connection between the wealth, for example of; Rockefeller, Harriman, Carnegie, Henry Ford… and their contributions in building America. Railroads were tying America together. Oil was fueling industry. America was surpassing Britain in steel production. Ford was putting the nation on wheels. When J.P. Morgan took to the floor of the New York Stock Exchange in 1907 to issue a buy-order; he stopped a panic…

There was perceived to be connections between wealth of these men and achievements. They were helping make America the most awesome industrial nation known to man. But as scholar William Quirk writes in his essay ‘Saving the Big Casino’; financial institutions now seem to rise and fall on profits and losses from the trading of; ‘derivatives’, ‘credit default swaps’, ‘exotic securities’… that not one man in a thousand understands…Fortunes are lost and made overnight. Names appear on the list of richest people who no one has ever heard of. Cheating and corner-cutting are constantly being unearthed.

Broker-and banker-gamblers in their 30s amass and flaunt nine-figure fortunes… Were the rest of Americans doing well, this might not matter but America is not doing well. And Americans are coming to believe that a system where high-rollers rake in tens of millions playing ‘Monopoly’ while workers who build things and make things never see a pay raise is rigged and wrong… Few begrudge a Bill Gates his fortune. But where vast wealth accrues to people whose actions seem unrelated to any contribution to society or country, and to have come simply from rigging the system for their own benefit, that system will not endure. The casino capitalists are playing with fire…

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In the article Casino Capitalism Explored by Michael Sandel writes: Risk is part of life, but financial speculation plays a growing role in the economy. When farmers plant crops or when companies build factories, they place a kind of bet. But these bets are incidental to productive activity. What about traders who don’t grow crops, but simply bet on the future price of wheat? Or hedge funds that don’t own Greek bonds, but bet on the likelihood that Greece will go bankrupt? Or brokers who buy insurance policies on lives of strangers and collect when they die?

These practices raise questions that intersect ethics and economics: Is there a moral difference between investing and gambling? If so, of what does it consist? The financial crisis of 2008 posed these questions with great urgency, but public debate has yet to grapple with them. Has capitalism lost its way, and how might it find its moral bearings…

In the article Rise of Casino Capitalism by Chris Hedges writes: The cultural embrace of illusion and the celebrity culture that has risen up around it have accompanied the awful hollowing out of countries. We have shifted from a culture of production to a culture of consumption. We have been sold a system of casino capitalism, with its complicated and unregulated deals of turning debt into magical assets, to create fictional wealth for us and vast wealth for the elite.

We have internalized the awful ethic of corporatism– one built around the cult of the self and consumption as an inner compulsion– to believe that living is about our own advancement and our own happiness at the expense of others… The free market became the god and government was taken hostage by corporations, the same corporations that entice us daily with illusions though mass media, entertainment industry and popular culture… According to Willy De Backer; we live in an age of proliferating political zombies, dis-imagination machines and punishing factories. This is an age of full-blown authoritarianism parading, ironically, in the name of freedom and liberty….

So how justified is disillusionment with capitalism? According to Lawrence Summers; this depends on the answer to two critical questions. Do today’s problems inhere in today’s form of capitalism or are they subject to more direct solution? Are there imaginable better alternatives? This problem is genuine. But does this reflect an inherent flaw in capitalism or, as Keynes suggested, a ‘magneto’ problem that can be addressed with proper fiscal-monetary policies, and which will not benefit from large-scale structural measures? So at one level the answer here is simply to insist on more political will and courage. But at deeper level, citizens of the world who believe that they live in progressive societies are right to wonder why increasingly affluent societies need to roll back levels of social protection.

Paradoxically, the answer lies in the very success of capitalism… When outcomes are unsatisfactory, as they surely are at present, there is always a debate between those who believe that the current course needs to be pursued with increased vigor and those who argue for a radical change in direction. That debate is somewhat beside the point in the case of capitalism: Where it has been applied its been an enormous success…

According to Dorian Scott Cole; many countries and people point to capitalism as if it was an independent entity that we serve and which dominates the world. If we allow it to be, then it is. In reality, what capitalism is, is up to us. It is up to us to make capitalism serve us. But first we have to understand what we are pursuing. Each will have its own reward. Simple gluttonous greed will end in the destruction of us all because we are simply competing against ourselves. But a system that is controlled to benefit us all, will benefit us all…

Wealth, Wealth Creation, Wealth Enhancement: Exposing Secrets for Building Wealth… Well, There Are No Secrets… Really!

The purpose of life is essentially to create and experience more life, and to enable the true expression of life. Wealth creation in its fullest and broadest meaning; fosters this expression.Keelan Cunningham

Wealth has many meanings and everyone sees wealth differently in their lives. The word wealth comes from  Old English word ‘weal’, which means; well-being, prosperity, or happiness. Generally, economists define wealth as ‘anything of value’ which captures both the subjective nature of the idea of wealth and the idea that it is not a fixed or static concept.

The concept of wealth, or its increase, is of significance in all areas of economics, and yet the meaning of wealth is context-dependent and there is no universally agreed upon definition. Adam Smith saw wealth creation as the combination of; materials, labor, land, and technology in such a way as to capture a profit.

The theories of David Ricardo, John Locke, John Stuart Mill, in the 18th century and 19th century built on these views of wealth that we now call classical economics. Marxian economics distinguishes between ‘material wealth’ and ‘human wealth’, defining ‘human wealth’ as ‘wealth in human relations’;  land and labor were the source of all ‘material wealth’.

Concepts of wealth also vary across time. Modern labor-saving inventions and the development of the sciences have enabled the poorest sectors of today’s society to enjoy a standard of living equivalent if not superior to the wealthy of the not-too-distant past. This comparative wealth across time is also applicable to the future; given this trend of human advancement, it is likely that the standard of living that the wealthiest enjoy today will be considered impoverished by future generations.

The Credit Suisse Global Wealth Report is the only study that analyses the wealth  of the world’s entire adult population: 4.5 billion people and they estimate the world’s wealth at US$231 Trillion (US$231 x1012) at mid-2011.  According to the Report; despite the financial crisis starting in 2007, global household wealth increased by US$117 Trillion between 2000 and 2011, with the share of emerging markets trending strongly upwards.

They estimate that ‘total household wealth’ will likely rise by 50% in the next five years from US$231 Trillion in 2011 to US$345 Trillion in 2016, equivalent to 8.4% growth per year. ‘Net worth per adult’ worldwide is expected to reach US$70,700 in the year 2016, an increase of almost 40% over 2011.

China will replace Japan as the second-wealthiest country in the world, with ‘total household wealth’ of US$39 Trillion in 2016, compared to US$31 Trillion for Japan. The U.S. is expected to maintain its supremacy in the wealth ranking, with a ‘projected total household wealth’ of US$82 Trillion. Well behind in fourth and fifth places are France and Germany with US$20.1 Trillion and US$19.6 Trillion, respectively.

Over the next five years, there will likely be big improvement in the position of emerging economies: Wealth in both China and Africa as a whole is projected to rise by over 90%, but India and Brazil are forecast to do even better, with personal wealth more than doubling by 2016. The case of India is particularly striking.

With total wealth of US$4.1 Trillion in 2011, India’s household wealth is comparable to the U.S. in 1916. During the next five years, India is projected to gain as much wealth as the U.S. achieved over the course of 30 years, beginning in 1916. This is due to an increase in wealth per adult accompanied by a rise in the adult population.

The case of Brazil is also noteworthy: With household wealth expected to reach US$9.2 Trillion by 2016; a level comparable to the U.S. in 1948, the rise in wealth in the next five years should correspond to the gain in the U.S. over the 23-year period from 1925 to 1948. ‘Total household wealth’ in China is currently US$20.1 Trillion, equivalent to that recorded for the U.S. in 1968.

If recent trends continue China could reach the wealth level that the U.S. achieved in 1990; a jump of ’22 U.S. years’ in just five years, by 2016. About 90% of global wealth is distributed in North America, Europe, and ‘rich Asia-Pacific’ countries (not including India), and 1% of adults are estimated to hold 40% of world wealth, a number which falls to 32% when adjusted for ‘purchasing power parity’ (PPP).

In the articleCan You Really Create Wealth? by Kelvin Parker: To have wealth, you must possess something of value. Different people value different things, so while one person may find wealth with money, another may base wealth on good health, and so on. Wealth is not a zero-sum game. There is not a limited amount of wealth in the world that must change hands from one person to another. One person’s wealth creation does not conversely result in another person’s loss of wealth.

Your wealth creation is limited only by your willingness to imagine, innovate and accomplish. There is no finite or predetermined allotment of it, and we call it ‘creating’ wealth or ‘making’ money.  Wealth creation can take many forms, and there are opportunities for wealth creation everywhere. In reality, you create value by fulfilling a need, desire, or solving a problem… it satisfies a void. Wealth, like beauty, is in the eye of the beholder. To create wealth you determine what others deem valuable, and create a way to give it to them.

In the article “Creating Wealth” by Jim Pinto writes: There are only three sources of wealth; natural resources, labor, and knowledge. Natural resources (oil, minerals and the like) are tied to geography. However, the largest transfer of wealth in human history occurred within this half-century, and it comes from the countries that generate wealth through productive knowledge, innovation, and enterprise.

Service industries and government jobs do not increase wealth; they just circulate money. Manufacturing creates wealth by taking goods of lower value, adding knowledge and labor, and creating higher value. Mining and farming create wealth for the same reasons.  Labor is a commodity; the value of which keeps increasing with education and training. Knowledge and innovation are the key ingredients for productivity and wealth generation.

Through inexpensive, universal communications, knowledge-based work is migrating worldwide to the highest-quality, lowest-cost providers. Productivity has become a fierce, head-to-head competition between regions and nations for the single reason that it is the source of wealth; and the key to improvements in living standards. Those who can produce cheaper, faster, better… are better positioned to create more wealth.

In the articleWho Creates the Wealth in Society?” by Uwe E. Reinhardt writes: The wealth of modern societies is dictated not so much by the natural resources at their disposal, but by their human capital; the knowledge and skill of human beings and their ability to learn and apply new knowledge on their own. Conscientious parents, especially mothers, rank as the major wealth creators in modern societies…

Next come educators, especially the visionary and dedicated elementary and high school teachers who succeed in getting their students interested in learning and motivated to amass human capital. However, none of the forgoing is to say that being highly educated and skilled is either a necessary or a sufficient condition for contributing value and wealth to society…

In fact, anyone who works for pay or volunteer creates wealth. What about government? A common mantra in the U. S. is that ‘government does not create wealth, people do’. In some sense, of course, the mantra is true. Government is just an inert set of legal contracts, as is any business. Thus one should really say: ‘Government and business do not create wealth… the people working in them do’. A nation’s wealth is truly a joint creation in which individuals, families, business, and government all play crucial parts. However, finding just the right mix of effort and regulation that will maximize society’s well-being is a tricky and never-ending quest…

In the article How Wealth is Created” by Dustin writes: The more goods we create, the wealthier we are as a nation. If wealth is important to you then it should be your goal to maximize wealth creation and minimize wealth destruction. Fortunately, it’s not really that hard. History shows us that 90% of the job is done for you by the ‘invisible hand’. Adam Smith described the necessary components of wealth creation as: ‘materials, labor, land, and technology in such a way as to capture a profit’.

Economists later called these things the ‘factors of production’, and not much has been added to this composition. It’s still; land (natural resources), labor, capital (materials and technology), and most important it’s the entrepreneur who brings it all together. So that’s how wealth is created; an entrepreneur gets access to capital, buys the materials he needs, hires people to do the work, and then they start making stuff…

In terms of history, capitalism has been the most efficient way to create wealth. I don’t think capitalism is perfect or infallible, but in terms of wealth creation, there is yet to be found a better system.

In the story of ‘King Midas’, he asked ‘the gods’ that everything he touched should turn into gold. The gods granted his wish. His joy soon turned to horror, however, when during a sumptuous feast, every piece of food he touched – turned into gold. Is gold wealth? Certainly it’s the best store of value mankind has ever found.

In the book ‘Does It Matter? Essays on Man’s Relation to Materiality’ by Alan Watts observes; for a shipwreck survivor and alone on an island, gold is worthless. He needs real wealth; food, shelter, clothing, and human companionship. Food and shelter is the original definition of wealth. In fact, wealth, creating wealth, maintaining wealth, and developing oneself so that you can create wealth, is the human mission in life…

This is about developing skills and knowledge that you need to be able to thrive in today’s world. Ironically, many people have an education and are taught about many different subjects; but very few actually have an education about wealth, about the things that so many strive to achieve. Wealth is not the same thing as money. Money is a comparatively recent invention, and a kind of shorthand: money is a way of moving wealth, and in practice they are usually interchangeable.

The best wealth creators are not generally extreme or unusual; they are in fact, average in many ways. Wealth creation is much more about lifestyle, than it is about just making money. Whether you’re herding goats in the Himalayas, working in a sweet shop on some street corner, or trading stocks on Wall Street; there’s no getting away from the subject.

Wealth creation is everywhere. People may have different ways of describing it; but essentially they are describing the same thing in accordance with their specific circumstances. Wealth creation is at the heart of the very purpose of life…

Wealth is the ability to fully experience life. ~Henry David Thoreau

Benefit Corporation, B Corp: Changing ‘Profit’ Capitalism to ‘Social Conscience’ Capitalism for New Economy… Paradigm Shift for Social Responsibility…

Many major corporations have already proven that they can be socially responsible for the well-being of societies, communities, and environments in which they operate.

There is a growing movement for a new type of corporation, a corporation structure that  is more socially responsible; namely, the Benefit Corporation. The Benefit Corporation is a class of corporation required by law to create general benefit for society, as well as for shareholders.

The Benefit Corporation must create a material positive impact on society, and consider how their decisions affect their employees, community, and the environment. Moreover, they must publicly report on their social and environmental performances using established third-party standards.

The Public Benefit Corporation is a public corporation chartered by a state designed to perform some public benefit. The chartering of Benefit Corporations is an attempt to reclaim the original purpose for which corporations were chartered in early America. Then, states chartered corporations to achieve a specific public purpose, such as building bridges or roads.

Their legitimacy stemmed from their delegated charter, although they could still earn profits while fulfilling it. Over time, however, corporations came to be chartered without any public purpose, while being legally bound to the singular purpose of profit-maximization for its shareholders.

Advocates of Benefit Corporations assert that this singular focus has resulted in a variety of societal ills, including the thwarting of democracy, diminished social good, and negative environmental impacts.  By law, the mission of a corporation is to maximize profit for shareholders, and the totality of a corporation’s activities must serve that single end.

Should a corporation fail to conduct themselves in that manner; fail to fulfill what is called its ‘fiduciary duty’, they may be held legally liable and face civil penalties.  By contrast, the ‘fiduciary duty’ of Benefit Corporations must include non-financial interests, such as social benefit, employee and supplier concerns, and environmental impact.

Chartering as a Benefit Corporation allows companies to distinguish themselves as businesses with a social conscience, and as one that aspires to a standard they consider higher than mere profit-maximization for shareholders. According to Yvon Chouinard who authored the book  ‘Let My People Go Surfing’ writes; the Benefit Corporation, usually referred to as a ‘B Corp’, creates the legal framework for firms to remain true to their social goals.

To qualify as a B Corp, a firm must have explicit social or environmental mission, and a legally binding fiduciary responsibility to take into account the interests of workers, the community and the environment, as well as its shareholders. It must also publish independently verified reports on its social and environmental impact alongside its financial results. Other than that it can go about business as usual.

The B Corp is a deliberate effort to change the nature of business by changing corporate law, led by ‘B Lab’, a non-profit organization. The idea of a legal framework for firms that put profits second is not confined to the U.S. Britain, for example, has since 2005 allowed people to form ‘community interest companies’. Similar laws are brewing in several European countries.

The impetus for all this comes from people who believe that existing laws governing corporations and charities are too restrictive, and they claim that existing laws for co-operatives and mutual companies are inadequate. Hence, the need for B Corps and other novel structures; such  goes their argument. There is no tax advantage for being a B Corp…

In the article “S Corps, C Corps, and B Corps, Oh My! Corporate Structure Matters” by Eric Friedenwald-Fishman writes: The basic structure for corporations is myopic; it focuses on maximizing profits to shareholders. Whether we are protesting the power and greed of corporations or defending them as drivers of the economy, we share the same basic expectation; that a corporation’s job is to maximize profits to shareholders.

This basic expectation is damaging to people, communities, the economy, and ultimately to the companies themselves. There is a better way: There’s an opportunity to make a paradigm shift that harnesses the incredible power of companies to benefit society and the economy; the Public Benefit Corporation.

For those unfamiliar, this structure requires three key elements: purpose (create a material positive impact to society), accountability (consider nonfinancial interests in decision-making), and a fair return to all shareholders with transparency (open disclosure of social performance using third-party standards). In other words,

Benefit Corporations are legally chartered both to consider and to benefit diverse stakeholders (shareholders, employees, the environment, and so on), and are held accountable for doing so. This shift in the corporate form has the potential to drive tangible positive impacts including; increased health and prosperity of the workforce and their families, improved air and water quality, community stability, and ultimately stronger companies that can compete for the long-term.

In the article “Adam Smith Was Not Schizophrenic” by Kyle Westaway writes:  Adam Smith, the father of modern economics, was the first to assert the concept of free market capitalism. In his most popular work, ‘The Wealth of Nations’ he wrote about the often-quoted ‘invisible hand.’ But in his first work, ‘The Theory of Moral Sentiments’, which he considered to be his most meaningful contribution; he writes about our duty to fellow members of society.

Given the gap between modern capitalism and the morals-based approach from his first book, one can’t help but wonder if Smith was an intellectual schizophrenic, essentially promoting two competing theories. I don’t think he was. In fact, I see his two preeminent works amounting to a unified theory, a blueprint for a more stable and sustainable version of capitalism; a conscious capitalism.

‘The Wealth of Nations’ presupposed that the capitalist system would operate on the moral framework he laid out in the ‘Theory of Moral Sentiments’. He was seeking to create a system defined by efficient allocation of resources driven by self-interest, but guided by self-restraint. However, the current version of capitalism’s guidance has the legal duty to maximize shareholder value.

Many are seeing the need for a new legal structure that embraces conscious capitalism by broadening the fiduciary duty from maximizing shareholder value to maximizing stakeholder value.  That is the legal mandate to make decisions that pursue not only a positive benefit on the bottom line of the shareholders, but also the positive benefits for the community, environment, employees and suppliers.

This broadening of fiduciary duty is a fundamental shift at the very core of the existing corporation. This new type of corporation that embraces both conscious capitalism and self-interest by broadening the fiduciary duty is known as Benefit Corporation…

In the blog B Corp is Not a New Legal Form by Ellis Carter writes: Although the terms B Corporation (B Corp) and Benefit Corporation may sound the same; they are distinctly different concepts. ‘B Corp’ formally known as a ‘Certified B Corporation’, is not a legal form, whereas the Benefit Corporation is a legal form.

The ‘Certified B Corporation’ is a label given by ‘B Lab’ (independent not-for-profit organization) to businesses that pass a ‘socially responsible certification’ process.  There are 3 key differences between B Corp and Benefit Corporation structures, and they are:

  • B Corporation (B Corp) is a voluntary certification.  ‘B Corporation’ certification recognizes companies that are purpose-driven and which create benefit for the community, the environment, and employees–as well as for shareholders. ‘B Corporation’ status is conferred on companies that apply with a passing score on the ‘B Rating System’ and that agree to take steps to legally expand their fiduciary duty beneficiaries beyond shareholders.  The certification is granted by an advisory committee from ‘B Lab’–a non-profit organization dedication to ‘B Corporation’ certification.
  • Benefit Corporation is a legal corporate structure.  You’ve likely heard of corporate structures such as; a ‘C Corp’ or an ‘S Corp’, similarly ‘Benefit Corporation’ is a another class of corporation that serves society and the environment, as well as shareholders.
  • Becoming a ‘Certified B Corporation’ is one way to meet statutory requirements for Benefit Corporation status. This is true for states that have passed ‘Benefit Corporation’ legislation.

A growing number of business people say that another kind of corporate legal structure is needed; a structure that requires companies to operate for the good of society, not just for their shareholders. According to Marc Gunther this vision is simple, yet ambitious; creating a corporate structure that uses the power of business to solve social and environmental problems. The B Corporation (B Corp) is a corporate structure that has the rigor and independent standards for meeting the requirement of social and environmental performance, accountability, and transparency.

According to Jay Coen Gilbert, a founder of ‘B Lab’: We can’t have a new economy unless we have a new type of corporation: Current law, he argues, require company executives to put shareholder’s interests ahead of everyone else’s and that is not socially responsible; we need a different structure. On the other hand, Marc Gunther says; the ‘B Corp’ concept is great in theory but the problem is that the majority of the world’s large corporations will not re-incorporate as a ‘B Corp’.

Thus, the idea of ‘business for the public benefit’ is not going to get big enough or important enough to make a real difference. It will just sit on the sidelines of ‘shareholder capitalism’. There are many existing corporations that are making the world a better place; by serving their customers, enabling their workers to flourish, and giving back to their communities. Even with the good deeds of many existing corporations; there’s no doubt that some key corporation reforms are needed; for a kinder gentler social conscious capitalism

Together, we can establish a 21st century corporate structure that provides returns to society, for granting its charter, while creating strong stable and responsible businesses. ~ ‘B Lab’

Private Equity– Changing Face of Capitalism: Dark- & Bright-Side of the World Financial Markets…

“Private equity is becoming a life-stage for CEO’s. It’s something we’ve never seen before. Perhaps the lesson to remember best is this: the Private Equity world is now attracting the ‘best and brightest’ of the corporate world…” ~Jeffrey A. Sonenfeld

Private equity firms have been castigated as “smash and grab merchants”, “deal flippers”, and criticize severely as “locusts that fall on companies and stripping them before moving on.” They have been accused of misleading promises, dodging tax and threatening social stability. Yet they are the emerging giants of the financial world, an alternative asset class that is increasingly attracting investor interest. Consider these facts:

  • The biggest five private equity deals together are larger than the annual budgets of all but 16 of the world’s largest nations. The five biggest deals involved more money than the annual budgets of Russia and India.
  • The annual revenue of the largest private equity firms and their portfolio companies would give private equity four of the top 25 spots in the Fortune 500. These firms have more annual revenue than companies, such as, Bank of America, JP Morgan Chase, and Berkshire Hathaway.
  • The top 20 private equity firms alone control companies that employ nearly 4 million workers.

Private equity investments are primarily made by private equity firms, venture capital firms, or angel investors, each with their own set of goals, preferences, and investment strategies, yet each providing working capital to target companies to nurture expansion, new product development, or restructuring of the companies’ operations, management, or ownership.

Among the most common investment strategies in private equity are: leveraged buyout (LBO), venture capital (VC), growth capital, distressed investments and mezzanine capital. Private equity is risk capital invested in businesses that aren’t listed on public-stock exchanges, or won’t be after they’ve been taken over, and de-listed. It’s also a shorthand term for firms that specialize in raising capital for new enterprises, financing management buyouts, and restructuring companies to realize the full value of their assets.

Over $90 billion of private equity was invested globally in 2009, a significant fall from the $181 billion invested in the previous year. The 2009 total was more than 70% down from record levels seen in 2007. Deal making however gathered momentum during the year with larger deals announced towards the end of 2009. With bank lending in short supply, the average cost of debt financing was up and private equity firms were forced to contribute a bigger proportion of equity into their deals.

Private equity funds under management totalled $2.5 trillion at the end of 2009. Funds available for investments totalled 40% of overall assets under management or some $1 trillion, a result of high ‘fund raising’ volumes between 2006 and 2008. Funds raised fell by two-thirds in 2009 to $150 billion, the lowest annual amount raised since 2004.

The difficult ‘fund raising’ conditions have continued into 2010 with half-yearly figures showing a total of $70 billion raised in the first six months, slightly below the same period in 2009. The average time taken for funds to achieve a final close more than doubled between 2004 and 2010 to almost 20 months and in some cases the final amounts raised were below original targets.

Prior to the economic slowdown, the market saw intense competition for private equity financing. The three years leading-up to 2009 saw an unprecedented amount of activity, during which more than $1.4 trillion in funds were raised.

In the article A Primer on the Structure of Private Equity Firms” by Michael Gasparro writes: The private equity firm is typically made up of limited partners (LPs) and general partners (GPs). The LPs are the outside investors. They provide the capital and typically consist of institutional investors such as insurance companies, endowment funds (Harvard, Stanford, Princeton, Yale, and other universities invest endowment funds in private equity), foundations, banks, retirement/ pension funds, family investment offices, as well as, high net-worth individuals.

They are called limited partners in the sense that their liability extends only to the capital they contribute. Generally, the minimum commitment for an LP is $1 million. The agreement between LPs and GPs will typically include contractual provisions which specify what private equity firm can and cannot do. Broadly speaking, provisions will be placed around the management of the fund, the activities of the GPs and the types of investments the GPs can make…

In the articlePrivate Equity Insights You Need To Know” by Tom Johansmeyer writes: ‘Global private equity deal flow has witnessed a resurgence during 2010 as a whole, with deal flow globally this year representing the strongest year for private equity deals since the onset of the global financial crisis. ‘In particular, this year has been notable for a surge in both North American and European deals, with North American deal flow in 2010 more than double that witnessed during 2009, and European deal flow in 2010 almost three times the value of deals seen in the region in 2009.’ According to the Preqin’s statistics:

  • There were 265 exits in the fourth quarter of 2010, amounting to $71.8 billion – this is the highest quarterly figure on record.
  • In full-year 2010, $204.9 billion worth of buyout deals was announced, more than doubling the 2009 total value announced.
  • Deal flow in 2010 increased 130 percent from 2009 and 35 percent from 2008 in North America.
  • Deal flow reached $68.1 billion in Europe last year, almost three times the $24.2 billion in announced private equity deal flow the year before.
  • In Asia and the rest of the world, announced private equity deal flow spiked 39 percent from the third quarter to the fourth quarter, with $8.6 billion in transactions announced.

In the article Private Equity and Strategic Buyers -Distinction Without Difference?” by Peter Lehrman writes: According to the ‘Pitchbook Data’s 2011 Private Equity Breakdown’ there were 5,994 private equity-backed portfolio companies at year-end 2010.

According to a recent survey ‘AxialMarket’ conducted, interviewing its private equity customers, 57% of the respondents indicated that their portfolio companies were actively looking to grow through acquisitions, while over 80% of the respondents indicated that their portfolio companies would opportunistically review  acquisition  opportunities. Why does this information matter to business owners?

Because the most likely strategic buyer for your business ironically might well be a private equity firm instead of a Fortune 2000 corporation.  What business owners and to a lesser extent M&A Advisors appear to under-appreciate is how significant the private equity community has become as its own strategic buyer category. In addition to having over $400 billion of committed but un-deployed capital that must be deployed in the coming years, private equity firms collectively own almost 6,000 private companies.

In the articleWill Dodd-Frank Forever Change Private Equity?” by Kareem G. Nakshbendi and Averell H. Sutton write: The ‘Dodd–Frank Wall Street Reform and Consumer Protection Act’ brings ‘private equity funds’ under the auspices of the Securities and Exchange Commission. Any entity that has assets of at least $150 million is subject to record keeping and disclosure requirements pursuant to the SEC and Commodity Futures Trading Commission (CFTC).

However to work-around the provision of the bill, funds simply make smaller deals: A firm can create different fund structures to have multiple funds that have no more than $125 million each and do not have similar ownership structures in order to evade Dodd-Frank. Venture capital funds are exempt from Dodd-Frank. The bill creates a level of transparency that has not been seen before in private equity.

One of the attractive things about private equity deals is that the public is not at risk and therefore has no reason to know the details of a deal arrangement. Private equity’s real currency is its unique access to information and clients, and the opportunity to make big gains for the risks taken…

“The best-performing companies are those where the private equity investors are: Bought into the right company at the right time; Backed strong management from the outset; Focused on delivering sustained improvements”. “The key to a successful private equity is thorough preparation”.  ~ Ernst & Young

The private equity world is a very freewheeling world. It is entrepreneurial, competitive, hard-driving, and unforgiving, in part because it is both numbers-oriented and short-term. Private equity is not necessarily a confusing topic, but it can be highly complex. Private equity firms typically seek to re-energize businesses by refocusing, restructuring, reinvigorating – and then sell them on a short-term horizon, generally 3 to 5 years.

While these firms commonly take a management fee of 1.5% to 2% off the top each year, their primary goal is the eventual payoff: 15% to 20% of profits upon sale or public offering. Their business emphasis is not on operating businesses for a profit, or even building businesses over the long haul, but on buying-and-selling businesses for a profit. With the bursting of the credit bubble the private equity industry was badly affected: In research,

Boston Consulting Group estimates that at least 50% of the private equity deals done in the recent past will default on their debt. The liquidity crunch has changed the availability of cheap debt, and approximately half the firms need to raise capital for new funds.

As a result, private equity firms will shrink dramatically and only the best firms will survive the new financial environment. However, in the long-term, it is highly likely that a more vibrant industry will reemerge…

“Investors need to be aware that most of the publicly-available data on private equity returns are usually wrong – and often grossly misleading.” ~Michael Moritz

Capitalism and Corporations: Time for an Overhaul?

“History suggests that capitalism is a necessary condition for political freedom” ~ Milton Friedman

“While the miser is merely a capitalist gone mad, the capitalist is a rational miser” ~Karl Marx

“Despite a voluminous and often fervent literature on “income distribution,” the cold fact is that most income is not distributed: It is earned.” ~ Thomas Sowell

In the article “Capitalism is Dead. Long Live Capitalism” by Gary Hamel, Management Expert, Cofounder of Strategos, Director of the ManagementLab, he writes: I’m a capitalist by conviction and profession. I believe the best economic system is one that rewards entrepreneurship and risk-taking, maximizes customer choice, uses markets to allocate scarce resources and minimizes the regulatory burden on business. If there’s a better recipe for creating prosperity I haven’t seen it.

So why do fewer than four out of ten consumers in the developed world believe that large corporations make a “somewhat” or “generally” positive contribution to society? (2007 study by McKinsey & Company.) Why is it that only 19% of Americans tell pollsters they have “quite a lot” or a “great deal” of confidence in big business? (2010 Gallup Survey; only Congress scored worse.) It seems that a majority of us expect big companies to behave badly—to ravish the environment, exploit employees and mislead customers. Some blame Wall Street for this state of affairs. In March 2009, the Financial Times claimed that the “credit crisis had destroyed faith in the free market ideology that has dominated Western thinking for a decade.” Around the world, hyperventilating pundits and grandstanding politicians argued that a new model of capitalism was needed—one that would make executives even more accountable to legislators and bureaucrats…

If individuals around the world have lost faith in business, it’s because business has, in many ways, abused that faith. In this sense, the threat to capitalism is both more prosaic and more profound than that posed by marauding bankers—more prosaic in that the danger comes not from the esoteric schemes of “rocket scientists” but from the slowly accreting frustrations and anxieties of “ordinary” folks; and more profound in that the problem is truly existential—it threatens to burden every large company with the sort of regulatory constraints that were once reserved for nuclear power plants…

Some may bemoan the fact that capitalism (broadly defined) has no credible challengers, but it doesn’t. Like democracy, it’s the worst sort of system except for all the others—and that’s why each of us has a stake in making it better. If we fail to do so, the growing discontent with business will embolden all those who believe CEOs should answer first and last to civil servants—to those who are eager to replace invisible hand of the market with the iron hand of the state…

We know the future cannot be an extrapolation of the past. As the great grandchildren of the industrial revolution, we have learned, at last, that the heedless pursuit of more is unsustainable and, ultimately, unfulfilling. Our planet, our security, our sense of equanimity and our very souls demand something better, something different.

So we long for a kinder, gentler sort of capitalism—one that views us as more than mere “consumers,” one that understands the difference between maximizing consumption and maximizing happiness, one that doesn’t sacrifice the future for the present and regards our planet as sacred…

Hamel continues; I am an ardent supporter of capitalism—but I also understand that while individuals have inalienable, God-given rights, corporations do not. Society can demand of corporations what it likes… Of course, as consumers and citizens, we must be acknowledge that companies can’t remedy every social ill or deliver every social benefit. We must also face up to our own schizophrenia. We can’t expect companies to behave responsibly if we blithely abandon our own principles to save a buck.

As for executives: If you feel your industry is still too lightly regulated, if you secretly long for the regulatory fetters to be tightened even further, if you think that Sarbanes-Oxley, the Patient Protection and Affordable Care Act, the Restoring American Financial Stability Act and Basel III don’t go far enough—then just keep on doing what you’re doing. If, on the other hand, you’ve had enough of sanctimonious politicians and meddling bureaucrats, then you must face up to a simple fact: In the years to come, a company will be able to preserve its freedoms only if it embraces a new and more enlightened view of its responsibilities.

Many CEOs have already resigned themselves to this new reality, and some have eagerly welcomed it. There are others, though, who still cling to the belief that a company is first and foremost an economic entity rather than a social one. Sooner or later, these holdouts will discover that they face the same hard choice that confronts every teenager—drive responsibly or lose your license. For the sake of capitalism, let’s hope its sooner.

In the article “Capitalism Forever? Why Companies Fail” by Sohail Inayatullah he writes: “Companies are born, companies die, capitalism moves forward. “Creative Destruction”, they call it.”, what US Treasury Secretary Paul O’Neill called “the genius of capitalism”. But economic systems (that what we do when we wake up in the morning) also fail.  First, is the problem of success. “A number of studies show that people are less likely to make optimal decisions after prolonged periods of success: NASA, Enron, Lucent, Worldcom – all had reached the mountaintop before they ran into trouble.” Might not this be the case with the world capitalism system itself, after hundred years of success? Capitalism defines what we do and how we do it…  

As 14th century macro-historian, Ibn Khaldun wrote in his classic The Muqaddimah (An Introduction to History): “At the end of a dynasty, there often also appears some (show of) power that gives the impression that the senility of the dynasty has been made to disappear.  It lights up brilliantly just before it is extinguished, like a burning wick the flame of which leaps up brilliantly a moment before it goes out, giving the impression it is just starting to burn, when in fact it is going out” (Khaldun 1967, 246).

Inayatullah continues; in the article “Why Companies Fail” by Ram Charan and Jerry Useem in Fortune magazine, they quote Jim Collins, author of “Built to Last and Good to Great”. The key sign – the litmus test – is whether you begin to explain away the brutal facts rather than to confront the brutal facts head on”.  While for companies the brutal facts are often an unsustainable business model, cash flow problems, too much risk, and acquisition lust, for the capitalist system as a whole; the brutal facts (taken from the United Nations Human Development Report, various years) are:  

  • While there are still 840 million people malnourished and 2.6 billion people have no access to basic sanitation, the world’s 200 richest people more than doubled their net worth in the four years to 1998, to more than $1 trillion  
  • The assets of the top three billionaires alone surpassing the combined GNP of all Least Developed Countries (LDCs) and their 600 million people.  
  • People in Europe and North America spend $37 billion a year on pet food, perfumes and cosmetics, a figure which would provide basic education, water and sanitation health and nutrition for those deprived.  

When the whole property of this universe has been inherited by all creatures, how can there be any justification for the system in which some one gets a flow of huge excess while others die for a handful of grains?”   

Of course, it could be that others are just lazy or just not smart enough or too corrupt or too feudal or too … or perhaps we need to face the brutal facts: (1) capitalism has succeeded for the last hundred years, recreating the planet, bringing untold wealth and now placing the entire planet in jeopardy. Capitalism can create wealth but distribution remains a quandary; all systems come and go, and new ones can and will be created.  

Perhaps it is time to move away the metaphor of the jungle of evolution (survival of the fittest) and design and create a system that works for all – humans and Gaia.  And perhaps that would be the greatest genius of capitalism, self-destruction, so that a new system can emerge.

In the book “The New Capitalist Manifesto: Building a Disruptively Better Business” by Umair Haque he writes: Welcome to the worst decade since the Great Depression. Trillions of dollars of financial assets and shareholder value destroyed; worldwide GDP stalled; new jobs vanishingly scarce. But this isn’t just a severe recession. Its evidence that our economic institutions are obsolete—a set of ideas inherited from the industrial age that no longer works for business, people, society, or the future.

Umair Haque argues that business as usual has outgrown the old paradigm of short-term growth, competition at all costs, adversarial strategy, and pushing costs onto future generations. These outworn assumptions are good for creating only “thin” value—gains that are largely illusory and produce diminishing returns every year.

For “thick” value—enduring, meaningful, sustainable advantage that deeply benefits the larger society, Haque details: A company that is `responsible’, `socially friendly’, environmentally sustainable, truly `democratic’ and innovative at its core. Transform the aggressive, mean and profit-driven corporation, of the industrial era, into a socially aware yet profitable enterprise. Democracy in the production process is essential in the world of the twitter-using, constantly linked and informed consumer, and synthesized production systems that will benefit both.

In the article “Opinion: A Defense of Capitalism” by Kevin Fisher he writes, in “The Tech” article, entitled “Who Does Capitalism Really Work For?,” Alexi Goranov argues that, “given the current economic and social state of America, it is clear that there must be an overhaul of the system. Greedy corporations and those in the upper echelon of the economic ladder have stopped at nothing to profit at the expense of America’s working class. The system has rewarded the few while failing to provide for the majority of Americans. Therefore, it is our responsibility to initiate a new, democratic way of doing things, one that puts people before money”.

This seems like a plausible argument. Yet what is its moral basis? Although not explicitly stated, the premise is that people have a right to certain things and it is society’s job to provide them. If I need something, it is the job of someone else to produce it for me…. The products of society are resources, to which all, at least to some extent, are entitled to. However, society is not an entity. It is made up of individuals, who themselves have inalienable rights. If it is society’s responsibility to provide for our needs, then the reality is that it is the job of some person to produce for the benefit of someone else. A socialist system is based upon this moral code…

Fisher continues; capitalism is a system that respects property rights and allows people to function as free individuals, just as the Founding Fathers envisioned. People interact with each other voluntarily in such a system, valuing and trading goods and services only when they see a benefit for themselves… It is the system that has made the United States the wealthiest nation in the world. It is the reason why for hundreds of years immigrants have left their homes to follow their dreams in the land of opportunity. It allows all people to live at their highest potential, enjoying the fruits of their own productive work…

You have every right to disagree with and criticize this argument. Yet the debate must be relevant to the subject at hand. Capitalism is a social and economic system, not a political one.  As Michael Moore shows in Capitalism: A Love Story, fraud in the government has been rampant. There are some corporations that wield sizable influence in government policy, which they use to cheat the system and gain even more profits. Fraud is wrong, but the solution is not to reevaluate our social and economic system. Rather, we should question the effectiveness and functioning of the government. Moore says that the $700 billion dollar financial bailout was in many ways a result of the greed of bankers who happened to have connections in the Treasury Department. It was immoral, even from a capitalist point of view…

Another argument that is often made against capitalism as seen in America is the growing gap between the rich and the poor. Depending on your value system, you may or may not be troubled by such statistics…In a society that rewards productive achievement; some people are going to be richer, possibly by a lot, than others. In an ideal capitalist system, a person gets wealthy when other people value the products of his or her work. As a nation gets wealthier, it is generally true that the rich will get richer at a greater rate than the poor will get better off….

Fisher continues; America is at a turning point. In light of the financial collapse, issues with healthcare and the waning competitiveness of our education system, just to name a few, it is clear that things need to be done differently. What exactly needs to be done differently is the subject of a very important national debate.

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“Capitalism is what people do if you leave them alone”~Kenneth Minogue

“Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone.”~John Maynard Keynes

“The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries.”~Winston Churchill

“Under capitalism man exploits man; under socialism the reverse is true”~Polish Proverb

“Doing well is the result of doing good. That’s what capitalism is all about.”~Ralph Waldo Emerson