With the fall of communism in eastern Europe between 1989 and 1991, many hailed this as the victory of capitalism.
Even China, which is still governed by the Chinese Communist Party, has embraced the market and accepted growing levels of private ownership of capital. It is only one or two countries, such as North Korea and Cuba, that could be described as communist in the way the term was used to describe the centrally planned economies of eastern Europe before 1990.
But whilst market capitalism seemed to have emerged as the superior system in the 1990s, may are now questioning whether the market capitalism we have today is fit for the 21st century. Today much of the world’s capital in the hands of big business, with financial institutions holding a large proportion of shares in such companies. And the gap between rich and poor is ever widening
The market system of today, is very different from that of 100 years ago. In fact, as John Kay agues in his article “Let’s talk about the market economy” below, it would be wrong to describe it as ‘capitalism’ in the sense the term was used in the debates of the 19th and early 20th centuries. Nonetheless, the term is still used and generally refers to the market system we now have. And it is a market system that many see as failing and unfit for purpose. It is a system that coincided with the bubble of the 1990s and early 2000s, the credit crunch of 2007–9 and the recession of 2008/9, now seeming to return as a double-dip recession
With the political and business leaders of the world meeting at the World Economic Forum at Davos in Switzerland on 25–29 January 2012, a central theme of the forum has been the future of capitalism and whether it’s fit for the 21st century.
Is there a fairer and more compassionate capitalism that can be fostered? This has been a stated objective of all three political parties in the UK recently. Can we avoid another crisis of capitalism as seen in the late 2000s and which still continues today? What is the role of government in regulating the market system? Does the whole capitalist system need restructuring?
It’s becoming increasingly clear that we need to talk about capitalism. The following webcasts and articles do just that.
Webcasts and podcasts
Davos 2012 – TIME Davos Debate on Capitalism< World Economic Forum (25/01/12)
Can capitalism be ‘responsible’? BBC Newsnight, Paul Mason (19/01/12)
Capitalism ‘nothing to do with responsibility’ BBC Newsnight, Eric Hobsbawm (19/01/12)
Are there alternatives to capitalism? BBC Newsnight, Danny Finkelstein, Tristram Hunt and Julie Meyer (19/01/12)
America Beyond Capitalism The Real News on YouTube, Gar Alperovitz (27/12/11)
The future of capitalism CNBC, Warren Buffett and Bill Gates (12/11/09)
Capitalism Hits the Fan (excerpt) YouTube, Richard Wolff (2/1/12)
Panel Discussion “20 years after – Future of capitalism in CEE” Erste Group on YouTube, Andreas Treichl, Janusz Kulik, Jacques Chauvet, and media Adrian Sarbu (24/2/11)
The Future of Capitalism: Constructive Competition or Chaos? YouTube, Nathan Goetting, Tony Nelson, Craig Meurlin and Judd Bruce Bettinghaus (24/1/11)
Capitalism in Crisis Financial Times, Various videos (24/1/11)
Bill Gates: Capitalism a ‘phenomenal system’ BBC Today Programme, Bill Gates talks to Evan Davis (25/1/12)
Capitalism (See also) BBC The Bottom Line, Evan Davis and guests (28/1/12)
Articles
Meddle with the market at your peril Financial Times, Alan Greenspan (25/1/12)
The world’s hunger for public goods Financial Times, Martin Wolf (24/1/12)
When capitalism and corporate self-interest collide JohnKay.com, John Kay (25/1/12)
Let’s talk about the market economy JohnKay.com, John Kay (11/1/12)
A real market economy ensures that greed is good JohnKay.com, John Kay (18/1/12)
Seven ways to fix the system’s flaws Financial Times, Martin Wolf (22/1/12)
To the barricades, British defenders of open markets! The Economist, Bagehot’s Notebook (26/1/12)
Community reaction to doubts about capitalism in Davos CBC News (26/1/12)
Capitalism saw off USSR, now it needs to change or die The National (UAE), Frank Kane (26/1/12)
Words won’t change capitalism. So be daring and do something Observer, Will Hutton (22/1/12)
A political economy fit for purpose: what the UK could learn from Germany Our Kingdom, Alex Keynes (20/1/12)
Debate on State Capitalism The Economist (24/1/12)
Questions
- How has the nature of capitalism changed over recent decades?
- Can capitalism be made more ‘caring’ and, if so, how?
- What do you understand by the term a ‘fair allocation of resources’? Is capitalism fair? Can it be made fairer and, if so, what are the costs of making it so?
- Can greed ever be good?
- How does the ‘Anglo-Saxon’ model of capitalism differ from the European model?
- What do you understand by the term ‘crony capitalism’? Is crony capitalism on the increase?
- John Kay states that “Modern titans derive their authority and influence from their position in a hierarchy, not their ownership of capital.” Explain what this means and what its implications are for making capitalism meet social goals.
- In what ways can governments control markets? Have these instruments and their effectiveness changed in effectiveness over time?
- What are the costs and benefits to society of the increasing globalisation of capital?
- To what extent was the financial crisis and credit crunch the result of a flawed capitalist system and to what extent was it a failure of government intervention?
- Why is it important for the success of capitalism that companies should be allowed to fail? Consider whether this should also apply to banks. How is the concept of moral hazard relevant to your answer?
In the blog Has Merlin lost his magic, the issue of banks failing to meet their lending targets as set by the government was considered. Small businesses have been finding it difficult to obtain bank loans to help their business grow. Vince Cable has gone so far as to say: ‘There is a serious problem with lending to good, small companies.’ As a result of this, new sources of finance are being sought and one innovative approach has come to the forefront: crowd funding. People group together by pooling their money and investing in ideas or businesses. The attraction is that it doesn’t require huge amounts of cash, but with enough potential investors, significant amounts of finance can be raised. The following BBC News article looks at this innovative approach to financing a business.
Small firms seek crowd funding BBC News, Catherine Burne (27/5/11)
Questions
- What is the attraction of crowd funding?
- Are there any risks of this method of finance to the investors and to the firm seeking investment?
- What are the disadvantages of crowd funding relative to something like investment from a venture capitalist?
- How important is the size of the firm when it comes to the viability of crowd funding?
We frequently hear about two companies merging with each other, whether for certainty, market share or economies of scale. However, in this case, we’re looking at a de-merging of one company to create two companies. Foster’s will be split to create two stand-alone companies.
With Foster’s retaining its beer business, a new company called Treasury Wine Estates will take over its ailing wine division. This split comes after 99% of investors cast their votes in favour of the split. The future profitability of this demerger is uncertain and how the stocks of the two separate companies trade in the coming months will give a clear indication of whether or not this divorce is the right move.
Foster’s votes to split beer and wine business Telegraph, Richard Fletcher and Jonathan Sibun (29/4/11)
Investors agree to split Foster’s into beer, wine units BBC News (29/4/11)
Two halves: Foster’s to split its beer and wine operations Mail Online (29/4/11)
Foster’s wine-beer demerger to clarify divisions’ value The Australian (30/4/11)
Questions
- What type of de-merger could we call this?
- How do you think the share prices of the 2 separated companies will fare following the de-merger?
- How concentrated is the beer and wine market? What effect will the de-merger have?
- In the BBC News article, Donald Williams says ‘The wine business needs a better pricing environment before it is likely to perform.’ What does this mean?
- Why has the wine division been a financial drain for so long?
There is a huge hole in public finances that needs to be filled and protestors are arguing that part of the deficit can be financed by companies that manage to avoid or indeed evade taxation. Sunday 30th January was marked by many as the day of action against this alleged tax avoidance by companies who choose to register in so-called tax havens. These countries offer much lower tax rates and hence provide an attractive environment for companies and savers.
However, protests by the campaign group Uncut have been targeting companies such as Boots, Vodafone and Top Shop, accusing them of depriving the UK economy of billions of pounds of tax revenue, which could be used to plug the hole in Britain’s finances and put the economy on the road to recovery. While these concerns have been around for a long time, they have been brought to the forefront by the government’s spending cuts in areas such as higher education, public sector pensions and the planned closures of libraries. There are numerous strikes planned by workers facing job losses, pay cuts and pension cuts. However, George Osborne has said:
“I regard these people as the forces of stagnation, when we are trying to get the British economy competitive again, moving forward again.”
With more and more spending cuts expected and households being squeezed could this tax avoidance really fill the gap? It is not known how much tax revenue is lost through tax avoidance and evasion, but HM Revenue and Customs estimated that the size of the tax gap could lie somewhere between £3.7 billion and £13 billion. The Commons Public Accounts Committee estimated a gap of £8.5 billion and the TUC at around £12 billion. A pretty wide divergence on estimates I grant you, but an indication of the sheer volume and value of tax avoidance that takes place. Clamping down on this may not plug the hole, but it would certainly help!
Analysis: UK Uncut- The true costs of tax avoidance Ethical Corporation 2009 (28/1/11)
Tax protestors stage Boots sit-in The Press Association (30/1/11)
Weekend of protests planned over tax cuts Guardian, Matthew Taylor and Jessica Shepherd (28/1/11)
Unions are “forces of stagnation”, says Osborne BBC News (28/1/11)
Day of action against tax avoiders The Press Association (28/1/11)
Firms’ secret tax avoidance schemes cost UK billions Guardian, Tax Gap Reporting Team (2/2/09)
Questions
- Why is the UK running such a large budget deficit?
- What is the point of tax avoidance?
- What are the arguments for companies such as Boots registering in other countries? Are these reasons ever in the interests of consumers?
- How are companies able to reduce their tax burdens by registering in countries like Switzerland?
- Why does George Osborne argue that trade unions and strike action are the ‘forces of stagnation’?
- What are the costs of striking to (a) workers, (b) consumers, (c) firms and (d) the economy?
- Would clamping down on tax avoidance be of benefit to the UK economy in the short and long run?
With news of the economy contracting in the previous quarter, it was perhaps a surprise to some that BSkyB has seen growth in its customer numbers to above 10 million: much of this increase due to growth in broadband numbers. In the second half of 2010, BSkyB reported that revenues increased by 15% to £3.2bn and their pre-tax profits were also on the way up to £467m. These latest figures are likely to put increasing pressure on News Corp’s takeover bid for the shares they do not own in BSkyB (61%), as share prices increase by 2%. Last summer, a bid of 700p per share was rejected and while both companies did agree to work together to determine if a future merger was viable, these higher share prices put BSkyB in a much stronger position.
However, before anything else happens, Rupert Murdoch’s company is waiting for regulatory approval from Ofcom for this takeover. BBC reports sugges that Ofcom has made an:
“unambiguous recommendation that News Corp’s plan to acquire all of BSkyB should be referred to the Competition Commission for further investigation.”
The Culture Secretary, Jeremy Hunt, has spoken of his intention to refer this potential merger to the Competition Commission, following Ofcom’s recommendation. There are concerns about the impact on competition and Rupert Murdochs’ increased influence over public opinion, if this merger were to go ahead. Any delays in finalizing a deal could benefit BSkyB, if their financial performance continues. Analysts suggest that the delay could be 6 months, while any investigation takes place. If profits continue to rise, share prices may also go up, requiring higher and higher bids by News Corp. Watch this space!
BSkyB profits soar 26% to £520m putting pressure on NewsCorp to increase takeover bid Daily Mail (27/1/11)
BSkyB reports big jump in profits BBC News (27/1/11)
BSkyB spends £7m on News Corp bid Guardian, Mark Sweney (27/1/11)
BSkyB result to highlight pressure on News Corp Reuters, Kate Holton (26/1/11)
HD TV, broad demand boosts BSkyB Telegraph (27/1/11)
News Corp bud for Sky should go to Competition Commission, recommends Ofcom Telegraph (27/1/11)
Call off the hunt Financial Times (20/1/11)
Numis raises BSkyB on expected News Corp deal delay Reuters (21/1/11)
Questions
- Explain what type of merger it would be between News Corp and BSkyB.
- What are the arguments (a) for the merger and (b) against the merger? Consider the impact on the public, the competitors, the workers etc.
- What is the role of Ofcom and the Competition Commission? How do their responsibilities differ?
- As demand for Sky’s products increases, what could we expect to see in terms of price? Now explain why your answer may not happen!
- Why have BSkyB’s share prices been affected? Is it the demand of supply of shares that has changed? Illustrate your answer on a diagram.