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Jeremy Grantham’s talk on Capitalism

7/25/2015

15 Comments

 

“Conference on Inclusive Capitalism” May 27th, 2014 


Introduction (Two Minute Talk)

It is generally represented that both Adam Smith and Milton Freidman argued that you could leave capitalism to look after itself and all would be well. In Adam Smith’s body of work however there are many indications that he knew that in the real world companies need a watchdog government.  Recent history re-enforces this view.  Capitalism does indeed do a thousand difficult things spectacularly and seductively well: it clears millions of different input costs and market opinions into a single price.  It does only a few things badly.  Unfortunately this handful of failures—that include social injustice and Long-Term externalities—may bring our system down and ruin the agreeable planet we enjoy today.  With capitalism in its current form we are reaching levels of inequality that may lead to extreme social instability.  Much worse, on our current path we will erode our soils, poison our planet’s air and water and cook our collective goose. 

The cure is, of course, enlightened government.  Given the limitations of homo-sapiens in action we will not approach perfection but perhaps we can aspire in the U.S. and U.K. to the average level of collective wisdom of the four Scandinavian countries.  Somehow they deal with a voting democracy like ours and yet they lead in foreign aid, have substantially more equitable divisions of income and capital and above all can make much more forward looking and responsible environmental decisions.  They are also measurably happier.  

Surely we can do as well?  But to do so, the U.S. in particular must reform its political system, which has produced such an extreme dysfunctionality that it facilitates our country’s many other ills. 

Exclusive Capitalism and other Deficiencies in the U.S. Model (Seven Minute Talk)

1. The U.S. is becoming increasingly unequal.  At current rates by 2030 the richest 10% will have 60% of all income, the poorest half 15%: the most extreme division in modern times. Anywhere.

2. How is this possible with universal suffrage? 

3. The answer is propaganda.  The political right has successfully bamboozled a substantial fraction of the poor to vote for them. 
  • They have been at it intensively for 30 years 
  • They have immense money 
  • It has been done with great even enviable skill

4. With help from a bizarrely right wing Supreme Court majority, politics in America has become legalized bribery.  The net result is that money is balancing the natural voting majority of the poor 
  • With about 50% of the time in government the right has used changes in tax not to balance rapidly increasing wealth and income concentration but to exaggerate it 

In the 60’s income from wealth paid a premium tax rate now it receives a substantial discount. 

The right still fights the Inheritance Tax and this is already a propaganda success for a tax paid by only 2% of U.S. families is opposed by 68%!

Since 1965 top CEO’s have gone from 50x the average worker to over 300x a level easy to regard as obscene.  The 85 richest people in the world—that could squeeze onto a London double-decker—have more wealth than the world’s poorest half: 3.5 billion people! 

5. Other previous stakeholders have been neglected or ignored
  • Labor is often treated as a necessary evil.  They have received zero percent of the rewards from the considerable increase in productivity since 1980.  Prior to that their wages rose equally

Defined Benefit Pension funds that used to be the crown jewel of employee care are being abandoned as unaffordable and this at a time when U.S. profit margins are unarguably at an all-time peak 
  • The locality.  Far from receiving corporate taxes they now engage in subsidy competition to entice them. 

Multi-nationals owe little loyalty even at the country level 
  • Even stockholders now lose share to management 

We have entered what Andrew Smithers describes as the stock option culture: decreased capital spending and increased stock buy backs. 

This is great for stockholders and even better for management but bad for jobs, growth and income inequality and income inequality reduces breadth of consumption and further reduces growth. 
  • But the most dangerous stakeholders loss is society and the environment 

A U.S. corporation may be increasingly treated in law as an individual but we humans are actually hard wired to be co-operative, to be tribal: 
Companies in comparison are almost sociopathic:
Ethical good behavior will only occur if:
    a) There is a strong regulation and enforcement  OR 

    b) If companies believe that a good image buys them a commercial advantage, particularly in hiring OR

    c) If dragged by exceptional individuals—but the good players are mostly in retailing and consumer brands.  We need the oil and mining bosses.

  • The biggest risk though to all of us, is in ignoring nature, ignoring the damage to water, soil and air in particular. On two of these—soil and air—our very existence in any favorable shape might depend. 

Water problems will soon lead to wars unless we are lucky

Soil erosion globally runs close to one percent a year in large scale agriculture including the U.S. mostly in very heavy storms, which are increasing rapidly with climate instability.  In the U.K. a recent study warns of a fourfold increase in very heavy downpours. 

The U.S.D.A. which is considerably under the influence of ‘Big Ag’ encourages only monoculture, heavy resource input, increased production at any cost—with little or no regard for long-term sustainability. This is unnecessarily dangerous for society in the long-term but is very profitable for many ag-oriented companies in the short-term. 

We will have either fixed this problem in the next 50 years or we will collectively have begun to starve

Air
All countries are pledged to try and keep global temperatures from rising above 4 degrees F
We know though that fossil fuel companies must leave over two thirds of the carbon they already have in their proven reserves in the ground 
Yet we collectively spend 650 billion dollars a year to find new oil that we absolutely cannot burn without going dangerously beyond the limit.  
There are no effective national leaders dealing with this impasse
The implications of climate change are brilliantly obfuscated by the propaganda of oil and coal interests, who have a dangerously large influence over the U.S. government.
(In England, the Loony Lords of climate denial, Lawsen, Ridley and the boys are also regrettably influential)
The cynicism is remarkable.  Exxon has prepared for years to drill in the arctic, which requires the ice to melt, while simultaneously funding deniers of the melting process itself. 

What we desperately need is of course, enlightened government and most importantly enlightened leadership by the U.S. 
We need some good new regulations to limit U.S. campaign contributions and ideally all political spending and to make the giving transparent.  In the case of corporations we need to require shareholder approval (it is after all our money)
  • We need a carbon tax with full equal rebate to individuals. It could just pass
  • We need more income and wealth equality, not less, therefore steeper taxes on dividends and capital gains, and we need stock option reform.  Steeper income taxes at the very high-end.  Above all retention and increases in the inheritance tax.  (how much more un-American could it be, than to create dynasties?)
  • We need Board reform, with fewer management crony’s and we need a complete review of how competitive salaries for top management are estimated
  • We need more ethical corporate leaders, who will also think about our world’s long-term well-being 
  • We need a full energy policy: we are running out of cheap oil—and other cheap resources.  
  • Oil prices are six times that of 15 years ago despite a weak economy yet there is no recognition of resource scarcity in economic theory or by current governments.  It is an extremely dangerous myopia.
  • We need stronger and braver expositions of climate science by senior scientists.  
  • We are threatened socially, economically and most of all environmentally 

If we can’t do better collectively, as a society, our grandchildren will pay a very high price.
15 Comments
Bob Kaufman
7/28/2015 11:29:53 am

Capitalism is what allows innovation to be profitable so as to improve the lifestyles of all economic classes. However, it also encourages exploitation of the masses by the owners of capital and the top executive team. We do not want to destroy the prosperity engine that is capitalism and we are unlikely to motivate business owner and leaders to slice up the economic pie differently. Therefore, we need government policies that provide a stronger safety net for the poor in times, like now, when income and wealth inequality become too large. I suggest that the source of that subsidy should be increased income taxes on the highest income earners, increases in the capital gain taxes, and much lower estate tax exemptions. My god, I sound like a democrat. HELP!!!!

Reply
Innovator Pramod Stephen link
12/1/2016 01:09:02 am

Simple Solution for Control Air Pollution in the Cities
. Air pollution in all cities is big problem throughout year. Now it is looking very high in Delhi. By Air pollution's people’s gets many kind of diseases like Asthma, Bronchitis, Mental disturbance, Skin diseases, and it’s also affect our metabolism. Now I am giving some permanent solutions that every Chou k (circle) we must put a big Rain fall to clean the air and control the weather. Because water has capacity to suck the pollution from the air control the humidity temperature. And increase the green vegetable and tree. According to my knowledge Bamboo Is very fast growing Plant (grass) in the world and it has big capacity to absorb pollution’s and produces oxygen. By putting this kind of plant we can control pollution. we must make cities in a plan way. We can use solar vehicle or battery vehicle in the place of petrol and diesel vehicle .we can use night soil and wastage of green vegetables for cooking gas. Because night soil, green vegetables, cow done produces methane gas. In other side we can use the wastage of green vegetables like Plants leafs, Green grass. Orange roughage Sugarcane waste etc in clean way then we can use it for animal’s fodders and we can produces milk and meat. I saw many cities administrations make places for throwing waste s and not a systematic way and people throwing not a clean way even then animals eating the wastage but not a whole after some time its produce smell. We can see the garbage in the corner of cities. And it is big problems of all cities. If we can plan for recycling of our green wastage's, Night soils, Glasses, Plastic, Cloths, water, leathers, furniture’s, Rabber’s, Bricks, woods , and other useless substance in such a way then we can control much kind of pollution's in the cities.

Reply
Jonathon Sarah link
4/9/2019 12:06:11 am

Capitalism sometimes requires assistance. Innovation which makes the world more profitable and improves lifestyle is not always enough. For example, I work with a team of world leading engineers who have devised an energy and food production platform akin to the Chaffey's technological advancements of the 1880's. The Chaffey's introduced modern hydrology based farming services and electricity generation to the world in California. We have introduced solar thermal and wind based modern farming services and electricity generation to the world, we call them Economic Engines TM, but there is no movement. It is time for government to intervene. All farming services and all energy projects (farmergy projects) should be Economic Engines TM from this day forth. Policy for existing farmers to be paid to replant native trees and manage their forests should be introduced. There are no subsidies needed for Economic Engines TM, only policies which will force the production of lower cost energy, food and water for all economic classes.

Reply
Anoop
7/29/2015 12:49:23 am

The unabashed worship of Mammon, over the last 40 -50 years, the lack of punishment for white collar crimes, the celebration of short termism, the availability of plentiful cheap labour across the world and an unprcedented period of global peace (with very localised conflicts) have all combined to swing to the pendulum of capitalism to close to an extreme level.

Reply
Seth
8/8/2015 03:48:02 pm

I like to call the contemporary Republican Party the "God & Mammon Coalition" because it offers God talk for the poor, bucket loads of cash for the rich.

The irony, unfortunately, needs to be explained in a world where Pope Francis is taken for a radical, rather than a gospel believing Christian. The bible tells us (Matthew 6:24):
24 No man can serve two masters: for either he will hate the one, and love the other; or else he will hold to the one, and despise the other. Ye cannot serve God and mammon.

Reply
Bob Maes
7/29/2015 09:13:43 am

We need term limits. Without term limits I don't think we can fix our current mess. The problem is, how do we get term limits? I don't think it will happen. Somebody please cheer me up.

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Seth
8/8/2015 03:41:45 pm

Term limits are not going to help. Short tenure of office in legislatures simply makes every legislator more beholden to lobbyists to explain what is going on, and how they should vote. It also turns every legislator into an aspiring lobbyist after being termed out.

The problem is the money, the money, the money.

Reply
Reinhard Stompe link
7/29/2015 07:49:58 pm

Very brave speech for a fund manager!
"Capitalism is what allows innovation to be profitable"
This is just another myth in a black and white view of the world. I would assume in today's oligopolistic markets "capitalism" prevents more innovation than it furthers. Where reigns "capitalism" today? In China they have centrally planned "capitalism" and in the US / EU its very close to what Mussolini defined as fascism, i.e. the close cooperation of Governments and Big Business. The only question on my mind is whether Robin Hood will do or whether we need a new French Revolution.

Reply
Bob Kaufman
7/29/2015 08:21:04 pm

That comment was not made by grantham but by me. I stand by it but I agree with you that both our political system and our economic system are now controlled by business and others who have the money to fund elections. I do not see the energy to revolt but I do think that revolution is the only way to bring change. The media is part of this and they are controlled by the funders of their advertising; again business.

Will we have the necessary revolution before we so destroy and deplete our environment as to make our modern lives unsustainable?

Will we ever have the firepower or energy to successfully revolt?

If we do revolt, what kind of government and economy do we want? Is it socialism? Is it a form of capitalism that breaks the hold that big money has on government and the media?

I want the later and think grantham has some great ideas in his speech to help. I also agree with term limits but do not see how we get there short of revolution.

It all makes me sad. I hope for a better form of capitalism but I do not see us making any of the necessary changes.

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geoff davies
7/31/2015 01:52:39 am

I'm surprised that Mr Grantham makes no mention of demographics - surely anyone believing in antropogenic GW must see the common factor is (increasingly) the number of people on the earth, and there ever growing list of "wants". How can we take seriously the Pope's remarks about GW when he inherently accepts unlimited population growth.
I'd also like to see mentioned how inequality is amplified by world class cities competing for investments by the world's mega rich ( a recent study suggests the wealthiest 92,000 have $21 trillion stashed in tax havens). Governments support trophy property developments etc. in order to attract this money - and must ignore the money laundering often implied and refrain from excessive taxation of these unearned gains for fear of losing the investment capital to competitor cities... think London, NYC, Sydney, Vancouver for example.

Reply
Tolar Nolley link
1/23/2016 08:12:23 pm

Please look at post by William Tolar Nolley on Oyster Company of Virginia Facebook pagec called Red Light...Green Light...Push Me Pull You...

Reply
Lewis link
7/1/2018 10:51:50 am

Mr. Grantham's keynote at the 2018 Morningstar Investment Conference expanded greatly on this blog post and added many immensely important -- and frighteningly prescient -- details.

I am a biomedical researcher whose study was stalled for 2-1/2 years because I needed to develop a novel experimental protocol that could work around the environment's now-ubiquitous chemical contamination which rendered previous studies incapable of replication.

My work proves that the following three statements from Mr. Grantham's presentation are dead-on accurate:

(1) “I think chemicals will turn out to be a hotter button than climate change."

(2) "We've created a toxic environment apparently not conducive to life."

(3) “We must respond rapidly by a massive and urgent move away from the use of complicated chemicals that saturate our daily lives.”

My work shows that the situation is even more acute and threatening, especially as regards the contamination from plastics that Mr. Grantham mentioned.

Getting a comprehensive grasp of the all-pervasiveness of the contamination has taken me five years of research that shows how chemicals from plastics cause or promote the current stealth epidemics of obesity, Type 2 Diabetes, Alzheimer’s Disease, reproductive disorders, and cancers.

The problems are even more serious than Mr. Grantham note, but are caused by the same corporate and regulatory lapses he so correctly described.

Reply
Robert Poole jr
9/3/2018 07:24:33 pm

https://www.indiegogo.com/projects/unlimited-range-electric-car/x/19339086#/

Join me in the combat of climate change please make sure Jeremy reads my story on indiegogo.

Reply
Susana Duncan, MD
8/13/2019 07:38:38 pm

82% of terrestrial CO2 is contained in soil; more than in all the vegetation and atmosphere and water combined. Modern intensive farming with its high nitrate fertilizers; insecticides and plough blades kills the earthworms; nematodes; bacteria; myorrhizal fungi and many other organisms which retain and make available to plants the essential minerals and chemicals for their growth and keep the soil friable, fertile and water retaining. Intensive farming turns soil to dirt, dependent on chemical fertilizers to make plants grow; many of which chemicals do not assist intended growth but run off into the rivers and seas. An unending, self reproducing vortex. It is estimated that if the worlds 19 million square miles of denatured grasslands were returned managed sustainably, they would solve our climate change. Restored to natural pasture they would capture 10 gigatonnes of carbon per annum. We currently emit 4.5 gigatonnes of CO2 per annum.

Reply
Kevin S link
12/14/2020 05:46:04 pm

Hello, nice blog

Reply



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