21st Century Capitalism Subverting Democracy, Says Top Investment Manager

Financial system failing; real problems of climate, environment, resource limitation, and looming food shortages ignored; long-term consequences never considered; rising inequality; a rewards system that stops the market from behaving rationally; democracy ineffective against the influence of the financial elite.

Photograph by Erik Madigan Heck via WSJ

Who says? Left-wing intellectuals like Naomi Klein, contrarian Nobel Prize economists like Krugman and Stiglitz, political dissidents like Syriza in Greece, Podemos in Spain, or Scottish National Party, Green, and a cetain Labour would-be leader in the UK? No; one Jeremy Grantham, financial strategist whose firm manages more than US $118 billion in assets, in his keynote address to the 2015 Morningside Investment Conference in Chicago. I don’t normally write about financial matters, but here we have the chief strategist of one of the world’s largest asset management firms delivering one of the sharpest critiques of what now passes for capitalism that I have ever seen, and his remarks* deserve far wider circulation.

Grantham lists the following 10 major problems [my comments in brackets]:

Resource constrains, low capital expenditure, inequality itself, climate pressures, and the low-hanging fruit is mostly gone. Facebook is not the steam engine.

Human folly, avoiding unpleasant information, leading to bubble after bubble as we repeat past mistakes, and deny or ignore the really important matters, like climate change.

Resource limitations. Conventional economics pays no attention to this, and assumes endless growth, as if the free market were a perpetual motion machine that would never run out of anything.

In particular, oil. Our economy was built on cheap oil, which is running out now. [Shale gas has reversed this, but only for the moment.]

Climate problems. Tree ring data show that California is the driest it’s been in 1,200 years. The cotton crop in Texas failed for 6 years in a row because of drought, and then came devastating floods.

Food problems. Probably, the biggest problems that we face, with water running out, soil erosion, population growth, and climate change. This may well lead to chaos in the world’s poorest countries. [Food problems were predicted in the 1940s, and failed to materialise, but that was because of the Green Revolution and Haber process fertiliser. There are no comparable innovations in sight.]

Income inequality. The economy can’t grow when wages are failing to rise.

Slow rise in output, for many reasons. What technology can most readily provide, we already have [as in my example regarding food]. As Grantham puts it, “Resource constrains, low capital expenditure, inequality itself, climate pressures, and the low-hanging fruit is mostly gone. Facebook is not the steam engine.”

Systematic failings of modern capitalism, which focuses exclusively on profit, neglects common resources such as air, water, and soil, and discounts the future of our grandchildren. As a Princeton University study shows, the [US] financial elite has massive influence on legislation, while public opinion has little or none; “This is not really effective democracy in action.”

Bad management by the central banks, and a corporate culture where 80% of the rewards of top management are in stock options, making financial manipulation (specifically, share buyback using cheap borrowed money) more rewarding than real investment in new productive capacity.

This is not really effective democracy in action.

Finally, market bubbles. These are built into the structure of the financial industry. Investment managers protect their jobs by following the herd. So everyone does the same thing, pushing markets away from correct valuations, and making the rational distribution of resources, which is after all the whole point of free market capitalism, impossible.

The rest of Grantham’s presentation was highly technical, directed at his fellow investment managers; that part of his talk is summarised here, as reported by an investors’ website, which did not, however, bother to relay his remarks on the wider issues discussed above.

*Behind a pay and membership wall, but this summary is my own personal review and may be freely copied with acknowledgement.