FP Article 31 (To learn what is needed to boost your personal productivity to earn more per unit time, click here.)

Is Capitalism Dead?

by Rajen Devadason

A common theme in the news reports and subsequent in-depth analyses of the big American investment banks that were at the heart of the US subprime fiasco was the unfettered greed of overpaid executives who were paid in accordance with short-term performance. The flaw in such a remuneration system is now clear: If an executive is not a shareholder but a mere hired hand, then he - all the high profile culprits of that era were testosterone-laden men - is going to do whatever is necessary to deliver the required short-term performance numbers needed to justify obscenely large bonuses. Genuine shareholders, owners of the business, were often blinded by the opaque corporate-speak of these smart employees and so went along with the flow. Big mistake...

It must never be forgotten that shareholders of a company are its owners. This means the employees, from the CEO or MD all the way down to the janitors and tea ladies, work for the shareholders.

In true capitalism, shareholders who are experienced and wise know that it is most profitable over the long haul to take care of the goose that lays the golden eggs. In that childhood story, the greedy poultry farmer decided he wanted ALL the golden eggs at once! He killed his magic goose, sliced it open and found only bloody innards without a trace of gold.

Commonsense teaches us patience is a virtue. Furthermore, the law of the harvest tells us that seed must first be planted and its growth nurtured for a full season before a profitable crop may be gathered.

We know this intuitively.

So, why did the heads of huge corporations, mainly in the West, ignore these truths when they created toxic weapons of financial mass destruction?

They were blinded by short-term greed, which was exacerbated by a lazy lack of oversight by the true owners of the affected businesses.

In Max Weber's classic book The Protestant Ethic and The Spirit of Capitalism, which was based upon Weber's German articles written in 1904 and 1905, the eminent sociologist and political economist noted: "Unlimited greed for gain is not in the least identical with capitalism, and is still less its spirit. Capitalism may even be identical with the restraint, or at least a rational tempering, of this irrational impulse."

For all its shortcomings, most notable of which is a tendency to widen the wealth gap between the poorest 20% of society and the richest 20%, capitalism is still the most dynamic economic system ever discovered by man. It is also the most successful in not merely enriching capitalists but in raising the general standard of living of all humanity.

Today, it is easy to take for granted the fast online connections, instantaneous satellite-linked phone calls, clean water, safe air travel and powerful antibiotics that are integral parts of our lives. None of these advances would have been accomplished as effectively outside a capitalist defined economic system.

In the aftermath of the subprime crisis, it has become fashionable to expect BIG GOVERNMENT to come to the rescue. I fear, however, that the ongoing printing of fiat currency, which is backed not by gold or silver but by nothing more than supposed confidence in the government doing the printing, will soon backfire on us all and create runaway inflation.

The only true solution, I believe, is to return to a purer, truer form of capitalism. One that is focused on earning an ethical, possibly slower growing profit over a long time.

More than a century ago, Weber made this observation:

"But capitalism is identical with the pursuit of profit, by means of continuous, rational, capitalistic enterprise."

Profit is good. Make no mistake about it. What is bad, indeed downright evil, is greed.

If each of us learns this lesson, correctly, it might turn out that instead of facing economic oblivion, we actually stand today at the cusp of a brand new era; one in which the worst excesses of the past will be suppressed, at least for a little while, so that the best form of capitalism can be allowed to do its healing work.

As capitalism does that, there is a great chance that each of us will have the opportunity to participate in this recovery to prosper.

While I don't have all the answers, I suspect the self-prospering solution all of us are looking for hinges upon more capitalism of the correct sort being integrated into our lives.

To succeed in the new arena ahead of us, I urge you to get back to basics and do 4 things:

1. Manage your cash flow better;

2. Save more money;

3. Invest more wisely;

4. Aim to build up multiple sources of income into your life.

To help you with each of those 4 vital goals, here are 4 resource articles I have written on those respective issues:

1. What is a Cash Flow Statement?

2. How to Start Saving Money?

3. What is Investing?

4. Create Many Income Streams for Yourself

The simplest definition of capitalism I can think of is using your capital to create current and future wealth.

You build up your store of capital by not spending everything you earn. At this point of history, Asians are doing a better job of that than those in the West.

But regardless of where you live, East or West, North or South, capitalism is not dead.

However, I'm convinced that any country, family or individual that abandons the most ethical form of capitalism will one day, soon, face economic extinction. As B. C. Forbes wrote: "A nation's economic salvation does not lie in the amount of money its rich inhabitants can squander recklessly. A nation's economic salvation lies in the amount of money its inhabitants can save and invest after providing themselves with all the necessities and all the reasonable comforts of life."

What will you do with this information?

(If you live in Malaysia AND believe you might require my help in the realm of financial planning and retirement planning, you're welcome to learn more about me here.)

© Rajen Devadason