With the crisis happening now, the words from Muhammad Yunus "capitalism is a half-developed structure" come back to mind.
And what he develops in the first chapter of his book "Creating a world without poverty - social business and the future of capitalism" resonate even more deeply:
"Capitalism takes a narrow view of human nature, assuming that people are one-dimensional beings concerned only with the pursuit of maximum profit. The concept of the free market, as generally understood, is based on this one-dimensional human being. Mainstream free-market theory postulates that you are contributing to the society and the world in the best possible manner if you just concentrate on getting the most for yourself."
The result is supposed to be a system that self adapts to situations and self corrects because people are dedicated to that one mission of maximizing profit.
The problem is that it does not work, as we can witness now on the financial markets.
Instead of self adjustments we get regular market failures, not exactly what the intent was.
What I see happening really is that creative mathematicians have invented financial products that generate big multiples out of nowhere and purely from speculation, allowing them to rip huge profit out off businesses or real estate properties regardless of the value they truly represent. Bubbles that end up blowing up.
If we are going to fix this system, I would like to follow Muhammad Yunus train of thoughts:
"The presence of our multi-dimensional personalities means that not every business should be bound to serve the single objective of profit maximization"
This is also what Bo Burlingham puts forward when he presents "Small Giants - companies that choose to be great instead of big".
When the sun goes down somewhere, it goes up somewhere else. This crisis is an opportunity, let's hope we learn to come back to the basics of what business should be about: adding real value on the ground, rather than maximizing financial ratios.
Tuesday, September 30, 2008
Logging you in...Comments by IntenseDebate
Subscribe to:
Post Comments (Atom)
Guillaume · 861 weeks ago
I agree with you that this is a great opportunity for learning and for change.
What I'm hoping for is that people will realize that our debt-based money system is wrong and that we should instead switch to a value or equity-based money system.
A debt-based money system is by definition bound to a failure where only a few get out with most of the wealth. We can only postpone this failure. Today, we just postponed it a little more.
An equity-based money system is one where we would all contribute our time/skills to an "Hour Fund" that would be used to reconstruct the U.S. (and Europe) whether in terms of providing healthcare or roads. This fund would issue certificates for our contribution that we could use as a currency to exchange products/services.
More on my blog on this later hopefully.
Guillaume
mdangear 37p · 861 weeks ago
There is nothing wrong with debt, and there is also nothing wrong with packaging loans to get leverage, as long as you do not mess up with the data.
What has been done wrong is abuse of the system at several levels:
- loans to people who cannot afford it is bad
- loans based on inflated house value is bad
- and mixing up bad loans with good ones the way it was done is bad, because you start loosing track of what is good and what is bad, and therefore you cannot trust anything in the end, resulting in the mess we see unfold now.
Having said this, debt remains a very good tool for financing. And if you need proof, take a look at microfinance: loans to people that are not even "bankable", which turn out to be a very good thing and got a lot of people out of poverty. And it has proven to be very sustainable, and even profitable, over the long term
On your other point, equity brings up a lot of issues:
On the private equity side:
- you do not know what you will get for your money until you turn it back into cash
- you do not know when you will be able to turn the money back into cash: you have to wait or force a liquidity event.
The good news however (you hope) is that you have a potential upside, rather than a fixed rate of return. So with the uncertainty comes the hope that you can make it big, and it works fine for certain people or in certain circumstances.
On the public equity side:
- whoever owns the stock may not even know they own it (they may have acquired it through mutual funds)
- most of the people who own stock probably don't know much about the business behind this stock. They rely on analysts, or they trade it like you bet on horses.
- the power of stock holder is dilluted, it is ultimately in the hands of a few who are supposed to represent them (board of directors) but mostly represent the largest investors with their own agendas and their special interests
Still, and despite all this, it remains a place where you can put your money to work if you have no better idea.
In the end, the opportunity is not to get rid of debt, or to move to an equity based system, but rather to bring the human back into the equation, as microfinance does and as preached by the people who want to include intangibles in the valuation of a given asset.
As Muhammad Yunus says, we should build a system that takes into account our multi-dimensional personalities, rather than trying to fit in a one-dimensional purely financial system.
And the good news is that a lot of people are working in that direction...