Saturday, April 11, 2009

Capitalism, socialism

Wikipedia defines capitalism thus:

"Capitalism is an economic system in which wealth, and the means of producing wealth, are privately owned and controlled rather than state owned and controlled. Through capitalism, the land, labor, and capital are owned, operated, and traded by private individuals either singly or jointly, and investments, distribution, income, production, pricing and supply of goods, commodities and services are determined by voluntary private decision in a market economy. A distinguishing feature of capitalism is that each person owns his or her own labor and therefore is allowed to sell the use of it to employers." (

The definition puts "ownership" and "control" of the capital in the same sentence, but does not stipulate that it is the same individual that both owns and controls the resources.

And therein lies our problem.

Commonly accepted theory of why capitalism is preferable to socialism goes like this: the owners generally make better decisions about allocating the resources than non-owners. When the owners do make sub-optimal decision, they lose their ownership stake to the smarter and more responsible new owners.

So far, so good. Except this is not at all the system that we have in the United States. In the US, the majority of the capital is owned by one set of people - the shareholders - and managed by an entirely different set of people - the corporate management.

The interests of these groups of people are not at all aligned (, and, what's worse, neither group is truly interested in the long-term success of the business.

As a result, while the executives in younger companies which are still managed by the original owners do often tend to do the right thing, I cannot call the behavior of the managerial class in most American enterprises anything other than looting.

This approach to management has been most visible on Wall Street, but look at any older US enterprise, and you will see the same looting of company resources everywhere, from car manufacturers to steel mills to utility companies.

Comparing to the old Soviet days, the system as we have it right now may actually be worse. At least the bureaucrats in Soviet Union were not paying themselves multimillion dollar bonuses and did not zip around in private planes as the economy crumbled.


Kevin said...

The specialization of investment and management that corporate structure affords is one of the greatest innovations in history. We should focus more attention on Boards of Directors and less on CEOs. The boards are the ones giving windfall parachutes and pay structures that reward short sightedness.

DzembuGaijin said...

Labels are not very important and even counter-productive.

I think in almost any system, regardless of it "classical definition" ( that is never true - oversimplified ) a people on the top of any social pyramid will try and fined a way to get a better cut of the pie. It can be money, power or other things. It does not matter.

Why big companies do that "bonuses" ? Well, because that can :-) of course!

It is a matter of negotiation: You want me - I want this and this. Simple like that. After all, it may be such a stressful job, that nobody would want it without a golden parachute :-)

Say, they need a CEO that has proven experience. Such guy probably established a few big companies and will probably go on with that, unless, you offer him some thing really good, so he will stop what he is doing and will work for you.

Say, you want Balmer to be CEO of your startup ( just hypothetically) If he is good or not: it is your call. But I would assume he will ask for a lot of compensation and for a nice exit package: because working for your start-up is a risk and they may not want him back to Microsoft.

So, what is wrong with what we have?

Is not that just a manifestation of a free market?

( Sorry, I do not know much about politics and economy, it is just a common sense :-))

Sergey Solyanik said...

> It is a matter of negotiation: You want me - I want this and this. Simple like that. After all, it may be such a stressful job, that nobody would want it without a golden parachute :-)

I'm afraid executive compensation has nothing to do with the market. Most CEOs of most big US companies are incompetent. Want proof? Look out the window. I am sure there are many many people who would run Citi/GM/... better than the current management, and for far less money.

If you look at the companies who actually have the original owners still involved in day-to-day management, you will find that executive compensations there (not just the money that the owners pay themselves, but the money that they pay their management) are relatively low, yet the companies are doing much better compared to older companies (think US Steel or GM) where the owners are long gone.

It goes approximately like this: CEO hires the board, the board establishes CEO's salary. The chances that the board would be fiscally responsible when it comes to the CEO's compensation? Zero: these people wouldn't be put on the board in the first place.

DzembuGaijin said...

There is doubt you can find people who may ( or may not) run company better. For one I would suggest change Balmer: I want to see my MSFT stock grow :-) But this matter is far from trivial ;)

As for CEO and board: that just make sense, no? Why would CEO/Board do some thing that contradict to their interests? ( it may not be just money, may be you want just to throw chairs for example and jump on the stage )

Your observation about original owners may be right: I believe they wanted to "make meaning", while replacement may want just "make money - for themeless"

Like a virus - such change may or may not kill the host and if it does, "the wheels on the bus go round and round": some one establish a new company e.t.c.

So, it is all looks totally self regulated by market.

DzembuGaijin said...

Yeah, and main difference IMHO between so called "socialism" and "capitalism" is "centralization". In Russia we essential only have "one pyramid". So when people on the top make mistakes, the hole country suffers.

In some sense USA started to approach this model with super big global companies. Once CEO and his friends manage to screw things up ( or things just screwed up by nature - why not?) A LOT of people suffer.

That is why "mono - culture", mono-poly and centralization is so dangerous - a very small part is broken and all collapse. Even one OS for all is no good :-) IMHO

DIversity is a better policy: first, it operates in smaller units and it is easier to keep on "making meaning" unlike big corporations and second: if one of few "ways" of doing it starting to fail, other may find the way out. Also less people suffer from single screw up : only that few that worked for the company, not 5000 :-) or more ( if you call it suffer, that is)

That is also why I like start-ups: it is more transparent. That may also explain why Google try to keep hierarchy flat :-)

Sergey Solyanik said...

> Even one OS for all is no good :-)
This is exactly why we were keeping Apple alive for so long :-).

Vadik said...

You keeping Apple alive, but I *USE* OS X every day!

Where is my 1500$ from Microsoft?! if you pay people to use YOUR software, why not show some love to people who keep balance of this world? To us, Apple faithful! :-)

There are BSD and Linux and other weirdoes as well, so hope is not yet lost :-)