Are there reasons to hope capitalism will calm down ?

Le Monde, 16/17 October 2005, by Eric Le Boucher

Massive industrial relocations overseas, housing bubble, financial instability... at present, capitalism is excessive. It swerves from lurch to lurch. When will it end up in the wall ? In the hole ? Several books appeared this week on the same theme : " Can this all last for long ?"

For Patrick Artus and Marie-Paul Virard (Capitalism will destruct itself, La Découverte), capitalism "has no project". "Employes loss of negociating power, linked to the threat of labor transfers overseas, to the loss of industrial jobs, to high unemployement, has caused a shift in the sharing of profit to the benefit of capital, and at the expense of labor."

But the relentless pursuit of high profits, and the financial markets flock behavior traps them into a logic of short sight, and forbids long term projects. The large flows of profit exceed firms investment capacity, which, as a consequence, pile up heaps of money. This capitalism is far from optimal, despite what liberal theories claim. Profits no longer make investments : a proof, on the contrary, of inefficiency.

King shareholder

Jean Peyrelevade shares this view (Total capitalism, Collection "The republic of ideas", Le Seuil). Ex CEO of Suez, UAP and Crédit Lyonnais, he knows from inside these much talked about financial markets ; hence, his analysis of the system is detailed. European capitalism, inspired by the German system, has lost its temperate aspect, by it own fault, says Peyrelevade at the beginning of his book. Banks, which were the pilars of the system, meddled too long with politicians (who have a "voter oriented" logic - clientelism), and they made numerous mistakes.

One reads between the lines the woes of the man in charge of putting Crédit Lyonnais back on track [after its catastrophic crash of the '90's, the bail out of which cost 150 billions FF to french tax payers], but the message goes farther. Inefficient banks cost "three or four percentage points" on the funds lent to them to be lent again. It is enormous. Therefore, capitalism, direct use of markets, easily got rid of the intermediary of banks.

It is an important point. To all of those who dream of going back to the "good old times" of the 1970's, and to a capitalism moderated by the Nation-state, Peyrelevade answers harshly. He denounces "the illusory revolt of the advocates of an alternative world economy" : the solution, if any exists, must be sought within the present system, and not in a utopia built up by "incompetent people".

The best part of the book is concerned with the shareholder, the king of the asset-capitalism celebration, according liberal theories. Worldwide, there are 300 million households  who own shares of firms, says the author, that is, 5% of world population, of which half are in the United States. But stock market wealth is highly unevenly distributed. In France, 1% of households own half of the stocks assets. With a simple extrapolation, there would be, according to Peyrelevade, "10 to 12 million people, i.e. 0,2% of world population, controlling half of the entire stock market capitalisation of the planet."


They are 50-60 years old, they received a higher education, and they have high incomes. As they are retired, most of them hold their stocks via the financial vehicle of pension funds, and, with the phenomenon of population aging, these outfits play a growing role.

These funds hold 30% of american stock market capitalisation, but, since, to diversify their risk, they placed a part of their funds in Europe and in Asia, they rule the stock markets of the whole world. [A few years ago, when Calpers - the largest US pension fund - decided to divest Alcatel line from its portfolio, Alcatel stock lost 40% in one day, ruining many french investors.]

Liberalism also has virtues, Peyrelevade is careful to note : "No other system has ever been able to produce so much economic growth that was beneficial to all humankind." Third world countries benefit from the growth too, by participating in trade. But financial capitalism leads to excess :"To seek ever more dazzling performances in ever shorter time."

This free-for-all fair is full of illogical aspects. Nobody ever defined what should really be the "Return on Equity (ROE)", but an imperative and accepted rule of financial markets stipulates that it should be 15%. It is not logical to require that, year after year, stock markets grow by that much, when economic growth is only 3% per year, or even, in Europe, less than 2%.

An opportunity to be seized

What to do to alleviate the importance of finance on real economy ? There are three ideas.

The first idea is that States put back in force strict controls and prudential regulations [increase banks required reserves, impose a tighter adequacy between risk of funds borrowed and risk of funds lent, etc.] For economist Elie Cohen (The new age of capitalism, Fayard) this idea of regulation, coming from the United States, where it goes hand in hand with the fear of juges, is the right one. It enables capitalism to overcome crises (Cohen looks at the crises of Enron and Vivendi) and to sustain itself. But other authors do not share this view : the slowness of regulation effect on speculative funds movements (three of these hedge funds recently went into fraudulent bankruptcy) is an illustration of its inadequacy.

The second idea is to disconnect again the interests of shareholders and the interests of top management. Either by law, but, in the present context, it unrealistic to plan to curb shareholders rights. Or by trying to convince individual shareholders that it is their own interest to put less confidence into these anonymous funds, and that, by approaching again the system with a long term perspective, their pensions would be more secure.

The last idea is to set up a different kind of funds, managed with a vision of long term, as suggested by Michel Aglietta (Financial capitalism adrift, Albin Michel, 2004).

It may be an opportunity to be seized. With the taming of inflation (disregarding oil prices), the persistent low level of interest rates, the narrowing of spreads (difference between lending rates and borrowing rates by financial institutions) and the stabilization of stock markets, the financial world may be at the outset of a new period, as compared with the 1990's. The margins of movement of financial funds have narrowed, and prospects of high returns are more scarce. Finance may choose to go into more risks, it may also choose to enter quieter waters.

Eric Le Boucher