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Time to Rethink Capitalism?

Harvard Business Review, Noviembre 2008

The leaders of publicly traded companies are beholden to the capital markets. Just consider the relentless pressure to meet the quarterly numbers. There once was a solid logic to this arrangement, but it no longer holds. The very logic that originally gave rise to free-market, competitive capitalism now supports free-market, competitive laborism - a system in which those who work for a firm reap most of the residual returns and have the greatest decision-making authority within it. This arrangement makes sense in terms of ethics and competitiveness.

Two hundred years ago, an individual investor might take the bulk of his assets and plunk it down in a factory. The factory would hire day laborers and pay them a day's wage. Who took the biggest risk in this enterprise and therefore ethically had a claim to any residual profits? The guy who put down the capital. And who had the biggest incentive to ensure the success of the factory? Capital. And who had the best information about the business and the greatest power to ensure the effective implementation of decisions about its operations?

Capital. That's the logic of capitalism: Those who take the biggest risks should be the controlling owners and receive the residual profits for reasons of both ethics and competitiveness.

Times have changed. Today individual shareholders are so diversified that they rarely bear substantial risk in the individual firms in which they invest. If one of the countless businesses in which you invest through your pension plan or mutual funds loses 50% of its market cap, there is a good chance you won't know about it. (Do you even know the names of all the companies you invest in?)

But what if the firm you work for lost half its market cap? You'd be pretty anxious. In the company where you work, you've made large investments that you can't diversify away, such as learning the business, building relationships,...