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As Capitalism Marches On…


As Capitalism Marches On…

As we head towards the end of the year we often become more reflective. One of the conversations that recently has been cropping up with people I meet annually before Christmas is the various limitations of capitalism. And as I think about these conversations I have realised that time plays an important part in the power to respond in a way that has positive outcomes.

Very few, if anyone, I know subscribes to the ‘greed is good’ mantra offered by Michael Douglas’ character Gordon Gekko in the movie Wall Street. The cost borne by society from promoting such self-interest would simply be too high to be anything other than morally repugnant. But even when capitalism’s extremes aren’t widely embraced, and even though capitalism has pulled many billions out of poverty, it fails on many levels.

Even regulated capitalism has failings thanks to inadequacies on the part of many stakeholders to foresee second and third order consequences, especially when those consequences might not be felt for generations.

It strikes me as more than curious that we have allowed a system and framework to develop that permits a private organization to extract an element, or to create one, and to keep all of the profits from selling it to the community with nary a cent returned to the environment from which it was extracted or to the environment for the damage caused by its waste or by-product.

Think about the manufacturer of an unrecyclable plastic box. How would society and regulators respond if the manufacturing plant had a conveyor belt which fed out into the ocean and as soon as each plastic box was pressed, stamped or molded, it was sent by conveyor belt directly into the ocean?

Society would be inconsolable.

And yet, each day, private companies are permitted to do precisely that. The only difference is that we stick a consumer, who votes with concerns only about their own lifetimes, in between the conveyor belt and the ocean.

Thanks to a myopia, capitalism permits the extraction of a private profit from a public resource.

Time frames have a lot to do with many of the weaknesses associated with capitalism.

If left to run unhindered through time, capitalism would also result in the concentration of wealth amongst the few as costs are minimized and profits maximized. We are already seeing this in action. Thankfully Europe has begun to recognize the dangers of too much power concentrated in the hands of too few. And while there are obvious dangers to a completely autonomous society (by that I mean a society where everyone can determine their own personal set of rights) it appears that the US and Australia are taking notice of the EU’s decision to give some control back to individuals.

When it comes to investing, capitalism has many failures; it for example, provides the foundation upon which shareholders rights and the maximization of profits are elevated above many others. And thanks to the time it might take for the effect of short cuts and the impact of greed to be revealed, shareholders rights may continue to be elevated even as the rights of others suffer.

The cycles produced by capitalism, when combined with personal greed and jealousy, also ensures that resources are misallocated, employees underpaid, and conflicted individuals and corporations stay silent amid a threat to their incomes. Meanwhile short-termism impacts markets and investor behaviour, perpetuating booms and busts.

On this last point take, as an example, an investor who has invested with a hypothetical fund manager who held plenty of money in the safety of cash and delivered 12 per cent in year one, 12 per cent in year two and 12 per cent again in year three during a surging bull market. One hundred dollars invested with this manager would have grown to $140 by the end of the third year.

At the end of the second year however, the investor spots another manager who invests in fast growing but profitless tech and consumer finance companies that delivered 30 per cent in year one and 30 per cent in year two. So, what does this investor do? They switch to the ‘performing’ manager.

But sadly, in the third year, thanks to capitalism’s repeating cycle of boom and bust, the manager delivered minus 30 per cent.

An investor who commenced with $100 invested with the ‘performing’ manager has seen their $100 in year one grow to $118 by the end of the third year. But the investor who switched boats at the wrong time in the history of capitalism, and not realizing that 30 per cent returns are both abnormal and unsustainable, has seen their $100 first grow to $125.44 with the first manager, but then fall in the third year to $87.80, after switching to the second manager.

Capitalism has many adverse consequences, such as damage to the environment and the concentration of wealth amongst a few, and these limitations can take many decades to be revealed. There are other limitations, such as the preponderance of cycles and the patterns of greed and jealousy, that are evident so frequently their patterns can be discerned. While it will take the concerted and coordinated effort of voters and regulators to change the former, you can immediately take control, or even advantage, of the latter.


Roger is the Founder and Chief Investment Officer of Montgomery Investment Management. Roger brings more than two decades of investment and financial market experience, knowledge and relationships to bear in his role as Chief Investment Officer. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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  1. Ludwig von Mises: The Death of Socialism
    The most influential thing that Ludwig von Mises (1881-1973) ever wrote was a brief article in 1920 on socialist economic calculation.
    He argued that socialist central planning is impossible, because without a system of free markets, nobody knows what anything costs, and therefore nobody knows what anything is worth.

    In the late 1980s, the Soviet Union’s economy finally disintegrated, and that ended the whole experiment in 1991. Yet almost to the very end, nobody saw this coming. I mean nobody.
    The whole thing came down in a period of about five years. The symbol of it was the tearing down of the Berlin Wall in 1989.
    Virtually nobody believed that anything like this could happen. It came on the whole world unexpectedly. Why? Because the world categorically refused to believe that Mises’s 1920 article was correct.

    In 1950, Mises gave a lecture, and that lecture became an article. The article was widely read in Misesean in circles, which were outside of academia. It was a great article. It had a great title. In fact, it probably was best title he ever came up with. It was even a great marketing title. Here was the title: “Middle-of-the-Road Policy Leads to Socialism.”

    Mises argued that state intervention distorts the free market economy. These distortions lead to public complaints by voters that the economy is not working properly. The voters pressure the government to fix it, so the government passes another law. Law by law, distortion by distortion, the economy gets worse. The society does not start out on a path to socialism, but the interventions of the market expand the state’s power, so the result is ultimately the establishment of a socialist economy. He wrote: “The middle-of-the-road policy is not an economic system that can last. It is a method for the realization of socialism by installments.”


  2. The Anti-Capitalistic Mentality by Ludwig von Mises Publication date 1956

    First: The great ideological conflict of our age is not a struggle about the distribution of the “national income.” It is not a quarrel between two classes each of which is eager to appropriate to itself the greatest possible portion of a total sum available for distribution. It is a dissension concerning the choice of the most adequate system of society’s economic organization. The question is, which of the two systems, capitalism or socialism, warrants a higher productivity of human efforts to improve people’s standard of living. The question is, also, whether socialism can be considered as a substitute for capitalism, whether any rational conduct of production activities, i.e., conduct based on economic calculation, can be accomplished under socialist conditions. The bigotry and the dogmatism of the socialists manifest themselves in the fact that they stubbornly refuse to enter into an examination of these problems.

    Second: There is no economic difference between socialism and communism. Both terms, socialism and communism, denote the same system of society’s economic organization, i.e., public control of all the means of production as distinct from private control of the means of production, namely capitalism. The two terms, socialism and communism, are synonyms. The document which all Marxian socialists consider as the unshakable foundation of their creed is called the Communist Manifesto. On the other hand, the official name of the communist Russian empire is Union of the Socialist Soviet Republics (U.S.S.R.).
    There is no such thing as a mixed economy, a system that would stand midway between capitalism and socialism.
    This third system that the economists call interventionism does not combine, as its champions claim, some of the features of capitalism with some of socialism.
    When Marx and Engels in the Communist Manifesto advocated definite interventionist measures, they did not mean to recommend a compromise between socialism and capitalism. They considered these measures—incidentally, the same measures which are today the essence of the New Deal and Fair Deal policies—as first steps on the way toward the establishment of full communism.
    Thus the social and economic philosophy of the “progressives” is a plea for socialism and communism.
    There is no need to stress the point that the essential argument advanced in favor of capitalism and against socialism is not the fact that socialism must necessarily abolish all vestiges of freedom and convert all people into slaves of those in power. Socialism is unrealizable as an economic system because a socialist society would not have any possibility of resorting to economic calculation. This is why it cannot be considered as a system of society’s economic organization. It is a means to disintegrate social cooperation and to bring about poverty and chaos.

    The substitution of laissez-faire capitalism for the precapitalistic methods of economic management has multiplied population figures and raised in an unprecedented way the average standard of living. A nation is the more prosperous today the less it has tried to put obstacles in the way of the spirit of free enterprise and private initiative. The people of the United States are more prosperous than the inhabitants of all other countries because their government embarked later than the governments in other parts of the world upon the policy of obstructing business. Nonetheless many people, and especially intellectuals, passionately loathe capitalism. As they see it, this ghastly mode of society’s economic organization has brought about nothing but mischief and misery.

    There is but one means available to improve the material conditions of mankind: to accelerate the growth of capital accumulated as against the growth in population. The greater the amount of capital invested per head of the worker, the more and the better goods can be produced and consumed. This is what capitalism, the much abused profit system, has brought about and brings about daily anew. Yet, most present-day governments and political parties are eager to destroy this system.
    To understand the intellectual’s abhorrence of capitalism one must realize that in his mind this system is incarnated in a definite number of compeers whose success he resents and whom he makes responsible for the frustration of his own farflung ambitions. His passionate dislike of capitalism is a mere blind for his hatred of some successful “colleagues.”

    The result of this ignorance is that people ascribe all improvements in economic conditions to the progress of the natural sciences and technology.

    As they see it, the unprecedented technological improvements of the last two hundred years were not caused or furthered by the economic policies of the age. They were not an achievement of classical liberalism, free trade, laissez faire and capitalism. They will therefore go on under any other system of society’s economic organization.

    The terms capitalism, capital, and capitalists were employed by Marx and are today employed by most people—also by the official propaganda agencies of the United States government—with an opprobrious connotation. Yet these words pertinently point toward the main factor whose operation produced all the marvelous achievements of the last two hundred years: the unprecedented improvement of the average standard of living for a continually increasing population. What distinguishes modern industrial conditions in the capitalistic countries from those of the precapitalistic ages as well as from those prevailing today in the so-called underdeveloped countries is the amount of the supply of capital. No technological improvement can be put to work if the capital required has not previously been accumulated by saving.
    Saving, capital accumulation, is the agency that has transformed step-by-step the awkward search for food on the part of savage cave dwellers into the modern ways of industry. The pacemakers of this evolution were the ideas that created the institutional framework within which capital accumulation was rendered safe by the principle of private ownership of the means of production. Every step forward on the way toward prosperity is the effect of saving. The most ingenious technological inventions would be practically useless if the capital goods required for their utilization had not been accumulated by saving.

    As John Doe sees it, all those new industries that are supplying him with amenities unknown to his father came into being by some mythical agency called progress. Capital accumulation, entrepreneurship and technological ingenuity did not contribute anything to the spontaneous generation of prosperity.

    Nobody is needy in the market economy because of the fact that some people are rich. The riches of the rich are not the cause of the poverty of anybody. The process that makes some people rich is, on the contrary, the corollary of the process that improves many peoples’ want satisfaction. The entrepreneurs, the capitalists and the technologists prosper as far as they succeed in best supplying the consumers.

    The poverty of the backward nations is due to the fact that their policies of expropriation, discriminatory taxation and foreign exchange control prevent the investment of foreign capital while their domestic policies preclude the accumulation of indigenous capital.
    All those rejecting capitalism on moral grounds as an unfair system are deluded by their failure to comprehend what capital is, how it comes into existence and how it is maintained, and what the benefits are which are derived from its employment in production processes.
    Capital is not a free gift of God or of nature. It is the outcome of a provident restriction of consumption on the part of man. It is created and increased by saving and maintained by the abstention from dissaving.
    Neither have capital or capital goods in themselves the power to raise the productivity of natural resources and of human labor. Only if the fruits of saving are wisely employed or invested, do they increase the output per unit of the input of natural resources and of labor. If this is not the case, they are dissipated or wasted.
    The accumulation of new capital, the maintenance of previously accumulated capital and the utilization of capital for raising the productivity of human effort are the fruits of purposive human action. They are the outcome of the conduct of thrifty people who save and abstain from dissaving, viz., the capitalists who earn interest, and of people who succeed in utilizing the capital available for the best possible satisfaction of the needs of the consumers, viz., the entrepreneurs who earn profit.
    Neither capital (or capital goods) nor the conduct of the capitalists and entrepreneurs in dealing with capital could improve the standard of living for the rest of the people, if these noncapitalists and nonentrepreneurs did not react in a certain way.

  3. Hi Roger, I don’t think you blame capitalism now because we don’t have capitalism, we have corporatism combined with globalism that produces global profits that are declared in the lowest taxing states in the world, which is a vast contrast to the small business I operate, where my taxable income cannot be offshored to the lowest bidder, it’s paid here at the current rate.
    My small business does not compete with these global conglomerates, But many other small and medium businesses do. The other major issue here is that the regulatory environment very much favours large global corporations and puts small and medium businesses at a major disadvantage due to the simple fact that in today’s highly regulated business environment, it is required that a large amount of ones time is taken up in unproductive activities to meet compliance obligations and to even understand them, these activities and associated costs are far greater as a percentage of an SMEs turnover and time in comparison to large corporations (they simply throw a team of lawyers at it) and management can then focus on productive activities. While We the SMEs have to burn the midnight oil, and pay the tickers and flickers.
    The other Elephant in the room is cheap and easy money which is only available if you can issue bonds or dilute stock or utilise many other financial instruments available to large corporations and not small and medium businesses. For example my bank will lend me money because I have a wage but it won’t lend my small business money because it’s to risky, yet it pays my wage,
    If I approached the CBA for a loan using Amazons revenues, profits, from say five years ago but scaled down to a typical small business level of revenues and profits, do you think they would consider giving me a loan to invest in a profitless business for exponential expansion? Yet Amazon has had not problem getting capital, and neither have the vast amount of Zombie corporations out there which seem to survive solely for the purpose of taking market share from profitable companies. This is not Capitalism. The weak survive and new initiative is smothered with regulation and capital starvation. All people see is that large corporations dominate and they blame capitalism and flock to socialism. When all that is needed is a return to real level playing field capitalism. Eg reduced regulation on SMEs, a return to real interest rates, a global tax system for global profits that returns taxation to the country Where the profits originate from.

  4. Roger

    There is so much that is good on your site, but this post is not. ‘Capitalism’ is not a system, it is the operation of an enormous of markets in which all kinds of products and services are tried, tested and improved. Some producers flourish, many fail and as consumers we have benefitted from hugely from this process, including billions of people now lifted out of appalling poverty. This great achievement arose not from laws or government intervention, but from people taking a risk, with their own money, that they had something to offer that consumers would value.

    As to the concentration of wealth, you ignore history: the constant turnover of the ‘rich’. The Fairfaxes once owned the great mansions on Sydney harbour, now just purchased by the Atlassian founders, because the Fairfax rivers of gold dried up. Look at the top 50 companies — only a minority stay at the top for more than 10-20 years. Your own commercial existence is founded on the fact that so many more Australians have money to invest, to put at risk, than was ever the case in my parents’ day.

    Across the world, a far smaller proportion of the world’s people live in absolute poverty. Globally, we live longer, enjoy better health and a higher standard of living. That is what markets have delivered.


  5. Mr. Roger
    “You Can’t Beat Something with Nothing”
    Where is your proposal I do not see any.
    Capitalism — what is it ?

    Self-Interest Is Not greed or selfishness
    self-interest does not necessarily make our motives impure.

    C.S. Lewis
    It is said that a half-truth taken as the whole truth becomes an untruth. Recent protest signs saying, “Capitalism is Greed” perfectly illustrate this saying. The half-truth is that capitalists can be greedy. But are all capitalists always and everywhere greedy? Certainly not. There are greedy socialists, Marxists, Democrats, Republicans, rich people, and poor people. Greed is an equal opportunity employer. We are all capable of being greedy. But is there something in capitalism that intrinsically makes greed more likely? Is greed encouraged? Adam Smith famously said that our dinner comes not from the butcher or baker’s benevolence but from their own self-interest (“self-love” or “interest”) Is pursuing our self-interest necessarily selfish or greedy? Can you have self-interest without selfishness?

    even in 1900 america you did not have laissez faire, free market or what Karl Marx called Capitalism.

    It was Karl Marx, the communist philosopher, who may have been the first to coin the term “capitalism” and he did not mean it as a compliment. Marx’s view of capitalism was that a small cadre of wealthy exploiters controlled the means of production – society’s “capital” – and that until this control was wrested away from this tiny exploitative group, the masses of society would remain impoverished and exploited.

    Capitalism, as it might be defined in the 21st century, has little to do with free markets or laissez faire economics. In a free-market society, there is a dearth of controlling or State regulation; the market itself regulates through competition. Modern capitalism is intensely regulated. Through “regulatory democracy,” a small, elite group is able to sustain its power, using the levers provided by law and regulation to generate immense profits that further increase its dominance. This system is also known as mercantilism.

    In 1900 america was closest to Free Markets:

    no central bank
    Gold Standard
    no income tax
    Us tax revenue were less than 5% of GDP

    Problems that you see and mention are because of big government, big bureaucracy and too many regulations.

    Most pollution is done on common properties own by governments.
    Do you think there is no pollution in socialist states?

    Mr. Roger say:
    “Even regulated capitalism has failings thanks to inadequacies on the part of many stakeholders to foresee second and third order consequences, especially when those consequences might not be felt for generations. “

    we are humans not Gods

    Government ownership, even socialism, has proved to be no solution to the problem of pollution.
    If government as owner has allowed the pollution of the rivers, government has also been the single major active polluter, especially in its role as municipal sewage disposer.

    Mr. Roger say:
    “capitalism permits the extraction of a private profit from a public resource”

    What is public resources?
    sound like socialism to me.

    Mr. Roger say:
    or example, provides the foundation upon which shareholders rights and the maximization of profits are elevated above many others. And thanks to the time it might take for the effect of short cuts and the impact of greed to be revealed, shareholders rights may continue to be elevated even as the rights of others suffer.

why did you start your company Mr. Roger?
    Did you start your company to make some money and if you have shareholders to maximize return to them or there was some different reason ?

    Mr. Roger say:
    “The cycles produced by capitalism, when combined with personal greed and jealousy, also ensures that resources are misallocated, employees underpaid, and conflicted individuals and corporations stay silent amid a threat to their incomes. Meanwhile short-termism impacts markets and investor behaviour, perpetuating booms and busts.”

    comparing to what? to Venezuela or China or Cuba?

    Mr. Roger say:
    “Capitalism has many adverse consequences, such as damage to the environment ”

    How bad environment is now in London, Paris New York comparing to 1850 ?

    Mr. Roger say:
    “concentration of wealth amongst a few, ”

    The Pareto principle 1896 :
    Essentially, Pareto showed that approximately 80% of the land in Italy was owned by 20% of the population.

    nothing changed since then –we all get richer — in free market new rich get on the top and old departed.

    “the great majority of the intellectuals, and of the general public too, which has been subjected to the educational system fashioned and run by them, continues to believe such things as that the profit motive is the cause of starvation wages, exhausting hours, sweatshops, and child labor; and of monopolies, inflation, depressions, wars, imperialism, and racism.”


Mr. Roger, I was born in SFRY and my wife in China and you need to read more to see that you attacking wrong problems.


    • Thanks Ned. Capitalism has indeed done many great things, which I offer a nod to. But capitalism isn’t perfect, that surely cannot be disputed. If its limitations are evident, then it remains the best we have but perhaps not the best. Pleased that it gets a discussion going.

      • The Pope and Capitalism By Walter E. Williams

        “First, I acknowledge that capitalism fails miserably when compared with heaven or a utopia. Any earthly system is going to come up short in such a comparison. However, mankind must make choices among alternative economic systems that actually exist on earth. For the common man, capitalism is superior to any system yet devised to deal with his everyday needs and desires.”

        Mr. Roger all problems as you write start with morality of people and money ( or lack of it ).

        the monetary system is at the heart of the modern world.
        rot or decay of any society, start there, and spread slowly.
        Inflation and Corruption They go together
        Your silver has become dross, your best wine mixed with water (Isaiah 1:22).

        Who should be in charge of minting money, well all of us if we want — you would have competition , if you give monopoly to government or some individual there is no competition.

        Human Freedom Rests on Gold Redeemable Money by Hon. Howard Buffett U.S. Congressman from Nebraska — he explain need for honest money.

        Gold and Economic Freedom by Alan Greenspan –before he switch sides he explain need for honest money.

      • Well said Ned, my sentiments exactly, albeit in a far more sophisticated manner. It’s the monetary system that’s the biggest problem, the enabler of big government big regulation, poor and unproductive capital allocation, housing bubbles, tech bubbles etc etc. one only needs to look at socialist China and its 50 million empty flats to confirm that one, cheap money causes vast waste and vast pollution as a result.

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