The times they are a changin’

Is it time for a reset on capitalism? Lionel Barker, the editor of The Financial Times thinks so. When the head of the biggest financial news source in the world makes such a bold statement, you have to ask yourself: Is the current capitalist model broken? 

The current liberal model of capitalism has delivered dramatic improvements to global prosperity over the last 50 years. However, the decade following the GFC has put the system under stress. While maximising profits and focusing on shareholder value is good business practice, Barker’s position was clear; these focuses aren’t enough for the future.

As the global economy looks like it’s shaping up for recession for the second time in 12 years, it begs the question: What are we doing wrong?

Could we be short-sighted?

To answer that question, we have to take a look at the history of money in Europe.

While China had paper money by the 12th century, it took Europe another 500 years to catch on. In the late 1600s, Britain and France battled through the Nine Years’ War. As a result, both countries hemorrhaged money for decades to come.

Then Louis XIV’s successor, the Duke of Orleans, got his hands on a book called Money and Trade Considered by John Law. Law was a Scot who had been gallivanting around Europe, learning about finance (and gambling). His book presented a radical new approach to money. He felt that money should move around the economy to stimulate trade and business. Big whoop, huh? While Law’s ideas are Money 101 these days, his approach was groundbreaking.

The Duke employed John Law as the Controller General of France.

He introduced a system in which a bank’s paper assets outstripped (then replaced) the gold it had in its stores. This was a precursor to fractional reserve banking. Law put into place many of the modern facets of money and trade.

So why did it end in disaster?

The public suddenly lost faith in the value of the paper currency. Riots broke out. After just 145 days in office, Law was fired.

Trying to overhaul an entire economic system in under 6  months was ambitious. The people weren’t ready for it.  Perhaps Law’s thinking was too short-term. 

By the late 18th century, we figured out Law was right.

Yet there were huge bank crises in England in 1797, 1825, 1847, and 1857. The same happened again in the 1930s, the 1990s, 2008 – and countless instances in between. As the interest rates continue to tumble, it looks like we’re heading in the same direction in 2020.

What has caused every single one of these events? 

Banks keep lending money to people who can’t pay it back. The public loses faith.

Capitalism’s issues are often attributed to socioeconomic gaps. But what if it is actually in our short-term approach to money?

What if the problem is in the stock market?

If we take things slow, could we solve capitalism’s problem?

Let’s look at tech for an insight into the future. 

Most of Silicon Valley’s big players have delayed going public. Wall Street’s short-term focus has misaligned their businesses. Tech companies find that these pressures shrink their innovation budgets – the very thing that sets them apart from traditional business.

Brian Singerman, an LTSE board member, said that the strongest startups are planning for five to ten years, not the next quarter.

The drawback? This practice locks public market investors out of future-focused companies. 

The Long Term Stock Exchange (LTSE) looks to address this. Approved in late May, LTSE is looking to disrupt the traditional capitalist model.

The LTSE provides the benefits of the major stock exchanges like early shareholder liquidity and capital markets access. Yet it avoids the cut-throat, short-term world of NASDAQ and NYSE trading. It discourages activist investors and puts en ends to quarterly reports.

Via a long-term share voting system, the LTSE allows founders to gradually give up control. It rewards long-term investors by giving them more power.

The system has been met with some contention. Critics say it could keep the founders in control. Investors are wary of stubborn founders trying to protect their babies.

While the founder of LTSE, Eric Ries, agrees that start ups can be dictatorial, he sees the LTSE as a middle ground for a move towards democratic tech investment. If they’re patient, investors could end up reaping more rewards in the LTSE than they would via the traditional stock market.

Is long-term thinking the way forward for capitalism?