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For more than two centuries Industrial Capitalism raised the level of well-being in many countries all over the world. For understanding the true meaning of NetWork Capitalism it is obligatory to acknowledge these achievements as well as Industrial Capitalism’s dark downside that emerged during its final years.
When Adam Smith wrote his two famous books during the second half of the 18th century the average level of welfare in Western societies was low. There was severe poverty. Wealth was controlled and centralised in small groups like aristocrats, the church and landlords. The overabundance of war meant there were little to no opportunities for social-economic upward mobility. To put it mildly, the birth of Capitalism was in many ways more than welcome.
For the first time in history Capitalism's Theory of Growth created the opportunity to generate wealth for an increasing group of beneficiaries.
Capitalism's three basic institutions – the right of private ownership, freedom as the economy's coordinating mechanism and a limited but important role for governments – paved the way for its most distinctive feature; enabling entrepreneurs to create an increasing amount of wealth.
Before Capitalism had emerged (a given amount of) wealth could only be (re)distributed or taken by force and war. Capitalism's ongoing capacity to 'make a bigger pie' changed all this. This unique value-creating feature of Capitalism is often forgotten, overlooked and taken for granted.
Ever since the invention of the steam engine coincided with the birth of Capitalism an almost inexhaustible number of inventions – like trains, railroads, electricity, cars, airplanes, medicines, communication tools, sewer systems, light bulbs, refrigerators, you name it – increased the level of well-being in many societies. For almost 200 years these achievements were unprecedented. Nothing else rivals these dynamics.
World poverty dropped enormously, life expectancy rose tremendously and ever more clever production processes released many people from the burden of physical labour.
As Industrial Capitalism's
wheel of progress just kept spinning and spinning this proved Adam Smith was right. An entrepreneur's attempts to be successful and gain personal benefits
are the most powerful, yet 'invisibly', force to create progress and
prosperity within society at large.
Despite the obvious successes, somewhere during the eighties of the 20th century it became apparent that Industrial Capitalism had developed a murky downside. Whereas in Adam Smith's Theory of Growth an entrepreneur's profits were merely means for investments to further increase productivity and wealth, during the eighties Capitalism was reduced to solely being a concept for maximizing profits.
Making (maximum) profits became Industrial Capitalism's ultimate goal in itself.
To a large extent this marginalised interpretation of Capitalism was fuelled by economists. In their search for scientific relevance and prestige economists enforced the basic rule of profit maximising behaviour. This allowed them to make the mathematical equations they believed were a prerequisite to give economics the status of an exact science.
Nowhere is this transition towards 'profitism' more noticeable than in influential economist Milton Friedman's famous essay from 1970 entitled “The Social Responsibility of Business Is to Increase Its Profits". When during the end of the eighties Capitalism's last challenging competitor (state-governed communism) gave in, this lifted profit maximization as the alleged 'raison d'être' to an ultimate high.
As Industrial Capitalism interchanged its means-end relationship it developed three deadly sins:
1. Economic transactions are devaluated into a zero-sum game
Profit maximization reduces economic transactions into being a zero-sum game in which the winner takes it all. Trade-offs between an entrepreneur maximizing his profits at the cost of consumers, competitors, employees, natural resources, communities or whoever becomes the standard in doing business.
2. Externalities are institutionalized as common practices
Profit maximization enforces the exploitation of production resources (labour, nature and capital). Negative side-effects, called 'externalities' by economists, are allowed (and maybe even required) as they help to raise profits. Whether or not the costs of these externalities can be justified is considered non-relevant as long as they add-up to maximizing profits.
3. Entrepreneurship is marginalized into spread-sheet management
Profit maximization absoluteness trashes entrepreneurship's original focus on raising productivity to increase wealth. It transforms entrepreneurship into a game of figures and the bottom-line. Sound economic decision making no longer has anything to do with creating wealth for the entrepreneur and its stakeholders. Transactions are solely regarded by the extent to which they contribute to raising profits.
Or as Heineken's CEO Jean-Francois van Boxmeer described it in 2014:
Financials have taken over the economy and made it asset oriented. It's all about forecasting and revenues. Entrepreneurship means trying something new while being uncertain if it leads to results. The financial world wants to know exactly when you will make what amounts.
For a long time the negative consequences of Industrial Capitalism's narrowed focus on profit maximization could accumulate and remain unnoticed. Peter Drucker's public warning in 1986 that corporate managements are being pushed into subordinating everything to immediate earnings and next week's stock price, marks a symbolic turning point. From then on it started to become noticable that Industrial Capitalism's shortcomings were overtaking its blessings.
Since the beginning of the 21st century this accumulated into the build-up of a comprehensive set of crises. Altogether they are 'the institutional crises of Industrial Capitalism'.
The financial crisis
Although it officially started in 2007, this is actually non relevant. This crisis has been labelled 'bad mortgage crisis', 'big debt crisis', 'euro crisis' and maybe soon 'Chinese investment bubble crisis'. Even though unprecedented financial interventions are in place, until today the estimated total loss of economic value is far beyond anyone's imagination.
In the 18th century there were 7 financial crises, in the 19th century there were 18 and during the 20th century it occurred 33 times. For the 21th century the only viable conclusion is that we're in a permanent state of financial crisis!
The financial crisis is the perfect illustration of how trade-off's work and a brilliant example of the ruthless exploitation of capital. This crisis is all about profit maximizing behaviour by the suppliers of capital at the expense of those who needed capital to invest. Whether investments will ever result in anything else besides a profit for the supplier of capital is considered non-relevant.
The social economic crisis
Partially linked with the financial crisis, the social economic crisis that is spreading over large parts of the world is primarily a crisis of disillusion. Although it is hard to make a misery index, most likely declining income or asset security, fast growing debt rates and increasing social inequality are top of the list.
Compared to the everyday reality of many, Adam Smith's ideal of men's natural state – no debt, good health and a conscious mind – seems almost obscure.
This crisis perfectly displays how Capitalism's lost track of its original focus on the wealth of nations. For the first time in history in a growing number of countries the once magic belief that future generations can and should live in a world that is characterized by increasing levels of prosperity seems to become something blurry from the past.
The ecological crisis
This crisis is troublesome in many ways. It is predominantly the result of the unlimited exploitation of previously considered 'costless' natural resources. The ecological crisis proves the 'free-lunch model' is a dead end street.
Further continuation will seriously harm the safety and livability of communities in both densely populated large cities as well as those in rural places. Even tough new eco-friendly production methods are being introduced, it will take decades to undo the damage done and rebalance ecology and economics.
The governance crisis
From the Netherlands, Germany, Great Britain and the rest of the EU, to the US, China, Japan, Brazil and also Africa the governance crisis is hitting countries on all continents. It manifests itself via cases of fraud, scams, bad management, nepotism and simply theft. Examples include accounting scandals, interest rate manipulation, food quality fraud, drug and medicine distribution bribing, unjustifiable executive payments etcetera.
This crisis illustrates what maximizing profits does to the brain.
In some cases the governance crisis is caused by the deadly combination of extreme egoism and a complete lack of morality. Yet, in most cases it's plain incompetence and ineptitude in the field of governing economic institutions.
Besides the direct loss of wealth, this crisis also triggers additional laws and regulations. While, understandable from a political and public perspective, these interventions add no value to the economy, only cost money and thus reduce future welfare. And to make things worse, in the end the result of additional laws and regulations will only be a higher level of calculated risk.
The 'diminishing faith and trust in Capitalism' crisis
This final crisis of Industrial Capitalism is the most recent one, but also the most serious and challenging one. It is the logical outcome of all crises mentioned before and the fact that, until now, attempts to find sustainable solutions have failed. As a result a fast growing number of people from all over the world is losing faith in Capitalism as the leading economic institution.
We're solving today's economic problems with yesterday's solutions. The only viable outcome will be that we make things even worse.
Research shows alarming results; only 50% of large companies in the Western world is trusted by the public. And when it comes to its executives' capabilities for solving mayor issues confidence rates decline even further to somewhere between 10 to 20%. Hardly a sound basis for building new future perspectives.