The distorted market

There has been a backlash against the market or capitalism in general that has accelerated since 2008.  The perception is that a market system has built in mechanisms that cause large gaps in income and wealth.  The results of the recent past seem to bear this out as the disparity between the highest income earners and the rest of  the population has reached startling levels.  But should we be concerned about the market system and capitalism or the distortions that have corrupted them.

What we need to be clear on is what we are fighting against.  I propose that the market that is in place today is not a true market but one that has been distorted by people and institutions that have profited grossly from it.  We also have a shopping mentality that rewards flash over substance and creates a false sense of need.  These forces have continued to move the market farther from its true form and more towards this distorted form.  You don’t have to be a socialist, unemployed or impovershed to want this distorted market reformed.  There are many hard working entrepreneurs that are also hindered by this distortion and would welcome a return to a real market.

Markets should create value for all of society and not just for a few people.  An increase in value means that the size of the pie increases to the benefit of a large number of people.  If all someone is doing is diverting pieces of the existing value for their personal benefit they are not creating value they are corrupting the market.  This rent seeking activity is what we have seen from the financial services sector where most of the distortion has originated from.  Any efficiencies they are claiming to create do not exceed the massive cost they have inflicted.  Further, they have taken financial services away from facilitating value creation and attracted people whose talents could benefit society elsewhere.

There should be an ability for anyone to participate in the market at whatever level they choose to.  People with businesses that create value should have access to funding, customers and suppliers without having to know the right people.  If you have a good story that is about a business that generates real value for investors, society, employees and other stakeholders that story has be told and heard.  I distinguish this from stories that are nothing but PR and fluff where there is no underlying value creation.

We need to look at long term value creation and measures that go beyond just return on investment or financial profits.  Companies that will provide employment, look after non-investor stakeholders and build economies need to have a long term focus and real purpose.  We have to avoid the build to flip mentality where people are looking for get rich quick opportunities and don’t stand for anything.

Markets will have some inequality.  That is part of their functioning where people get rewarded for hard work and value creation greater than those that provide less value.  We will not and cannot eliminate all inequality in a market system.  But we have allowed the inequality to go too far and need to bring it into proper proportions.

Before we look at possible solutions we should also consider the alternatives to an open and strong market.  We could stay with the market but look to the government to intervene in a substantial way.  This is the solution I hear most often.  While its true that there are some regulatory and taxation alternatives that could help level the markets do we really believe governments have the capability to do this?  Do we want knee jerk, politically motivated band aids and quick fixes when what we need are long term, well thought out changes?  Finally, how do we eliminate the elitism that we all despise when governments are influenced by lobbyists and funded by special interests?

There are even people that are calling for direct government involvement in the private sector through government owned enterprises and even calls for the kind of socialism that exists in China.  Governments are having a difficult time effectively and efficiently running the services that are currently under their control.  How do we expect them to take on more and do it better than the private sector is doing now?  We also have to acknowledge that China is in a completely different stage of development where there may be some merit in the level of state involvement they have.  But we are starting to see some cracks in that system and I predict we will see that what lies below the surface is not as attractive as we have been led to believe.

So then, what do we do about this?  In the spirit of the entrepreneurial society we need people to build businesses that have a long term viewpoint, a mix of financial and non-financial objectives and that create sustained and real value.  Then we need investors and customers who will seek out these companies, buy their products and invest in their shares.  We need to punish short term thinking institutions by not buying their products or shares and by letting them know we don’t like the way they have been run.  As a population of investors and customers we have to stop pretending we haven’t contributed to the problem.

We can ask our financial institutions to provide the kinds of services that benefit their customers and are not just there to suck in fees in any way possible.  Get back to basic services where they fund and support businesses.  Manage stock portfolios in a way that demands performance from the companies they invest in and don’t stand by when executives take grossly inflated salaries and bonuses.

Our politicians need to provide us with long term plans on how they will support and nurture an entrepreneurial society built around fair markets.  We need limits on political contributions and lobbying.  Move away from negative attack ads and tell us what they will do not what is wrong with their opponent.

A truly functioning market system is how we have built the prosperity we enjoy.  It can’t remain stagnant and needs to evolve with the times.  It also can’t be hijacked by special interests whether they are the elites or those that would have us revert to government control.  We depend on well functioning markets and need to take it upon ourselves to protect them.  I have thrown out some discussion points but haven’t come close to covering every possible solution.  So as a society we need to stop talking about what we don’t like about how things are being run and start coming up with solutions.

Published by Vince Bulbrook

Vince has spent over twenty five years working with entrepreneurs providing financial and strategic advice. Much of this advice has centered on business model design and product development. Issues such as determining how to invest product development resources, pricing options, features, distribution and client requests all come in to play. For much of the past fifteen years Vince has operated a business providing CFO and strategy services to small businesses. In this period he spent three years in the product development group of a software company that had a $26-million development budget. Along with overseeing the development of a product he also worked with senior management and the other product teams to determine how to manage the product portfolio. He has advised clients in software, entertainment, digital media, publishing, retail and distribution on product pricing, feature selection, distribution strategy. Prior to founding the advisory business Vince worked with Price Waterhouse and Ernst and Young. Vince graduated from the Ivey School of Business with an HBA and is a Chartered Accountant.

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