Moral Underpinnings of Capitalism

Alan Štefanacalan.stefanac@gmail.com

April 30th, 2014

Presentation for Quick Expert Challenge – DMP Challenge 2014

Presentation Summary

The birth of capitalism

Economic turbulence of the 20th century

Rise and fall of the global economy

Global wealth polarization problem

Global challenges and economic impacts

Future development of capitalism

Renaissance of the modern public sector

Influential individuals are today’s reformers

Technology beyond our imagination

Economic impact on the environment

Personal contribution to our future

The birth of capitalism

Since the beginning of human civilization, people were trading with basic trading goods (factors of production)

land, labor, capital

Development of printing machine and human colonization of „new world” forever changed history of mankind

Further trade development required new systematization Commodity money eventually evolved to monetary money

Authorities regulated all aspects of business life, from private ownership to trading and fiscal systems

Capitalism was recognized as a social system where „invisible hand” manages with supply and demand for goods

The roots of first exchange are recognizable since 1300s (Venice)

The first stock exchange is from Antwerp from 1531

Industrial revolution was the peak of conservative capitalism where the capital owners were „money Gods”, and labor workers were just „spendable resources”

The clash between wealth and poor societies was later defined as continues battle between workers and capital owners which continues till nowadays...

Capitalism emphasis individual collection of profit, rather than equal profit distribution between workers like socialism

Adam Smith (1723 – 1790) „Father of

capitalism”

Like gravity law, supply and demand are guided with some invisible force. Adam Smith

Adam Smith – Wealth of NationsMilton Friedman – Capitalism and Freedom

Economic turbulance of the 20th centuryHistoria Est Magistra Vitae! – Cicero Economic history is repeating and unfortunatelly the consequences are the same.

The last century was the period of significant prosperity as well as enormous suffer of whole mankind*

Global economies experienced global declines during „Great depression” in 30’s, „oil crisis” in 70’s,ex Soviet countries „transition adjustments” in 90’, and „lost decade” like Japan are representing some significant economic crisis during last century

Enormous global economic downturns were followed by high unemployment rate even in the most successful economies

Business cycles and downturns in market economies became „normal” situations, but different respond measures became subject of debate

Capitalism developed in two major labels - conservative or Keynesian’s economics, neoliberalism or Hayek’s economics

Second half of 20st century was marked by idealistic epic struggle between capitalism and socialism

However, late 80’s showed that socialism as economic system wasn’t sustainable in long term, and by mid of 90’s capitalism became the dominant economic system

Side-effects of capitalism booms and busts showed increasing doubts over sustainability of current capitalism economic system – liberality shouldn't cause higher inequality**

„Great depression” and unemployment* started 29th Oct 1929

* Data taken from US Bureau of Labor Statistics, Adam Smith Institute, Forbes, CPMG, Delloite** Thomas Picketty – Capital in Twenty-First century

Rise and fall of the global economy

After the fall of the Eastern Bloc, free market become economic guide for the most of global economies

Institutions such as WB, IMF, WTO, FAOUN, and many others become the basis of modern global economic systems

Foreign direct investments became important as natural resources, and the main capital flowdirections was to emerging countries (64% of total global FDI) - $723 bn a year from 2009 to 2012

Basic labor work force was replaced with high technology, which increased efficiency and optimizedproduction processes – the „new economy”

Stock exchanges experienced rapid growth, which caused several bubble busts in the last decade

Financial markets growth exceeded the growth of real economy, which created huge disproportion between real and market expectation (historically low CB interest rates didn’t pull the trigger of real economy recovery)

Debate about impact of monetary policy measures on real economy, due to slow recovery of labor and household markets, but incredible growth of leading stock indexes by 170% since 2009*

Early warning signals should prevent global financial crisis such as Dot.com crisis, global financial crisis, sovereign-debt crisis (PIGS*), etc., but unfortunately signals are not interpreted correctly

The greed for extra profits and competition between the biggest financial players created environment where some of them became „to big to fail”

Lehman Brothers, Merrill Lynch and many other large financial institutions failed, and at the same time dozens received huge financial aid from public funds (AIG) but their behavior haven’t change dramatically compared to précises period (managers’ bonuses, risk exposures, regulatory affairs, etc.) – all of that caused the question of moral hazard

• The Economist, Aug 2010; S&P500; NASDAQ;• Thomas Pikketty – Capital in Twenty-First Century

McKinsey Global Institute – Report QE and Ultra Low Interest Rates

Globalization showed that neoliberal capitalism was allowing economic boiling and melting down of allglobal and local markets due to the hunger for extra profits

Global wealth polarization problem

Huge disproportion of regional and personal wealth distribution is decreasing, so today more than 1.2 bn people are living in extreme penury with income below $1.25 per day

Total global wealth rose by 113% from 2000 to 2013, but that only increased concentration of wealth inside North America and Europe, although India and China exceeded that growth

In the same period Europe and North America increased it’s households wealth by 100%, but even higher growth was made in India (211%) and China (376%)

Although Africa has 14,6% of total population, their total wealth is representing only 1,13% of total global wealth

Net worth per adult increased by 68% from 2000 till 2013, but still wealth problems remain the same

*Credit Suisse Research 2012, 2013, Gini coefficient – WB **Wealth is defined as sum of non financial assets, financial assets and debt

Global wealth reached the highest historical level of total USD 241 trillion in 2013 despite setback in 2008, but wealth distribution became more disproportionate

Global challenges and economic impacts Society is going through strong changes everywhere in the world

Local social movements are becoming global phenomenon (Occupy Wall Street, Arab Spring, social networks, social protests in EU, etc.)

Internet revolution is providing global access to knowledge and information

In 2013 the number of Internet users was estimated to 39% of total global population (developed countries 77%, developing countries 31%)

Social networks became a global phenomenon with enormous social as well as economic impact (number of users of top 15 social networks reached 32% of total global population in 2014)

The world is living in the real time environment and censorship became almost impossible even in autocratic societies where people started seeking democratic and liberal changes of societies

Transformation of the energy landscape is becoming more suitable to new climate and environmental

Climate and energy policies are seeking for more sustainable, effective, and secure energy solutions

EU target till 2030 is to reduce its carbon emissions below 40% of levels from 1990, increase renewable energy to 27% till 2030

Current energy vulnerability to energy supply disruptions and price increases is harming businesses and economic competitiveness

Health care, taxation, regulation, legislation and other reforms are replacing old systems with new ones

PPACA, TARP, Basel III, ESM, CRD, ACTA, and etc.

Ongoing social, political and technological revolutions and changes are re-shaping economic systems

• EC - 2030 climate and energy goals for a competitive, secure and low-carbon EU economy, IP 14/54

• Thomas Pikketty – Capital in Twenty-First Century; McKinsey Global Institute – Report QE and Ultra Low Interest Rates; No of Social Media Users – Alexa; International Telecommunication Union

Future development of capitalismLike every system, capitalism has to evolve during some time. Where it’s going to develop that’s the question, but if the goals are clear than the future development is more certain.

• Thomas Pikketty – Capital in Twenty-First Century• Credit Suisse Research 2012, 2013

Transformation of capitalism has to include all current socio-economic changes in order to correct any problem that was caused by previous or current defects

Wide reforms should include all sectors, and their main goal should be directed towards more equal world wealth distribution and environment preservation

Highlighted changes will be made inside public sector, contribution of influential individuals, rapid technology improvement and innovation, environment solutions, and our personal future contribution.

The economic system should become the engine of corporate, as well as social, prosperity

Renaissance of the modern public sector The transformation of the public sector will start due to changes inside the real sector

Due to development of ICT the governments will be required to expend the services of e-government and other public services connected with the Internet services

New public sector will encourage public management to proceed with decentralization, setting real objectives, cooperation between public agencies and real sector, develop new standards against corruption and realized that the main value of further progress is inside human resources

Regulators should implement the best business practices and monitor potential negative shocks

Establishment and strengthening of independent global and regionalregulatories in order to prevent future negative impacts of some disorders

Technological innovation will allow quick regulatory adaptation on new economic conditions and policy changes

Public investments are expected to increase in future, due to technical requirements and needs of modern business

Investments will include communication infrastructure, software,energy infrastructure, research and development facilities, etc.

One of the biggest investments should be made in human resources,due to growing needs for efficient public management

Changes inside taxation systems will put focus on the taxation of rent or pollution, rather than focus on taxation of labor or consumption

Bureaucracy and regulators should take in consideration global environment of modern businesses,so their restrictions and work must change focus from local to global aspects

• World Bank: Public Sector Reform: What works and why?• Thomas Pikketty – Capital in Twenty-First Century• EC: Powering European Public Sector Innovation: Towards A New Architecture

Idealistic „open government”

Influential individuals are today’s reformers Some of the richest persons in the world are the

biggest philanthropist

Bill Gates and Melinda

Warren E. Buffett

George Soros

The Giving Pledge is campaign which encourage the wealthiest people in the world to donate 50% or more of their wealth to charity

Not only the richest people on the planet can make differences

Barack Obama

Albert Arnold „Al” Gore

Angela Merkel

Hillary Clinton

“If you’re in the luckiest one per cent of humanity, you owe it to the rest of humanity to think about the other 99 per cent.”  W.Buffett

If you show people the problems and you show people the solutions they will be moved to act. – Bill Gates

Bill Gates, 1955 – present,cofounder of Microsoft

Warren Buffet, 1930 – present,The most successful investor

of the 20th centuryGivingpledge – charity fund funded by Bill and Melinda GatesNyTimes, Forbes, The Economist

Technology beyond our imagination

Technology innovation is became essential business pattern

The price of transistor decreased more than 512 times, and speedexponential growth more than 9.015*E15

One Google search uses the computing power of entire Apollo space mission

Technology is changing everyday decisions making, production process, products (3D printers)

Purchasing and implementation costs are increasing, but operation costs are dramatically decreasing (more than 70%)

Data driven businesses and economy are followed with cloud technology

Implementation of new high technology everywhere and anywherein the world is allowing us to call modern economy „smart world”

SME which are placing their businesses online are growing twice faster than those without internet environment*

Technology is reshaping our economic environment, and by that directly changing the systems basic requirements (regulation restrictions, operation costs, markets, etc.)

The only produced good, which became essential part of our life, and since the beginning is increasingspeed, quality and at the same time decreasing price is transistor.*

1960 1970 1980 1990 2000 2010 2020 2030 -

100

200

300

400

500

600

Production costs of RAM microchips in current USD

Costs of RAM

*Moor’s Law – speed and quality of transistor productionMIT technology reports, Google Loon project, The Economists. Intel reportsKPMG – Technology Industry Survey 2013, A.T. Kearney – Rebooting Europe’s High-Tech Industry

Google’s project Loon –„Global Interent Access”

Economic impact on the environment Impacts of global warming must be reduced due to sustainable economic growth

UN and EU are setting global strategic guidelines and directives in order to prevent devastating environment exploitation caused by fast moving capital from multinational corporations or individuals

Kyoto protocol showed first real intention of reducing overall emission by 5,2% from their 1990 levels by the end of 2012

Find the common global policy instruments which will enable sustainable control over gas emission (either cap trading systems, carbon taxes, or some other international instrument)

Capitalism is looking the ways of environment conservation

Implementation of new innovative technology, recycling materials usage, improving energy efficiency, will reduce the Greenhouse effect and prevent overheating Earth’s surface

Impacts of global warming must be reduced due to sustainable future economic growth

Waste, gas emissions, energy unefficiency, caused by industry and urbanization, must be overcome byreasonable usage in order to prevent high

Today temperature increased for 2˚C above pre-industrial average temperature

Environment and climate changes were caused mainly by intensive economic development, and in the future, economic systems needs to find formula for sustainable growth.

UNEP – Global Environment Outlook 2012EEA – Environmental Indicator Report 2013

Personal contribution to our future

Future economic development is in the hands of young generations

Increasing accessibility of information and internet connection is providing unimaginable potential for further economic and social development

Constant socio-economic changes are forcing us to make adaptation in order to improve the environment where we live in

High education should learn us about moral obligation, equality, justice, and personal contribution to our planet

More understanding between different nations will create global dialogue

National policy will be influenced by global individual awareness and economicconnections which will lead to global peace due to new socio-economic environment

Personal contribution in further development of capitalism will result as ourinternal moral and ethical development as whole humanity

High technology will prevent large scale of frauds, optimize our work and change our view of the planet

„Be the change you want to see in this world” - Gandhi

Steve Jobs, 1955 – 2011,Inovator and entrepreneur;„Let’s invent tomorrow, rather thanworrying about what happenedyesterday!”

Questions and Answers

Economic systems will change due to ongoing social, technological, environmental and corporate changes. All of these changes will include new ethical and moral elements which will re-shape current capitalism systems.