Posted March 3, 2006
Capitalism in the Dock
An Interesting analysis of the market and free-market policies
New York February 18, 2006
A zenit.org report
In this article. Bogle refers to a need for virtue and especially the virtue
of truthfulness and being able to trust in each other. In other words, he is
referring to the “soul” of capitalism and the need for having values that
keep it wholesome. At the end of this article you will find some quotes on
truth that both laud it and also reveal how difficult it can be in
After the collapse of communism and the adoption of free-market policies by
just about all countries and political parties, market capitalism should be
triumphant. But recent books highlight the shortcomings of the free markets.
In "The Battle for the Soul of Capitalism" (Yale University Press), John
Bogle analyzes what he considers to be crucial failings in the financial
markets. Bogle, former chief executive of the Vanguard mutual fund group,
wants the system to be run in the interests of the shareholders and owners,
rather than the managers.
Bogle argues that the last couple of decades have seen serious erosion in
the conduct and values of business leaders, investment bankers and money
managers. A staunch defender of capitalism and free markets, Bogle
nevertheless laments the excessive attention given to stock market prices,
instead of the intrinsic values of corporations.
Drawing on his own experience in the mutual fund sector, he looks at how
this sector has contributed to current problems. These funds not only siphon
off very large sums of money in the form of fees and their share of profits
on stock market gains. They also serve to isolate managers from any form of
control by stockholders, Bogle contends. Institutional investors in general,
such as retirement funds and mutual funds, now own two-thirds of all U.S.
equities. In fact, the largest 100 funds account for no less than 52% of
Another factor adversely affecting financial markets, Bogle notes, is the
concentration on short-term gains. A few decades ago mutual funds saw around
15% of their stocks turn over in a year. By the late 1990s this had risen to
100%, or more, as fund managers chased quick returns in the booming market.
This trend from investment to short-term speculation in stocks means that
funds are less likely to be interested in pressuring companies to improve
their ethics or management.
As well, corporate directors, auditors, and legislators have all too often
failed to ensure sufficient oversight of how companies are being run,
leading to the scandals of recent years.
"Capitalism requires a structure and value system that people believe in and
can depend on," Bogle argues. This includes trust in the word of others, and
an assurance that the system will function with equity. And for a long time
this worked; capitalism delivered remarkable economic benefits.
By the late 20th century the system changed and turned into a form of
"manager's capitalism." In extreme cases, it saw companies being run to
benefit the managers, not the owners or shareholders. Proof of that is the
soaring level of remuneration given to company executives in recent years, a
trend Bogle strongly criticizes.
Shareholders have benefited too, Bogle acknowledges. Even counting the
"bubble burst" in 2000, the U.S. stock market rose an average annual rate of
13% from 1982 to early 2005. (He adds, however, that a large proportion of
shares that were sold before the bubble burst were those held by corporate
Bogle proposes a variety of reforms to overcome the deficiencies he
outlines: performance-based compensation for executives; better corporate
governance; improving accounting standards; a return to a long-term focus;
and a clearer separation of ownership from management.
Another book that has drawn attention to how financial markets are causing
serious problems is "Capitalism's Achilles Heel" (John Wiley & Sons).
Written by Raymond Baker, ex-businessman and current guest scholar at the
Washington, D.C.-based Brookings Institution, the book draws attention to
problems such as bribery, money laundering, tax evasion and income
Baker is, he stresses, in favor of capitalism. But he worries that too many
people today cater to its weaknesses rather than build on its strengths. He
is particularly concerned that the defects he outlines are contributing to
the enormous gap between rich and poor, which, in turn, is undermining the
future prospects for prosperity.
The market also has many positive aspects. One of its defenders is John
Meadowcroft, deputy director of the London-based Institute of Economic
Affairs and author of the book "The Ethics of the Market" (Palgrave).
He argues that the market is an important school for virtue, and that
participation in a market economy strengthens rather than weakens
institutions such as the family. The market does not impose a specific set
of values. The market mechanisms as such, Meadowcroft observes, can be used
just as easily by selfless altruists as by selfish hedonists.
The market system does allow individuals to make choices that are morally
questionable, he notes. Yet he argues that it would be a mistake to try to
force morality on people. There is good reason to believe, Meadowcroft
argues, that where the role of the state has expanded it has crowded out the
institutions of civil society and diminished their possibility to contribute
to the moral capital of society.
The ethical justification for the market lies in its being the most
efficacious mechanism for helping people of whom we have no direct personal
knowledge. As well, it gives individuals the greatest possible scope for
determining their own destiny.
In the marketplace, people pursue their own ends and the market is able to
regulate economic activity and ensure the greatest efficiency through a
freely operating price system. This is not just an individualistic system,
Meadowcroft argues. The market is, rather, a social process in which
individuals learn that their own ends can be achieved only if they are
reconciled in some way with those of other people.
By requiring people to continually review their ends in the light of
information about others, communicated through price signals, the market
coordinates a myriad of competing ends and values into coordinated economic
In this sense, it is not correct to think of the market operating, as Adam
Smith described it, through self-love. It is not selfishness that drives the
market. Rather, individuals are motivated to respond to the price signals
generated. Economic coordination depends on people being alert to these
signals, whether the ends they seek are selfish or altruistic.
And what about the accusation that the market system leads to an unequal
distribution of wealth? Meadowcroft replies that this is simply the result
of the value of economic contributions as determined by the perceptions of
consumers and producers. Inequality is a part of how the market works.
Moreover, it is part of a system that brings with it benefits for all
members of society. He does, however, contend that the state should
guarantee a minimum income to ensure that no one be left in absolute
The Compendium of the Social Doctrine of the Church has an ample section
dedicated to the economy. It recognizes (in No. 347, for example) the
positive role played by markets, which allow economic potential to be
Yet, the Compendium urges that people also need to remember aspects such as
ensuring justice and solidarity. They must avoid the error of seeing the
accumulation of material goods as the only end of their activity.
Moreover, economic activity is only one facet of human activity and it needs
to be placed within the wider context of the person. Keeping things within
this wider perspective is, in fact, a key point raised by the Compendium.
That's a hard sell for some, but one that would go a long way to fixing
deficiencies in the way the market works.
Quotes on truth to be pondered in light of ethics in the marketplace:
One must always tell what one sees. Above all, which is more difficult, one
must always see what one sees.
Charles Pierre Péguy
A thing is not necessarily true because a man dies for it.
Oscar Wilde (1854 - 1900)
The true lover of knowledge naturally strives for truth, and is not content
with common opinion, but soars with undimmed and unwearied passion till he
grasps the essential nature of things.
Plato (428? BC - 347? BC)
One falsehood spoils a thousand truths.
Truth fears no trial.
Before you tell the "truth" to the patient, be sure you know the "truth,"
and that the patient wants to hear it.
Richard Clarke Cabot (1868 - 1939)
Errors, like Straws, upon the surface flow;
He who would search for Pearls must dive below.
John Dryden (1631 - 1700)
God forbid that Truth should be confined to Mathematical Demonstration!
William Blake (1757 - 1827)
He said true things, but called them by wrong names.
Robert Browning (1812 - 1889)
I never give them hell. I just tell the truth and they think it is hell.
Harry S. Truman (1884 - 1972)
I tore myself away from the safe comfort of certainties through my love for
truth; and truth rewarded me.
Simone de Beauvoir (1908 - 1986)
If the truth were self-evident, eloquence would be unnecessary.
Cicero (106 - 43 BC)
It is man that makes truth great, not truth that makes man great.
Confucius (551 BC - 479 BC)
It is one thing to show a man that he is in an error, and another to put him
in possession of truth.
John Locke (1632 - 1704)