Capitalism failing, warns investment kingpin

Soothsayer: Warren Buffett is one of the richest men in the world. © CNBC

Is capitalism broken? Today, as experts digest the warnings of billionaire investor Warren Buffett, many are wondering if the system that dominates the globe is working for everyone.

In ancient Rome, before making an important decision, people would often consult a haruspex: a fortune-teller who could forewarn them of the dangers of each choice.

Today Warren Buffett plays a similar role. The 90-year-old investor is sometimes called “the oracle of Omaha”, after the Nebraskan city where he lives. Investors, economists and other experts flock to hear his opinions on the future of the economy.

But in his most recent meeting on Saturday, Buffett was troubled. He complained that the app Robinhood, which was at the centre of the GameStop controversy in January, is encouraging small investors to see trading stocks as a form of gambling, instead of a way of directing funds towards productive businesses.

He also railed against the cryptocurrency bitcoin, calling it “useful to kidnappers and extortionists” and “contrary to the interest of civilisation”. He had equally harsh words for Spacs (special purpose acquisition companies) – firms set up solely to raise capital to buy other companies – which he described as a “moral failing”.

What seems to worry Buffett is the idea that capitalism is not working in the interests of the majority of people. He believes that capitalism should uphold civilisation – not destroy it.

This is a debate that has been raging since capitalism first developed in the 18th Century. At that time, some people were concerned that access to luxury goods was corrupting morals, making people greedy and materialistic.

In response, philosopher Bernard Mandeville argued that greed was good for society. He claimed that everyone benefits from the lavish spending of the rich because it creates employment for others.

But by the early 20th Century, capitalist societies had become deeply divided between rich and poor, and many protested that the system was not working. In response, some politicians argued that capitalism had to be made fairer. They set up the welfare state, paid for with taxes on the highest incomes, to redistribute wealth from the richest in society to the poorest.

This lasted until the 1970s when economists began to argue that cutting taxes and welfare would stimulate economic growth and therefore benefit everyone. This idea, known as “trickle-down economics”, was adopted by governments across the world. Once again, conventional wisdom held that greed is good.

Now the pendulum seems to be swinging the other way. Even those like Buffett who have benefited from laissez-faire capitalism are concerned that it is deepening inequalities and eating away at the fabric of society.

This problem has been compounded by the pandemic: between 2020 and 2021, 150 million people around the world fell into poverty, while billionaires increased their wealth by more than 25%.

It has prompted some to argue that capitalism is once again in need of reform to make it work towards a moral purpose and serve the interests of society, instead of benefiting a handful of people.

Is capitalism broken?

Breaking point

Yes, say some. The promise of capitalism was that ordinary people could, through hard work, earn enough for a comfortable life. Yet today, while people are working harder than ever, incomes are stagnant, and many young people cannot even dream of owning their own home. Greed and self-interest have not caused wealth to trickle down to the many; it is being hoarded by the few.

Not at all, say others. If capitalism really were failing the majority of people, we might expect people to start resisting it. Yet there is no sign that the popularity of capitalism is waning. In recent years, politicians across the Western world have promised to reform capitalism in favour of ordinary people, and they have all been rejected by the electorate.

You Decide

  1. Is greed good?
  2. Does it matter whether or not an economic system is moral? Why?

Activities

  1. Get in a small group to draw a storyboard about a wealthy person who decides that greed is wrong and tries to make amends.
  2. You are going to debate the motion: “This house believes that greed is immoral.” Divide the class into two and assign each one a side to argue.

Some People Say...

“We want capitalism and market forces to be the slave of democracy rather than the opposite.”

Thomas Piketty (1971 – ), French economist

What do you think?

Q & A

What do we know?
Most people agree that an economic system can only survive as long as most people support it. Famously, the liberal political theorist Hannah Arendt argued that power is always dependent on the consent of the governed: the moment people stop obeying it, it fails. That means any economic system has to be able to guarantee that it will make most people better off than the alternatives. Capitalism promises to maintain individual freedom at the price of high inequality.
What do we not know?
There is some debate over what “capitalism” really means. Around the world, there are many forms of capitalism. In most of the western world, capitalism is dominated by financial services, but in the Global South, a different kind of capitalism, based on the manufacturing of goods, is more prominent. In China and Singapore, there is another kind of capitalism again, based on state management of the market. These different kinds of capitalism work in quite different ways.

Word Watch

Haruspex
A haruspex would usually make predictions by watching patterns of birds in the sky or sacrificing an animal and examining its entrails.
Warren Buffett
The seventh-richest person in the world, with a personal wealth of almost $104bn. In 2010, he pledged to give away 99% of his fortune.
Omaha
The largest city in the American midwestern state of Nebraska. Warren Buffet was born there in 1930.
Robinhood
An app that allows investors to buy and sell stocks commission-free. It was named after Robin Hood, who stole from the rich and gave to the poor, because its founders wanted to give ordinary people access to the stock market.
GameStop controversy
In January, small investors organised on the social media site Reddit to inflate the price of shares in Gamestop, a flagging video game company.
Cryptocurrency
A digital currency not backed by a central bank. Because cryptocurrencies cannot be traced easily, they are often used for illegal activities.
Spacs
A Spac has no commercial operations and usually no employees. It exists solely to raise money and buy existing companies.
Capitalism
An economic system based on private ownership of property and the production process.
Bernard Mandeville
A Dutch-English philosopher whose most famous work is the Fable of the Bees, in which he argued that society benefits when people act immorally.
Laissez-faire
An economic ideology that advocates deregulating markets and shrinking the state.

Subjects

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