“Over the last 25 years American capitalism has become financialism, which is primarily transactional, unrestrained greed.”–Ed Hess, Forbes
The capitalism envisaged by Adam Smith has been replaced by what Ed Hess, author of Smart Growth: Building an Enduring Business by Managing the Risks of Growth, terms “financialism.”
As he explains in a recent op-ed in Forbes, Financialism espouses that the the only purpose of a business is to create shareholder value and that the unfettered market will effectively regulate itself. An emphasis on creating stockholder value and a short-term approach to business are core tenets of financialism and are responsible for the financial collapse.
Not surprisingly financialism has contributed to a growth of the financial industry but at the expense of a weakened U.S. economy, a stagnation in middle-class wages, greater income inequality, the exporting of jobs and our manufacturing capacity, and increased risks of financial volatility.
Hess does list some companies (Starbucks, Southwest Airlines, UPS, Wholefoods, McDonalds) that have resisted this trend by incorporating both short-term and long-term views to their business. However, these businesses are too few and far between. Ultimately, what is at stake is not only the health of the economy but society’s faith in the marketplace. Hess concludes the op-ed writing:
Capitalism is not broken. But the financial industry achieved a 25-year creeping acquisition of it that led to the recent financial crisis, and today financialism controls our economic system. It appears that its leaders have forgotten the underlying premise of capitalism, that the marketplace needs to work reasonably well for all participants. At stake is the American dream and ultimately social cohesiveness. Long-term societal value creation needs to replace the short-term sole stakeholder model.