You may never have thought that capitalism is broken, but Jeremy Grantham, who predicted both tech and credit bubbles, heartily disagrees. He points to executives making 600 times the average worker with no apparent increase in management ability, shortsighted firms that excessively discount the future, and the view that growth is limitless, even in the face of finite resources. Given these cracks in capitalism, can we fix it? And how?
The political problem
One major problem, Grantham explains, is that companies' money in politics fends off the long-term solutions that society needs to succeed in the future. This corporate influence in politics is becoming more scrutinized as of late, with an increase in the proportion of shareholder initiatives regarding political spending. But just for a sampling of corporations' lobbying activity, according to the Center for Responsive Politics:
spent $26.3 million, with a lot of activity related to defense bills -- for example, pushing for an alternate engine for the F-35 Joint Strike Fighter that GE would have built and had estimated as a potential $100 billion market. (NYSE: GE)
spent $20.5 million lobbying on tax issues related to the Close Big Oil Tax Loopholes Act (defeated 52-48 in the Senate last May), among other items. (NYSE: COP)
spent $20.2 million on an agenda that included nudging legislators to push through its attempted merger with T-Mobile, which failed last December. (NYSE: T)
spent $19.2 million concentrating on the Protect IP Act and Stop Online Piracy Act, although this cash failed against the large virtual uproar from Internet users. (Nasdaq: CMCSA)
spent $16 million, predictably on efforts to influence defense spending, but also on the Securing American Jobs Through Exports Act of 2011, which aims to re-authorize the Export-Import Bank through 2015. Boeing just inked a $740 million deal with the bank that allows Boeing's suppliers to receive early payments on invoices. (NYSE: BA)
With so much money floating around politicians, it's difficult to see how the system could change. However, Grantham points to northern Europe as an example to follow; there is a reason why Denmark, Finland, Sweden, Norway, the Netherlands, and Switzerland all fall within the top 10 least corrupt countries in the world.
And to buffer corporate influence on politicians, Grantham says politicians themselves need to have higher qualifications, especially in science. Whereas "eight of the nine senior leaders in China's government are scientists," Grantham notes that "of our 535 Congressmen and the President and Vice President, less than a handful -- arguably only two or three -- would pass the test." With wiser politicians that are not influenced through corporate cash, Grantham hopes politicians would put in place sensible regulations that will help capitalism prosper again.
Better regulations that are uninfluenced by corporate money will hopefully solve the greatest threat that capitalism doesn't take into account: finite resources. As Grantham states, "You don't have to be a Ph.D. mathematician to work out that if the average Chinese and Indian were to catch up with ... the average American, then our planet's goose is cooked ... if they caught up, we would need at least three planets to be fully sustainable." While capitalism pushes growth at all costs, and a decade or century sounds far away when hearing about peak oil, we do in fact live in a world with finite resources that will require proper solutions -- with the help of capitalism and clever regulation.
While companies keep their tight grip on lobbying, it's unlikely Grantham will be happy with the road that capitalism leads us down.
In the face of finite resources and a growing global population, commodities are seeing demand from developing countries around the world. For a few ideas on how to profit from this demographic shift, read our free report: "3 Stocks for $100 Oil."Fool contributor Dan Newman is heavily invested in mac and cheese futures, given Grantham's advice. He also holds no shares of the companies mentioned above. Follow him @TMFHelloNewman. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.