Why Did Capitalism Fail This Time?

Ever since I read the LA Times article (see post below) about the KB Homes CEO collecting mega-bucks for just, I guess being around, I’ve been wondering what went wrong. I mean, why didn’t the titans of American industry see all of this coming and warn the rest of us or at least keep their companies out of the dumpster.

I know, greed. Well I don’t quite buy that argument. Look, a lot of these guys had more money than they could spend in a lifetime. They may have wanted more so they could add to their score on some mythical tote board but they weren’t dumb. They saw what happened to the executives of Enron, World Com, Drexel Burnham — years ago —  Quest and on and on. The reprecussions of running a company into the ground in this country aren’t pretty. Loss of your reputation is the most benign result and jail is not out of the question.

Were they so sure of themselves that they just didn’t think it could happen to them or did they in fact just not have a clue? Reluctantly, I am beginning to think they didn’t have a clue and that’s a scary proposition.

Look, the folks who have been running these companies have more on the ground intelligence than every agency of the federal government and the Fed put together. There is no reason that they shouldn’t have known that the markets in which they not only participated but dominated were full of nothing more than fool’s gold. What motivated them to keep pushing the envelope and not send up warning signals?

I’ll admit to no great insight but I think it’s a fairly important question. Here’s why. If capitalism and a free market is going to prosper then it has to do more than just maximize profits. It needs to be self-limiting in the sense that it knows when to pull back and save its shareholders from untenable markets and it needs to speak up and call attention to unsustainable business practices for the greater good of the society. It’s evident that by and large neither of these things happened when we needed it most.

Let’s leave the greed argument aside. It’s too facile. Here are some thoughts on what might be at work here. I would really appreciate your ideas as well.

  1. Boards of directors were abject failures in carrying out their responsibilites. Effectively, they became pawns of management.
  2. Management complacency. Essentiall a failure to say “But Then What.”
  3. B-Schools have groomed a cadre of managers that can’t look beyond Excel spread sheets and make intuitive judgments about the dynamics of the businesses they manage.
  4. Too many managers lacked an historical perspective of down markets.
  5. Thinning of middle management ranks that were closer to micro-trends and thus might have called attention to the anomalies that were developing.
  6. An overall dependence on management by numbers and a lack of appreciation for anectodal evidence combined with an aversion to getting down in the trenches with the troops.

Finding what went wrong is important. Business as usual is not going to suffice. The politicians, if you haven’t noticed, have already put down that marker and they have the public behind them. Management of America’s companies is going to have to come up with some ideas or they are going to be rendered extinct.

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