Welcome Communism

In a mixed economy such as the UK or the USA, there are laws, such as the UK Companies Acts (most recent 2006), which protect shareholders, limiting their liability provided a company is run according to certain rules. This legislation is designed to encourage the investment of capital in businesses so that they will thrive, creating employment, goods and services and wealth for the shareholders. This is the capitalist system. The stability of the system depends on a fine balance between risk and reward. The board of directors is appointed by the shareholders and is responsible for running each company. Shareholders risk their money, based on the information provided by the directors. Directors are responsible for filing company accounts annually and for ensuring that the company is trading legally at all times, usually this means having assets that are equal to or more than liabilities at any one moment in time. Assets include cash, capital investments such as property, stock, machinery. The money for these is raised by selling shares to shareholders or from the profits made by the business. If the business in which they invest does not succeed (i.e. at any time liabilities exceed assets) then shareholders stand to loose their investment, but, under company law they are protected from being pursued by creditors of the business, provided that the company ceases trading the moment it is no longer solvent.

Banking is not an ailing industry for the UK. It has been badly managed recently and it has taken risks beyond what is reasonable (alongside banks the world over). Whilst the banks may deserve to go bankrupt, it is not really in anyone's interest to let this happen. It's not the Government's money being used, of course, but the UK tax payer's money or money being borrowed on our behalf. Actually, the tax payer stands to gain when the banks are sold back to the private sector in a few years time.

Now that we are bailing out other industries, the risks may be higher to the tax payer. Giving the motor industry £2.3B may not save it and certainly won't create a greener motor industry into the bargain. But what is now clear is that the threat that always hung over the shareholder, that he would loose all his money if the business he invested in failed, is no longer a threat. Fail and the government will bail you out.

Does this mean a turning point in the Western capitalist system? The work ethic, the motivation to succeed, may have dried up. The great criticism of communism was that motivation was poor. With no capitalist reward, under communism the state will always struggle to grow an economy, maybe even struggle to provide the basics for it population. Isn't this where we are heading in a system that no longer punishes the investors of a failing business and therefore takes away a sizable part of the motivation?