"Capitalism has run out of steam"
It is an illusion that we live in the most innovative era. That is according to Björn Weigel, who argues that ownership is crucial for capitalism to flourish. You can hear him speak at SKAGEN's New Year's conference in January 2019.
“In recent decades, companies have become smaller and less willing to change, even though we believe the opposite. Bureaucracy is increasing at the expense of entrepreneurship and innovation. The problem is that we think we are more innovative than we are,” says Björn Weigel, strategist and co-author of the book The Innovation Illusion: How so little is created by so many working so hard.
Lawyers govern companies
The traditional capitalist and entrepreneur driven by a will to innovate is under threat of extinction. Companies are increasingly owned by institutions, pension foundations and large funds. As an example, institutional ownership in the United States since the 1950s has increased from six percent of total outstanding equity to nearly 60 percent today. It is not enough for us to live in an era of revolutionary technology. In order for innovations to lead to growth and productivity, companies must be able to make them available in society. Instead, existing ownership structures promote bureaucracy, regulatory frameworks and predictability.
“The fact that institutions own more and more companies is not a bad thing in itself. However, few people question whether we are losing something with the disappearance of entrepreneurs. Lawyers have now taken over corporate governance. Capitalism has simply run out of steam,” he says.
There are certainly good and skilled institutions that are, to a certain extent, entrepreneurial in their ownership. However, at the same time as the world of investment has become professionalised, so has the economy become more predictable and the desire to test new things has diminished. Old thinking patterns are increasingly rarely challenged. Companies invest less in research and development that could make their products better than those of their competitors. The long-term effect of this has been that many developed economies are characterised by low productivity.
Creative destruction needed
We have a much more uneasy economic system today than the macroeconomics pioneers, such as the 18th century philosopher Adam Smith, could ever have imagined.
The key to change and a more lively form of capitalism is that we become aware of the problem. Who owns the companies and what signals the owners send plays a role in how dynamic a society is. We need companies that challenge old structures and generate creative destruction. That is a point that many politicians miss, according to Weigel.
At our New Year’s Conference 2018, Professor of Economics Mariana Mazzucato talked about public initiatives rather than business being the mother of innovation. She went so far as to call the state a form of risk capitalist. What is your view?
“Mazzucato makes many good points and I agree that the state has an important role to play in basic research. But states do not take risks, instead they reallocate funds from a never-ending stream of money. Historically, the state has not been an effective actor. This reflects a view of innovation as instant coffee, whereas understanding customer needs is equally important. It's not just a matter of assembling different technical components.”
What is your take on the endless debate around active vs passive management?
"It is an interesting debate that concerns systematic differences. But the debate still takes place within our existing ownership structure. Regardless of whether ownership is active or passive, this makes all the difference. The debate about active or passive management misses this important point.”