The fundamental theory of capitalism is that a medium of exchange, in the hands of an entrepreneur, becomes an essential ingredient in the production of goods and services. The entrepreneur, when capital is available, makes effective use of available infrastructure, resources, land, equipment, and labour. A proper mixture of ingredients provides desired goods and services which can be marketed at a profit.
The entrepreneur's idea does not always result in a profit. After a period of trial, if the anticipated market fails to develop, the assembled components will be redistributed. There are always losses. Those who have contributed capital will normally lose it.
Capitalism has certain built-in assumptions. One is that the entrepreneur will devote all available intelligence, integrity and information to the success of his enterprise. This is the contribution executive talent contributes toward efficiency.
Efficiency means that minimum costs in capital and time will be expended per unit of product or service offered. Each added cost must be considered a burden of inefficiency to be eliminated.
Success in capitalism means profit for the enterprise, to be distributed among the shareholder owners. They receive their share of profits as dividends charged against the profits. Usually a fund will be retained for a prudent reserve against exigencies. Additional profits will be used to retire debt or improve efficiency.
Incestuous relationship
The major weakness of capitalism is its intolerance of fair competition. Instead of distributing the profits to shareholders, profits are used to devour competition. This sometimes takes the form of merger, in which the competitor is absorbed; other times the competition is destroyed by 'dumping' sufficient goods or services at a loss to sink the smaller and weaker local business.
This is regarded as unfair competition, because it must be conducted at a loss. As such it is a management decision. Management in theory is selected by a board of directors, who oversee their performance.
The board of directors is nominally chosen by the shareholders. In practice, the management finds means to choose the board of directors, leading to an unfortunate and inefficient incestuous relationship threatening the enterprise.
Use of profits to acquire other enterprises tends to concentrate control of production. This makes the entry of new ideas and smaller-scale enterprises much more difficult than when there is a wider distribution of more small companies.
In the modern world many countries are so concentrated that over 75 percentage of all goods and service pass through large corporations under narrow ownership.
This concentration of economic power leads also to concentration of management talent. Since managers are the means of maintaining necessary efficiency, their executive ability is essential and well rewarded.
In return, the executives respect the necessity for corporate loyalty and confidentiality of trade secrets. Loyalty provides security, and any suspicion that may arise from an attempt to advance through job change is viewed seriously.
Sweetheart contracts
Capitalism thus breeds an unattractive form of organisational captivity that has personal overtones of soullessness similar to over-ripe political associations. Often the corporate and political worlds are tightly intertwined.
The government grants generous contracts to favoured companies, and the companies return the favour, rewarding the politicians through various means, such as director's fees, consulting fees, 'sweetheart' contracts and a thousand forms of share exchanges and secret under-the-board shuffling.
Capitalism in theory is based on honesty in business dealing. The executives are expected to have integrity, providing accurate information about the business enterprise. Information regarding both success and failure is treated as a basic right of the shareholders, who are kept informed through quarterly reports.
Quarterly reports are audited and made public by disinterested third parties, bonded and selected for competence. Corporate credibility rests essentially on these independent external audits, which report openly and objectively on all activities of the enterprise.
In Malaysia, this objective and open reporting by independent external auditors is missing by custom. It is an established part of what is euphemistically known as the Asian way. As a result, major benefits of capitalism are forfeited, while potential for fiduciary mischief is exercised to maximum potential.
Information in Malaysia is typically a form of disinformation. Integrity is feigned. Contractual sincerity is elusive in both the corporate world and the public sector. Politicians interfere in corporate activity at will. One finds an itchy palm proffered at every government level for necessary cooperation, creating intolerable inefficiencies.
Spoiled politicians
The government routinely introduces additional inefficiency through laughable blunders. A typical example occurred last weekend, when the Malaysian Air Force entertained F1 racing fans, while all airlines had forced delays of an hour or more at the nearby KLIA.