Can we blame the incentives for the evils of capitalism?Are stock options the root cause of all the major shortcomings of capitalism? Can we blame the incentives for the evils of capitalism?

This article by Tim Cohen appeared in the Business Day in 2011 (2011-11-10 to be precise) already.  Backlinking to the original article, unfortunately, is not available anymore.

The Big Three

He says, in order to answer it, we might have to go back to the big three of the 19th century, the era when capitalism was really just stretching its legs and getting into its stride.  The big three were, in his opinion, Karl Marx, Sigmund Freud and Charles Darwin.  The point is that each of them was responsible for the emergence of a new “science”: sociology, psychology and natural history.

Each proposed a cause of action that could explain humanity. For Freud, it was the psychology of the mind; for Marx, the structure of society; and for Darwin, the process of natural evolution.

Of the three, it was Darwin’s project that was the narrowest, most scientific and most correct.

Blame the incentives for the evils of capitalism

And behind these notions of action lies, in fact, a single motivator — incentives.  Nothwithstanding all their other differences, they shared one central idea: they were mechanists in the age of mechanism.

For Freud, the mechanism moves forward because of innate desires.  For Marx it was class mission and the dialectical stresses of society.  And for Darwin it was the need for survival. The discovery of incentives was possibly the common theme all of the big three were grasping for.

The knowledge of incentives, their measurement and their consequences, is really what economics aims to understand. It was the missing link between them.

Now, years later, we know all about incentives because we, the shareholders, provide them in very measurable circumstances to the executives.

Stock Options.

Arguably, all of the evils of modern capitalism can be linked to stock options. An obsession with short-term growth and the tendency to find short cuts to achieve it. Like absurd frequencies of mergers and acquisitions. And huge special dividends.

A PDF version of this article is available here.