When Karl Marx defined capitalism he meant an economic and a social system in which power rested with the owners of capital. In today's capitalism the owners have been usurped by a new class of executives.
The idea that a firm might be run for the benefit of its managers rather than the owners is not new. Economist refer to this as the "agency problem". In theory, the shareholders own the firm and appoint a board of directors to ensure that the firm is run well and profitably. Yet over time the professionals running the company manage to divert the company's resources to their own benefit - a more comfortable office, a car and driver, a company plane, a bigger salary, a performance bonus and share options.
My contention is that the agency problem has grown to such a stage that it now defines the nature of the economy. The outlandish levels of remunerations which bankers and executives in the financial sector award themselves is only the most blatant example of the new agency capitalism. In some cases, as much as half a firm's net earnings are paid out as bonuses. The obvious questions are: how has this happened and what is the alternative?
In the 19th century the owners of capital were largely wealthy individuals. They could take an interest in the firms in which they invested to ensure that they continued to develop and grow and provide a good return. Now individual shareholders are a small part (10%) of the stock exchange. In 2008, 42% of shares in the London stock market were held overseas. Of the remainder 40% are owned by financial institutions - insurance companies, pension funds, mutual funds etc. (Details here) So two-thirds of UK shares held in the UK are owned, not by top hatted capitalists, but by us - people who pay into occupational pension funds, private pension funds, insurance policies and ISAs.
Strictly speaking they are owned by the insurance companies, pension funds and other institutions; but it is our money they are investing ultimately for our benefit.
With 42% of shares owned overseas and 40% owned by institutions, the company owners are no check on the executives running the companies. It is no wonder bankers can get away with daylight robbery.
The problem is compounded by the idea that a company's purpose is to provide "shareholder value"; an idea which has reduced the shareholder's interest to whether the share price is going up.
What is the alternative? I believe that there is an alternative to agency capitalism. More on that another day.