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Foreword: What Went Wrong with Capitalism?

Foreword: What Went Wrong with Capitalism?

It was more than 150 years ago that the poet and journalist Charles Mackay coined the phrase “the extraordinary popular delusions and the madness of crowds.” Today, as global investors ponder the painful lessons of the stock market boom and bust, Mackay’s phrase rings truer than ever. Every age, he argued in his classic study of 1841, had its peculiar folly, scheme, or fantasy into which even otherwise rational investors plunge, “spurred on by the love of gain, the necessity of excitement, or the mere force of imitation.”

Predators and Profits catalogues those very follies and examines just what went wrong with capitalism during the classic bubble we have just witnessed—a bubble that is right up there with the tulip mania in Holland in the 1630s, the great South-Sea Bubble of 1710–1720, and the Great Crash of the New York Stock Exchange in 1929–1933.

This most recent epidemic of high hopes, faulty finances, and pervasive greed by the corporate, financial, and auditing communities, as well as by investors themselves, found its roots in a fundamental perversion of our capitalist system.

A contemporary journalist, William Pfaff, writing in The International Herald Tribune in 2002, described what happened as “a pathological mutation in capitalism.” The classic system—owners’ capitalism—was based on a dedication to serving the interests of the corporation’s owners in maximizing the return on their capital investment. But a new system developed—managers’ capitalism—in which, he concluded, “the corporation came to be run to profit its managers, in complicity if not conspiracy with accountants and the managers of other corporations.”

How did this happen? “Because the markets had so diffused corporate ownership that no responsible owner exists. This is morally unacceptable, but also a corruption of capitalism itself.”

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