The limits and failings of capitalism

The Financial Review reports: A joint Fairfax Media and Four Corners investigation has exposed claims from CommInsure’s former chief medical officer Dr Benjamin Koh of a culture where doctors are pressured to alter or delete medical records and opinions to allow the Commonwealth Bank subsidiary to avoid paying claims.


 Commonwealth Bank chief Ian Nareev: Despite his protestations and “disappointment”, it is clear that CBA customers come a poor second to profits.

Other media reports indicate that this is just the tip the iceberg and this practice is widespread in the industry. Most analysis will point to companies greedy for profits and claims managers greedy for commissions by minimising payouts.

Yet, the problem is far more deep-seated than this and goes to the very heart of our financial institutions and processes.

At the bedrock of our capitalist society is the assumption that economic activity should generate wages for those who work and profits for those who invest. It’s the second part of this proposition that creates the problem that we’re now seeing with the Commonwealth Bank.

If someone invest money in a factory that makes motorcars, it is quite reasonable at they should receive some return for the capital that they have invested and possibly a premium if the motorcars they make are particularly good.

But there are some industries where this principle does not work particularly well.

The provision of health and medical insurance is an excellent example. People pay premiums to insure themselves against times of sickness and disability. The people who run the system that collects the money and pays out to those who need it should be paid according to their skills, efforts and ability.

But the assumption that someone should be able to make a profit from the provision of the service is where the problems start.

The first problem is that the profits will come from the premiums that people pay to protect themselves.

You can be fairly certain that if someone were to be told,

“This premium costs you $100 a week. Of that $80 goes into a fund to protect you  and five dollars goes to the people who manage the fund. The other $15 goes to the people who own our company who, incidentally, have an interest in avoiding or minimising any payments that you may be entitled to.”

Then they would say: “I might look somewhere else, thank you.”

The principle that should operate is that people should be paid if they add value to a product, a process or a service. In the CommInsure situation, the  CommInsure shareholders and investors, in this case the Commonwealth Bank, do not add value beyond that which is provided by the people who work to keep the system functioning. It is therefore unreasonable that the Commonwealth Bank and its shareholders should be able to extract a rent from this process.

It’s a deep-seated and fundamental failing of our capitalist system, so deeply and systemically embedded that it will be exceptionally difficult to change. That failing can be stated very simply.

The people who invest in the Commonwealth Bank are people who have excess economic capacity over what they require to maintain themselves. The ability to invest in the Commonwealth Bank is denied those people who only have economic capacity to provide for their daily needs, to say nothing of those who have less capacity than is required.

Over a long period of time, this disparity produces an increasingly large gap between the haves and the have-nots.  There has been widespread media coverage of economic data that indicates this phenomenon.

Oxfam said that the wealth of the poorest 50% dropped by 41% between 2010 and 2015, despite an increase in the global population of 400m. In the same period, the wealth of the richest 62 people increased by $500bn (£350bn) to $1.76tn.

The charity said that, in 2010, the 388 richest people owned the same wealth as the poorest 50%. This dropped to 80 in 2014 before falling again in 2015.

There is a strong argument to be made that there is a range of services that should be run on a not-for-profit basis. Medical health and disability insurance is one of those services but prizing it out of the greedy fingers of the big banks is going to be extremely difficult.


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