Primary navigation:

QFINANCE Quick Links
QFINANCE Reference
Add the QFINANCE search widget to your website

Home > Macroeconomic Issues Viewpoints > Goldman Sachs, the Symbol and Essence of What Went Wrong with Western Capitalism

Macroeconomic Issues Viewpoints

Goldman Sachs, the Symbol and Essence of What Went Wrong with Western Capitalism

by James Anderson

Table of contents


James Anderson graduated with a BA in modern history from Oxford University and, after postgraduate study in Italy and Canada, he gained an MA in international affairs in 1982. He joined the independent Edinburgh-based fund management firm Baillie Gifford & Co in 1983, becoming a partner in 1987. He headed Baillie Gifford’s European investment team until 2003 when he became deputy chief investment officer and head of the global equities investment team. Anderson is a member of the investment policy committee and became chief investment officer in 2006. He has been the manager of Scottish Mortgage Investment Trust plc since 2000. Baillie Gifford manages a total of $94 billion in active equity and bond portfolios for investment clients around the world.

Professor Joseph Stiglitz has said that after the bank collapses of 2008, market fundamentalism should have become as discredited as Communism was after the fall of the Berlin Wall.

I have some sympathy with that view, as I do with Joseph Stiglitz’s current pronouncements on whether we are talking ourselves into undue austerity. It puzzles me that, even after what happened, we have not been able to get away from market fundamentalism, the notion that “the market always knows best.” Perhaps it’s only a matter of time. After all, after the crash of 1929 it took until the mid-1930s before the Glass–Steagall Act was enacted.

Perhaps it’s more difficult to come up with an alternative ideology than it was in the 1930s, because of the globalized nature of the world? Don’t individual countries prefer to await a globally agreed solution rather than risk going out on a limb with regulatory or structural change?

That is no longer a valid excuse. It is based on prevailing trends and assumptions—the globalization of the financial sector—that are now redundant. US-style capitalism is not going to be the dominant orthodoxy over the next 100 years.

US-style capitalism did become rather detached from the real world, especially were executive pay was concerned.

If executive pay, or the share of GDP, of one particular sector diverges from the fundamentals, as happened to the financial sector in the United Kingdom and the United States prior to 2008, that’s a sure sign it is entering dangerous bubble territory. However, it’s worth noting there are two sorts of US capitalism at the moment.

The bad part combines financial services, big East Coast industry, Jack Welch-style management and Milton Friedman-ite ideology. It has the imprimatur of Harvard Business School and the endorsement of Goldman Sachs.

People like Simon Johnson, professor at Massachusetts Institute of Technology, are right in saying that it is the capture of Washington, DC by that part that is so dangerous. How can you change an economy when many of its policymakers have such close links to Goldman Sachs?

Goldman is both the symbol and the essence of what went wrong with Western capitalism. Look at who has gone into government from Goldman Sachs. Look at how Goldman now has such a trading-led culture. Until Goldman is broken up, or its share price falls more sharply, we may continue to be in a state of crisis. That sort of US capitalism has taken us precisely nowhere in the last 15 years!

By contrast, West Coast capitalism remains profoundly innovative. In West Coast capitalism, the founders are still running the show—so you have Steve Jobs at Apple, Jeff Bezos at Amazon, Larry Page and Sergey Brin at Google, Mark Zuckerberg at Facebook. Those are their companies; most of their reward comes through the capital they have invested in those companies, so there is no management/agency problem. That generation of West Coast business leaders have an idealistic ethos of how to run a business, how to globalize, how to use technology. It’s hugely encouraging.

For me, the real divide is between West Coast values and East Coast values. It is hard to understand why the latter ideology still occupies the commanding heights in Washington, DC.

Do you see that sort of creative, innovative, long-term value approach to business replicated anywhere elsewhere in the world?

China is now creating the same sort of entrepreneurial fury—you could call it Silicon Valley times twenty. That already includes venture capital networks, millions of qualified software engineers, links between universities and start-ups.

We were recently in China and met the ex-boss of Google China. He told us “I won’t talk to you about Google, but I will talk to you about my new role as a venture capitalist.” He regards Google as being terribly elitist, given it only caters for the top 1% of the population. Today he is much more interested in early-stage venture capitalism, helping start-ups focused on the mobile internet. There are strong parallels between what’s happening in China today and what’s been happening in Silicon Valley since the 1960s.

Are you happy for companies in which Baillie Gifford invests to focus on other stakeholders—including customers, employees, the environment, society, the wider economy—rather than just obsessing about stockholder value?

Yes, absolutely. Amazon is currently Scottish Mortgage’s biggest holding. It is the first time a US company has been our biggest holding for over 20 years. In 1997 Jeff Bezos wrote a letter to stockholders in which he made plain his contempt for Wall Street, and the letter is republished in the annual report every year. It includes the line: “From the beginning, our focus has been on offering our customers compelling value.” So he is not chasing quarterly earnings but customer satisfaction. Everything else will follow, he believes.

Fund managers are generally very critical of the banks.

Fund managers need to take a look in the mirror. As John Authers said in his new book The Fearful Rise of Markets, fund managers were a big part of the problem. Why did the vast majority of fund managers back RBS? I think it was because we were scared of being underweight; there were momentum effects, including the fact you get judged on performance over a three or six-month period. We need to develop a much more sensible framework for the fund management industry, in which performance and rewards are judged over the longer term.

But there isn’t much sign of any change in that area, is there?

I would agree. I am probably more pessimistic about the fund management industry than I am about the attitudes towards capitalism in general. It’s surprising there hasn’t been more of a clamor for change, given that those investors who have done a decent job are not playing a short-term game; they’re the ones with a vision of where the world is going.

Back to Table of contents

Further reading


  • Bogle, John C. Enough: True Measures of Money, Business and Life. Hoboken, NJ: Wiley, 2008.
  • Johnson, Simon, and James Kwak. 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown. New York: Pantheon Books, 2010.
  • Kurzweil, Ray. The Singularity Is Near: When Humans Transcend Biology. New York: Viking, 2005.
  • Lewis, Michael. The Big Short: Inside the Doomsday Machine. London: Allen Lane, 2010.


Back to top

Share this page

  • Facebook
  • Twitter
  • LinkedIn
  • Bookmark and Share