Several people who regularly comment on this blog are extremely critical of capitalism. That’s understandable, given the distorted version currently practiced in the U.S., but I would caution that broad-brush diatribes against a market economy and calls to abolish the entire system are misplaced.

The culprits that have led to what we actually have–a “system” more accurately described as “corporatism” or “crony capitalism” are twofold: a lack of understanding of  where markets work and where they don’t–and public policies based both on that misunderstanding and on the outsized influence of monied interests.

A good deal has been written about the lax enforcement of anti-trust laws, and the concentration of economic power, but there has been less attention paid to structural problems that provide perverse incentives.

Earlier this month, Elizabeth Warren introduced a bill intended to address those problems. Titled The Accountable Capitalism Act, Warren’s plan “starts from the premise that corporations that claim the legal rights of personhood should be legally required to accept the moral obligations of personhood.” Warren has described herself as a “huge” proponent of capitalism, whose goal is to make the system work properly for all stakeholders.

And “stakeholder” is the operative word.

Shareholder primacy—the belief that everything a corporation does must be for the benefit of shareholders (who should extract as much wealth from the company as possible) and no one else—is the dominant legal framework operating within firms today…. Ignoring the contributions of all stakeholders to corporate success, the shareholder primacy model has driven the deep-rooted economic inequality that we live with in America today.

The linked discussion from the Roosevelt Institute traces the origin of this focus on shareholders to the detriment of others who have important interests in the operation and health of the corporation.

Part of the problem is that in the U.S., states charter corporations. As any corporate lawyer will confirm, larger enterprises “shop” for states in which to incorporate by looking to see which states have laws that are most beneficial (i.e., least restrictive). States woo new businesses, and so corporate law has become a race to the bottom (which is Delaware).

Warren’s bill would require large corporations–those with revenues over one billion– to be chartered by the federal government.

Under current law, corporate boards are elected by, and represent, shareholders. The consequences are predictable:

Board members who want to hold onto their seats are going to do what they can to please short-term oriented shareholders. And chief executives are now largely compensated in ways that are tied to the price of shares, so they have an additional incentive to steer the board towards decisions that push up short-term share prices. The existing shareholder primacy model means that boards focus too much on increasing their share price. That’s why Goldman Sachs estimated that American corporations are on track to spend $1 trillion dollars in 2018 on stock buybacks,essentially propping up the entire stock market by repurchasing their own stock.

Stakeholder governance would recognize that many different groups contribute to a corporation’s success. Employees, customers, even the public, have a stake in that success along with the shareholders, and they all should play some role in the corporation’s decision-making, as they do in a number of other countries.

This means that employees have real representation on corporate boards, so that decision-making is shared among stakeholders, instead of shareholders electing all board members. Accountability to stakeholders also means that the board has to consider all of the company’s stakeholders when making decisions, including customers, suppliers, and the broader public.

The focus on shareholder returns to the exclusion of all else hasn’t always been a part of corporate behavior, as Vox points out. That single-minded focus has come to mean that

for executives to set aside shareholder profits in pursuit of some other goal like environmental protection, racial justice, community stability, or simple common decency would be a form of theft. If reformulating your product to be more addictive or less healthy increases sales, then it’s not only permissible but actually required to do so. If closing a profitable plant and outsourcing the work to a low-wage country could make your company even more profitable, then it’s the right thing to do.

There is nothing about market competition that requires government to allow rapacious business behaviors. For that matter, markets only work properly when government works properly– insuring a level playing field and requiring obedience to laws and regulations.

When government fails to work, capitalism devolves into what we see around us.