Ouch. It's been another painful week in the stock market. Yesterday's flat showing did nothing to impove the dismal scoreline. Blue-chip shares in Britain are down 8per cent this week. They are 47 per cent below the peak of October 2007 and they have sunk 49 per cent from the record high reached on Millennium Eve.

Apart from a fleeting window of opportunity afforded to those smart enough to pile into the share market just before the tanks rolled into Iraq in 2003, equities have not produced a real return in excess of risk-free government bonds in any period shorter than 27 years, according to the Barclays Equity Gilt Study.

That is a sobering statistic for anyone who believes in, or relies on, outperformance by equities — pretty much anyone under 50 with a pension fund or an endowment policy.

It has been the worst ten-year period for equities since the 1970s and, before that, the Great Depression, with total inflation-adjusted returns averaging —1.5 per cent a year. That compares with average returns since 1899 of 4.9 per cent a year.

Warren Buffett, in his annual letter to shareholders this week, said of 2008: “By year-end, investors of all stripes were bloodied and confused, much as if they were small birds that had strayed into a badminton game.” With shares down another 20 per cent since then, the shuttlecocks now look more like grenades.

The orthodoxy that equities beat government bonds in the long term is starting to sound hollow. They still do, but the long term is now very long — indeed, longer than many people's investment horizons.

Tim Bond, of Barclays, argues cogently that the lousy recent return from shares is not because of some intrinsic problem with the asset class; rather it is entirely because of the extreme overvaluation of equities in the 1990s. That excessive optimism has now largely evaporated and shares are once again looking good value, Mr Bond reckons.

But what if there is a deeper structural problem? What if the system now operates in a way that permanently dampens returns? This goes against received wisdom, but there are some reasons why things may have changed.

1. Management and staff are taking too much of the company surplus. Remuneration schemes are fundamentally flawed, rewarding short-term performance and not punishing failure. The saga of Fred's pension is an extreme example of the disease. The poorest period for share market returns in decades has been accompanied by an unprecedented blowout in management rewards. Something is badly wrong.

2. Direct investment is now rare. The fund managers and other agents for the end-investors — pension fund members and insurance policyholders — are too weak, too timid and too focused on the short term. With a few honourable exceptions, their own reward structures are similarly flawed and inimicable to the interests of their ultimate clients.

3. The entire system has increasingly been corrupted by financial engineering. Advisers who egged companies on to gear up and do share buybacks are the very same people now urging them to pay down debt and do rights issues. The U-turns, not to mention the colossal fees, are highly dilutive of long-term shareholder returns.

4. The cult of the equity paradoxically contains the seeds of its own disappointment. Fresh capital is constantly being pushed into the system, diluting future returns. People wanting to take advantage of tax perks when saving for retirement have little choice but to put money into listed equities. Quality suffers.

5. Company promises. Listed companies are trapped by excessively generous promises to past employees in final-salary pensions (and in the US in expensive healthcare schemes). Every fall in share prices further inflates pension fund deficits. Some of our biggest blue chips languish in this vicious circle, not least BT, whose share price slumped yesterday to just 74p - against a 120p float price 25 years ago.

6. Government promises. The mushrooming liabilities of the public sector will for a decade, possibly a generation, crowd out the private sector. Corporate surpluses are increasingly likely to be snaffled by the taxman. Already equity is taxed more heavily than debt.

Too much value has been creamed off by an elite of senior managers, abetted by advisers, tolerated by fund managers and accepted as the norm by pension fund trustees. For a quarter of a century now, shareholders have not been rewarded for the risks they take. The collapse in shares, far from triggering soul-searching and reform, is stoking up a fresh gravy train as a new generation of executives lock in to share options at depressed prices.

I am probably guilty of capitulation — doubting shares at precisely the wrong moment. But even if they recover strongly over the next few years, there is a mountain to climb before they match the golden-era returns of 1945-1999. Assuming that returns will always revert to the mean can be a useful tactic, but it is not automatic.

Partnerships, family firms and closely controlled private businesses may well continue to deliver strong returns. But mainstream capitalism — as exemplified by listed companies owned by distant, absentee shareholders — for now looks badly broken.

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