Recovery requires more capitalism, not less
Last week, US tech giants reported profits the size of the GDP of a small country.
At about the same time, we learned that Conservative donors were paying to listen and influence the policies of our Prime Minister and our Chancellor. It was not difficult to conclude that something is rotten in the state of capitalism today.
It’s no surprise, at times like these, that some are calling for something completely different. “Burn capitalism, not gasoline,” read the banners of the Extinction rebels. But they would do well to heed the words of John Kenneth Galbraith. “Under capitalism, man exploits man,” he said, “under communism it is quite the opposite.
Others hope that a new, softer variant of capitalism will emerge and replace the old one. They want companies to respond not only to their shareholders, as arch-capitalist Milton Friedman argued, but also to a myriad of other “stakeholders”: employees, customers, the communities in which they operate and the community. society as a whole.
This “stakeholder capitalism” has its own problems, however. Whether this is really useful to society, for example, is far from being proven. In 2019, members of the US Business Roundtable – a club of America’s largest companies – signed off on this new philosophy.
When KKS Advisors, an environmental consultancy, looked at their stocks in 2020, they saw no “fundamental change” in corporate behavior when Covid struck. When the interests of shareholders came into conflict with other stakeholders, shareholders prevailed.
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Whether this new capitalism is effective even for shareholders is debatable.
Japan has long practiced the model of capitalism that stakeholder capitalists now preach. For decades, it has been the hotbed of deflation and sluggish growth.
The real winners have been the ossifying Japanese companies. Under Japanese corporatism, stakeholder capitalism has become anti-shareholder. Witness the Toshiba executive who recently asked a contact in the Japanese government to “beat up” a hedge fund on his behalf.
It’s certainly interesting that while the world at large signals a shift towards stakeholder capitalism, Japan is looking to escape it. At the heart of the “Abenomics,” the economic reforms of former Prime Minister Shinzo Abe, were an attempt to encourage investors to push leaders into higher returns.
The answer is not the end of capitalism, nor a new variant. Rather, it is time to get back to basics. To do this, capitalism must regain its vital force: competition.
Competition is the way capitalism best serves society. To beat their competition, companies must respond to the wants and needs of their customers, thereby creating useful products and services. When customers demand higher environmental or social standards, companies compete with each other to provide them. In competition with each other, they reduce each other’s profits and provide the greatest possible value. In doing so, they create jobs and pay taxes. Three quarters of the UK workforce is employed in the private sector. Corporate tax brings £ 60 billion to the treasury every year.
We are a long way from this utopian ideal, of course. Staggering profits suggest monopolies, not competitive markets, and President Biden‘s apparent efforts to break tech monopolies should be welcomed by capitalists around the world.
Tax loopholes around the world must be closed, and once again, the efforts of the Biden administration are to be commended. And the intimate relationship between government and rulers smacks of an uneven playing field. Before being swallowed up by one, David Cameron predicted that lobbying would be the next big scandal. It is time for his successors to do something.
If this sounds like a bitter defense of capitalism, it also wants to be more humble.
Stakeholder capitalists operate under the illusion that corporations can solve all social problems, if only they were accountable to all of us. In doing so, they arrogate to themselves powers over which they have no rights. They should leave policy making to those we elect to do it. No business can save the world, but when competing, they can serve it better.
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