From Main Street to Wall Street: Reimagining Capitalism
.........................................................................
Originally published in MISC Magazine, 2016
.........................................................................
14 MINUTE READ
As this was being written, the news was dominated by two of the most harrowing examples of capitalism-gone-bad we have seen since the crash of 2008. First was the Volkswagen scandal. By the time this article appears, the shock will have died down, or maybe just eclipsed by yet another predatory scheme in some other quarter of commerce. But the fraud carried out by VW executives in an effort to mask the excessive emissions of nitrogen oxide by diesel engines (35x acceptable levels) has knocked the business world on its butt and left an indelible black mark on both VW and, by extension, Germany inc.
The financial fallout alone will be massive. In a matter of days, VW lost a third of its market cap (about $33 billion). It faces US$18 billion in potential fines. It has issued a profit warning, setting aside $7.27 billion to "cover the necessary service measures and other efforts to win back the trust of our customers." Given the scale of this disaster (it affects some 11 million vehicles), that estimate sounds wildly optimistic.
And as if to rub salt in our collective wounds, VW CEO Martin Winterkorn, who resigned his post in the face of this monumental fraud, was rumoured to be receiving an exit package of $32 million.
As we tried to absorb the impact of this catastrophe, we saw yet another news story that revealed the sociopathic potential of some of today’s captains of industry. Martin Shkreli, CEO of Turing Pharmaceuticals, hiked the cost of taking the toxoplasmosis-fighting drug Daraprim from $1130.00 to $63,000.00 annually. When accused of price-gouging by everyone from presidential hopeful Hillary Clinton to CBS medical correspondent Dr. David Agus, Shkreli replied, “this is simply capitalism at its finest. I’m trying to create a big drug company, a successful drug company, a profitable drug company. We’re trying to flourish, but . . . our first and primary stakeholders are patients, there’s no doubt about that.” (As long as those patients have an extra $63K in their pockets.)
In the same interview he actually went on to say that the price hike was “altruistic”, because with the “reasonable profits” he expects to gain from the price change, he can invest in the creation of a new drug to replace Daraprim, something he says “people sorely need”. If that’s altruism, ISIS is a charitable organization.
The twisted logic that uses the profit motive to justify such crimes against humanity is beyond immoral. It’s downright evil. Somehow the notion of healthy competition has morphed into a rapidly metastasizing strain of predatory capitalism. Freed from the regulatory regimes of the mid- 20th century, many corporations are operating without any moral restraint, as if possessed by the ghost of Ayn Rand, enabled by the hand of Milton Friedman and ruled by the conscience of Bernie Madoff.
Are these isolated scandals, or are we looking at a syndrome here? That is the question asked in a recent article by Henry Mintzberg, Cleghorn Professor of management studies at McGill University and author of the recently published Rebalancing Society: Radical Renewal Beyond Left, Right, and Center. Mintzberg lays out the evidence: the Deepwater Horizon disaster, Toyota’s faulty brake and fuel systems flaws, Chevrolet’s ignition systems recalls, and Goldman Sachs’ commodities market manipulation. Seems you can’t swing a dead cat in the arena of late capitalism without hitting an instance of corruption or scandal.
Is this nasty strain of capitalism becoming business as usual? Political economist C.J Polychroniou thinks so. “The world is returning to the predatory laissez-faire capitalism that immiserated millions in the early 20th century. Since the late 1970s, most capitalist economies have been marching to the tune of neoliberalism - a term to signify preference for a set of economic policies favoring privatization, deregulation and a "minimal" state. This is the version of neoliberalism developed by Milton Friedman and the so-called Chicago School and is usually associated with the Pinochet regime in Chile and later on with the so-called "free-market" policies of Margaret Thatcher and Ronald Reagan. In more popular usage, it can simply be referred to as predatory capitalism.”
Just how ‘predatory’ has capitalism become? Harvard philosophy professor Michael Sandel puts it like this: “Over the past three decades . . . we've drifted almost without realizing it from having a market economy to a market society. A market economy is a valuable and effective tool for organizing productive activity, but a market society is a place where almost everything is up for sale. It's a way of life, in which market thinking and market values begin to dominate every aspect of life: personal relations, family life, health, education, politics, law, civic life.”
Professor Henry Mintzberg
To illustrate, let’s apply this ‘market society’ model to some of the crimes cited above. Eric Reguly, European correspondent for Toronto’s Globe and Mail, has rightly asked the question, “What were they thinking?” of the VW execs who crafted a software hack to cover up the fact that their diesel engine exceeded emissions limits. What they were doing was comparing the price of public health with the price of going back to the drawing board on their engine design. With 11 million engines on the road emitting 35x the allowable limit of nitrogen oxide, the effects on public health are not insignificant. But when people develop respiratory disease from breathing too much of this stuff, they don’t go to VW; they go to the hospital (if they can afford it). VW is not only saving itself millions in design and production costs, but is also passing the cost of disease onto both the health care system and the patients it supports.
Mr. Shkreli’s bold assertion is that by exponentially raising the price of a drug, he is only doing what any ‘good’ capitalist would do. He’s trying to make a profit, after all. Raising the price by 5500% would deliver what Shkreli called a ‘reasonable’ profit. But at what cost? Not a cost that Shkreli will bear, but a cost born by all those patients who have depended on this medication up to now and suddenly will have no more access to it. Who pays for their care when they can no longer get the drug? Not Turing.
These examples illustrate very clearly the false assumptions and complete lack of empirical truth to Milton Friedman’s belief that markets are ‘inherently just’ – that they do what they do without the burden or bias of a moral perspective. They are, in the neoliberal mind, as amoral as nature itself. The difference, of course, is that ‘nature’ lacks the ability to distinguish between right and wrong, while people know damn well what the difference is.
It is impossible to execute a business decision without it having an impact on other humans, or on the world in which both humans and businesses operate, even if those humans are not directly invested in that business, either as shareholders or employees. In this sense, the ‘market’ is exactly the opposite of amoral, because it affects people, communities, their livelihoods and their environment. The trouble with the neoliberal concept of free markets is that humanity is removed from the equation. It’s as if the ‘market’ is an abstraction, somehow operating independently of the people who use it, run it, profit from it - or are harmed by it.
Roger Martin
Much has been written about the difference between the stock market and the ‘real’ economy. It used to be that the market served the real economy by providing the capital necessary to grow businesses and create jobs; now, it seems we’ve turned that the other way around. Wealth used to be created by making products and providing services; now it is created by unregulated financial speculation. Since access to capital is limited to an elite few, the wealth that is created is not as widely distributed as it was in the years between 1945 and 1973, a time when there was a greater balance between government and industry, management and labor, and white collar and blue collar.
As author Mathieu Ricard described this period in a recent Salon article, “Thoughtful regulation allowed the creation of a balance in society by applying an incremental wealth tax rate. People were more concerned for their fellow man and the social contract had a stronger element of cooperation instead of barefaced competition.” He continues to point out that from the 1980s on, social solidarity waned and inequality grew thanks to deregulation, de-industrialization, globalization and the major tax cuts granted to the rich by the likes of Ronald Reagan and Maggie Thatcher.
So now we find ourselves in a world that has boomeranged back to a set of unbalanced conditions more akin to the days of the robber barons and plutocrats. We have, in the United States, a concentration of banking power in the hands of 6 major financial institutions – the largest in the world – which hold assets of $10 trillion, equivalent to 66% of the entire US GDP. In 1990, these banks held 10% of total banking assets. Now they hold 44%.
Robert Reich
That puts a dangerous amount of political power in the hands of a very few, because as Robert Reich, US Secretary of Labor in the Clinton administration points out, “market power translates into political power”. How else do you explain how, after the subprime crisis of 2008, the bankers who caused the greatest financial disaster since 1929 were bailed out by taxpayers and walked off with outsize bonuses while many of those taxpayers went without jobs and lost their homes? How else do you explain that the free trade deals that have been and are being struck around the world, without any public oversight, allow corporations to sue a sovereign state on the grounds of threatening the corporate right to make a profit, even if that ‘right’ is in direct conflict with existing health, safety or environmental laws? How else do you explain that we are now living in a world where private profits take priority over public rights?
The real question is, how can we possibly reverse this dystopic trend? How can we move towards a world where there is a greater balance between political, economic and social interests?
Sectoral Equilibrium Neoliberals tend to view themselves as ‘realists’. They subscribe to Adam Smith’s notion of the ’invisible hand’ of the market, in which individuals acting in their own self-interest create wealth, opportunity and material benefits for everyone. Anyone who disagrees with that is labeled a communist, and is reminded that when the Berlin Wall came down in 1989, it was proof that capitalism had triumphed, once and for all, and that communism was finally proven to be fundamentally flawed.
Tibetan Sand Mandala
Henry Mintzberg disagrees. He points out that what won was balance. In post-war western economies, as mentioned above, there was less income inequality, a more even distribution of wealth, more balanced taxation, and more evenly distributed influence among public, for-profit and not-for-profit organizations. CEOs did not make 400x the lowest paid employee, unions were strong enough to protect their members against corporate excess, and the social contract provided greater largesse to society’s least capable and most vulnerable. Communism, on the other hand, was completely unbalanced, concentrating power in the hands of a few political elites while everyone else suffered.
Now the private sector is behaving in much the same way as the communist regimes of old. Financial and political power is overly concentrated in the hands of a few, and everyone else is suffering for it. As an antidote, Mintzberg does not propose that the government take back the power it has surrendered to corporations, but that we recognize the importance of a third sector that he calls the ‘plural’ sector. This is made up of organizations and associations that are owned by no one and beneficial to everyone. They include formal organizations like cooperatives, NGOs, unions, religious orders, hospitals and universities, and informal ones like social movements and initiatives that are created when people come together – either en masse in the streets, or in communities on the ground - to bring about needed changes. Such a plural sector, claims Mintzberg, is the only place where you can challenge the status quo, with relative freedom from the controls of public sector governments and the expectations of private sector investors.
The plural sector, he continues, mitigates the sliding back and forth between the unacceptable extremes of left and right, nationalization vs privatization, public vs private, and communism vs capitalism that has characterized the last 200 years of history. Using the metaphor of a three-legged stool, he asks us to “imagine these three sectors as the pillars on which a healthy society has to be supported: a public sector of political forces rooted in respected governments, a private sector of economic forces based on responsible businesses, and a plural sector of social forces manifested in robust communities”, with no one prioritized over either of the others.
The Walton heirs
Progressive Taxation A core principle of neoliberal dogma is tax reduction. There are several problems with this. A reduced tax base means less funding for the infrastructure and social programs necessary for creating an environment in which it is safe and healthy for societies to grow, business to invest and economies to develop. Infrastructure requires constant investment, and the cost must be shared because no one individual or organization can afford to pay for it. Taxes are therefore the best solution we have yet devised to ensure the maintenance of healthy communities and environments.
Tax breaks tend to go to those who can afford them. Along with the fabled 1 per cent of individuals in whose hands is concentrated the greater part of the world’s personal wealth (example: 110 Russians hold 35% of that country’s wealth; the family that owns Walmart has more wealth than 42% of American families combined), the world’s largest banks and corporations can afford the legions of lawyers and accountants necessary to keep their taxes to a minimum. They are also legally entitled to move taxable income to offshore tax havens, further reducing their contribution to the public purse.
Two years ago, New York Times economics and finance columnist Steven Rattner found a 2008 congressional study that documented how subsidiaries of American corporations generated 43% of their profits in tax havens where they had only 4% of foreign employment and 7% of their foreign investment. In 2010, General Electric reported global profits of $14.2 billion, only $5.1 billion of it from US-based operations. And from 2005 to 2010, GE declared $26 billion in American profits while receiving a net tax benefit of $4.1 billion.
A year earlier, Chuck Collins - Senior Scholar of the Institute for Policy Studies - showed how in 2010, 25 of the largest US companies paid more to their CEOs than they did in US taxes. The average CEO paycheck in this study was found to be $20 million, proving beyond doubt that the tax system heavily subsidizes bloated CEO pay.
Finally, there’s the fact that in the period just after WWII, 32% of US income tax was paid by corporations. Now it’s 9%. If that is not imbalanced, what is?
Separate Accounts One of the reasons that 2008 is so often compared to 1929 is that both crashes were the result of unregulated financial speculation. One of the US government’s efforts to protect the public from such chicanery was the Glass-Steagall Act of 1933, which split the commercial banks from the investment banks in order to safeguard the deposits of ordinary citizens. Unfortunately, the power of Glass-Steagall has since been significantly eroded, mostly due to flaws in its exceptions and exclusions – what most of us would call loopholes – which have increasingly enabled commercial banks to merge with securities firms since the law’s inception.
Critics like Robert Reich and politicians like US presidential hopeful Bernie Sanders have called for the reform of this flawed legislation and the proper separation of commercial and investment banking.
Common Decency The neoliberals will always remind you that you can’t expect investors and executives to operate with a moral compass. Greed is inevitable. Incentives in the form of stock options will inevitably result in gaming the system; financial regulation will always inspire workarounds. To expect the financial world to be fair and transparent is hopelessly idealistic.
Brad Katsuyama
Thankfully, there are individuals who are decent enough and brave enough to challenge that attitude. One such individual, celebrated in the 2014 Michael Lewis book Flash Boys, is Brad Katsuyama, the one-time RBC trader who was able to prove that certain high frequency traders were using a combination of complex algorithms and hyper-fast computer hardware to ‘front-run’ trades, allowing them to skim more than $160 million a day off the transactions of ordinary investors.
Katsuyama and his team developed software that acted as a speed bump which prevented such electronic front running, and then founded their own stock exchange, called the IEX (soon to be renamed the Investors’ Exchange). Their mission: to introduce fairness and transparency to the stock market in order to protect investors. The saying around IEX is, “We’re capitalists, but we believe in responsible capitalism.” For this, they are regarded by many with suspicion. It’s a sad statement on the reality of Wall Street that there are those who don’t believe IEX – or anyone in his right mind - would act in the interests of the common good.
In a recent profile in Report on Business magazine, Katsuyama responded to this bred-in-the-bone cynicism. “People on Wall Street are no different than people in any other industry; they’re just incentivized to do the wrong thing. And the incentives on Wall Street are very, very high. That has created tension between Wall Street and Main Street. And I think that is going to change. We are living in an ultra-transparent society where there is very little you can get away with anymore”.
Marshall McLuhan once quipped, “Art is anything you can get away with.” He may just as easily have been talking about predatory capitalists. Thankfully, players like Katsuyama and pundits like Henry Mintzberg and Michael Sandel are part of a growing chorus of voices who are reimagining capitalism in a way that will ensure it has a sustainable future. Along with thinkers like Michael Porter and Gary Hamel, and business leaders like Paul Polman (CEO of Unilever) and McKinsey’s global managing director Dominic Barton, this chorus is getting larger and louder and providing us with some hope that we can change capitalism from a form of elite predation to one of economic democracy. Here’s hoping the world listens.
References
Barton, Dominic: Long-term Capitalism, Harvard Business Review, April 2011
Clark-Nealy, Michelle: Commercial & Investment Banking: Should this Divorce be Saved?, StLouisfed.com, April 1995
Collins, Chuck: How Our Tax System Subsidizes Bloated CEO Pay, Huff Post Business, October 1, 2015
Davies, Alex: VW’s Ousted CEO is Probably Getting a $32 million Pension, WIRED Magazine, September 2015
Kaufman, Scott Eric: Martin Shkreli on his “altruistic” motives: “I’m a capitalist — I want to create a big drug company”, Salon.com, September 22, 2015
Martin, Roger, Fixing the Game, Harvard Business Review Press, Cambridge, 2012
Mintzberg, Henry, Rebalancing Society: Radical Renewal Beyond Left, Right and Center, Berrett-Kohler Publishers, Oakland CA, 2015
Mintzberg, Henry, Don’t Call it a Scandal: Volkswagen Corruption is a Syndrome, Globe and Mail, September 22, 2015
Polman, Paul: The Remedies for Capitalism, Harvard Business Review, April 2011
Polychroniou, C.J., The Political Economy of Predatory Capitalism, truth-out.org, January 12, 2014
Rattner, Steven, America in 2013, as Told in Charts, New York Times, December 30, 2013
Ricard, Mathieu, Ayn Rand Killed the American Dream: Our Free-market Economy only works for the 1 per cent, Salon.com, June 21, 2015
Sandel, Michael J., What Money Can’t Buy: The Moral Limits of Markets, Farrar Straus & Giroux, New York, 2012