Dear Mr Wolf… Reflections for the Magic Mountain

Can Davos 2012 offer real alternatives or will it serve up a smiling, gritted-teeth espousal that ‘business as usual’ can and should be sustained?

The Davos countdown has begun, as some of the world’s most powerful embark on the ritual trek up the Magic Mountain. What should be expected from this glitzy, snowy, global dialogue in this Year of Unreasonableness? The Davos headline for this year is The Great Transformation, “…an indisputable leadership challenge that ultimately requires new models, bold ideas and personal courage to ensure that this century improves the human condition rather than capping its potential”. But can Davos offer real alternatives or will it serve up a smiling, gritted-teeth espousal that ‘business as usual’ can and should be sustained?

Martin Wolf, the FT’s economics supremo, has tried to meet expectations in his article on 7 Ways to Fix the System’s Flaws. Sadly, however, he has wasted a great opportunity in clothing a softly-softly approach in the claim to be addressing ‘capitalism in crisis’. Fixing finance, the elephant in the room, needs in his view higher capital ratios, stronger oversight, and smarter consumers. Whilst no one would disagree with such common sense advice, there are equally few who would agree that these actions will fix the problem. They leave in play perverse incentives, conflicts of interest and the entire, under-regulated shadow banking system that is busy repeating yesterday’s profitable errors. Mr Wolf’s solution to inequality is equally laudable, large-scale fiscal redistribution and investment in education for the poor. But does such fashionable moral Keynsianism, echoing the best of Victoriana, really address the economics of inequality; how best to change a system that is increasingly delivering winner-takes-all outcomes?

Mr Wolf agrees that problems with power and accountability lie at the heart of our broken economic system in highlighting the need for changes in corporate governance and the corporate financing of politicians and their parties. But again, his solutions seem at best partial. Limiting direct financing of politicians is a great idea, as would making public finance available for our noble representatives in their struggle to be elected. But how does he propose to get these turkeys to vote for Christmas? And does he really believe that closing the front door to political financing will shut down an activity that some estimate to be the most profitable game in town. And similarly for corporate governance. Mr Wolf declares the ‘corporation’, by which one must assume he means the Anglo-Saxon approach to running business, as the best we have and as good as it gets. Improvements, he pleads, need intelligent, well-informed board directors, greater transparency and no government intervention, (except for the banking system).  Yet few believe that any but deeply involved (and therefore no longer) ‘non-executive’ directors can understand the complexity of today’s corporate money-making moves. Any a ‘how-many-clicks’ map of today’s non-executive directors of the world’s largest, listed companies highlight how small this club really is, and raises doubts as to whether it can support any real challenges to ‘business as usual’. Indeed, given the short-term interests of most investors, today’s dominant fiduciary approach seems unlikely to deliver anything but trouble, including lower financial returns.

Mr Wolf is one of my professional heroes, fearless, smart and vocal. But although his solutions are sensible they do not address the underlying problems.

Think first of all about what he has left off the table. After decades of crusading anti-corruption measures, there is little doubt that things are getting worse. And far from this being a problem linked exclusively to emerging economies and businesses, we see an ever-greater visibility of those on the take, flaunted cynically by politicians and businesses, in countries with mature regulations and institutions that are meant to provide oversight. Frankly, the main difference between corruption in developed economies compared to weakly governed societies is that corruption in the former has been legalised into super-profit taking, obscene remuneration, laying-off risks on the poor, and systematic under-contributions of the rich and profitable through the tax system. The inequality of outcomes identified by Mr Wolf are the manifestations of these endemic features of our political and economic system, and cannot be solved by calls for fiscal redistribution.

And what of the environment, Mr Wolf, which you get around to mentioning three lines from the end of your article, calling for “above all, protection of the environment”. Surely such trivialization is not worthy of one of today’s most visible economists. The problem here is not just that you have, or at least offer no clue as to what to do about it. It is that you appear to see no links between the state of the economy and the state of the natural ecology that sustains our lives on this planet. The real problem with the financial markets is not that they are unstable and liable to periodic implosion – it is that they are not doing their task of investing our money in creating a resilient, sustainable economy that will benefit current generations and those to come. Endemic short-termism is another way of saying that investors are disinterested in what creates real value, financial or otherwise, but have decided that competing with each other to make money out of money is a simpler way to get rich. Even if you are unwilling to value what cannot be monetised, take a look at how catastrophic last year was for the insurance business because of natural disasters, or the speculation-driven food price peaking just before the Egyptian revolution. Please, Mr Wolf, do not relegate the environment to an after-thought to your ‘serious economic analysis’.

Radical change rarely comes from the mainstream. We know all about disruption when it comes to technology. CEO’s nightmares are filled with unexpected enterprises that in short time suck the value out of their incumbent businesses. But when it comes to institutions, political systems, values and beliefs, most folks – especially economists – turn their backs. Mr Wolf has under-played himself in doing the same. He does of course mention the Occupy movement, but only in the context of a complaint against inequality, not as a source or vector for economic innovation. Surely the ‘financial transactions tax’ is worthy of mention, not because he agrees with it (which he certainly does not), but because it illustrates exactly the kind of solution that we should be debating, inventing and advancing into practice. If reform of corporate governance is part of the solution, why not consider the value of a new generation of state-owned enterprises from China to Chile that are entering the global economy with both profit and public interests in mind. Or closer to home, why not consider the merits of the so-called B Corporations emerging in the US and elsewhere as having fiduciary arrangements that allow for, indeed encourage, financial and broader interests to be taken into account.

Political Economy 101 tells us that change is unlikely to come from the dog that bit us in the first place, the politicians, businesses and classes of people in whose interest it is to change as little as possible. And that brings us back to Davos. Like capitalism, the World Economic Forum has been hugely successful in reshaping its constituencies and narrative to stay in the game. Thanks in no small part to the political intuition of its founder, Klaus Schwab, the Forum has avoided becoming the stranded asset that is the fate of most fashionable venues. Responding to earlier anti-Davos sentiments, the Forum established a public forum that allows the local community and global activists to voice alternative views whilst remaining outside of the Forum. Furthermore, as its earlier constituencies aged and perhaps got a little drab, the Forum created its own disruptors, social entrepreneurs, young global leaders and technology pioneers just to name a few. And this year, in response to the Occupy movement, Davos will sport yet another class of internalized disruptors, the Global Shapers. It is nothing short of genius, simple and effective.

Yet Davos does not seem to be able to avoid the Orwellian-type edict that inclusion in an exclusive club eventually makes for a room full of rather like-minded folks. Differences are carefully socialised, and disruption frowned upon and a cause for the removal of club privileges. This is not especially bad or mean, it is just the rule of all clubs. There may well be an expert in B Corporations at Davos, and there will certainly be folks who support the financial transactions tax and see the power of state-owned enterprises to improve the state of the world. There may even be the odd person on-site who wants to discuss the role of resource nationalism, religious fundamentalism and non-democratic political systems in saving us all. And to be fair, somewhere on Davos-campus, perhaps in one of the smaller hotels up the hill, protected from serious visitors and the media by distance, ice and a lack of prestige, some of these discussions might actually, in fact almost certainly will, take place. Yet these conversations are in Davos born to be marginalized, ridiculed, or just ignored.

It is tough to seek to disrupt the lives and livelihoods of one’s own members, sponsors and friends. That is certainly true in Davos, but is also painfully true in the inner world of international NGOs, or the bureaucracies of government and international organisations. Try supporting nuclear in a Greenpeace meeting and see how far it gets you. But it is disruption that is needed, of that there is no doubt. The Davos strapline, the Great Transformation, is not conceivable without the Great Disruption, and there are few if any incumbents that will welcome that. So Mr Wolf, thank you for your proposed seven tasks and thank you for being a wonderfully erudite economist and writer. But might I ask you to raise your ambitions, and those of your readers, by applying yourself and risking more in setting out what needs to be done to address the underlying problems of our time, and the fuller range of possible measures for doing just that.

 

Simon Zadek blogs from Davos 2012 at http://www.zadek.net/blog/

About the author

Simon Zadek is an independent advisor and author. He blogs at www.zadek.net/blog.