A little rebellion, now and then...

Martin Wolf recognizes many of the ills of our existing economic arrangements, but his solutions involve little more than tinkering.
Jeremy Fox
28 January 2012

Martin Wolf’s “Seven Ways to fix the system’s flaws” reads more like a paean to our existing economic arrangements than a serious attempt at visualizing how we might reorganize our economy so as to avoid some of the more critical ills to which they have led us: a savage increase in inequality, a financial crisis wrought by the rich and paid for by the poor, high levels of national and individual indebtedness, environmental destruction on a massive scale, and so on. Wolf recognizes many of the ills, but his solutions involve little more than tinkering.

Where he is undoubtedly correct is in pointing out the mismatch between regulation, which remains largely at national level, and the multinational reach of global business. We should remember, however, that international regulation is far from impossible, and that it has occurred before, notably at Bretton Woods following WWII, which gave rise to the IMF and the World Bank. The main reason why consensus may be much more difficult to achieve now is that there are many more significant players round the table as well as substantial differences between countries in how capitalism is interpreted.

Neo-liberal capitalism - the West’s version - gives primacy to the market, to which we are all expected to be subservient because it supposedly functions best without the malign influence of human intelligence. Its weaknesses are now widely recognized. Left to themselves, markets turn out not to work efficiently: they tend towards monopoly or oligopoly (look at the UK’s banking and newspaper industries for example), while consumers are expected to make choices based on perfect information (there is no such thing), and to be rational in their economic behaviour (when we all know that economic benefit is not the only priority in people’s lives and that decisions that may seem bizarre to an economist may be entirely rational from other perspectives). Free-trade, the neo-liberal mantra for international exchange, opens national borders to a free-for-all in which employees are reduced to the status of commodity inputs, and are as exposed to price fluctuations and as substitutable as common widgets.

State-directed capitalism of the Chinese model, or highly-controlled capitalism (the other BRIC countries) are proving successful alternatives in terms of growth and competitiveness. China’s system, in particular, rests on a strong sense of collective nationalism as distinct from the individualism of the West.

Is the difference between these models so great? Yes and no.

Yes because state involvement in the BRICs is much more overt and dirigiste than in the West.

No because much of our corporate world relies on state largesse despite a general pretence that this isn’t so and that government does not and should not interfere with the private sector. Taxpayers in the UK, for example, foot the bill for health and education, police and fire services, transportation infrastructure, bank rescue and resuscitation, incentives for new investment, etc; and they also directly subsidize a vast array of industries including rail, air travel (through aviation fuel), bio-tech (through R&D grants), and so on.

One wonders if there is any significant business in the UK that does not depend for its success to some great extent on the state. In other words - and here comes the heresy - there is no such thing as a purely private sector activity. In a modern state, all so-called private capital investments are joint ventures with the taxpayer. It follows, therefore, that the state should have a voice in how they are run. In this respect, the Chinese have got it right.

So much for the theory. What of the practice? Wolf confines himself to exhortation: “Serious mistakes must not be repeated,”…”control of executive pay and corporate decision-making (must occur) without government intervention…” His arguments are not just indelibly stained by the status quo, they are also fueled by a belief (currently finding expression in the row over RBS boss Stephen Hester’s near £1 million bonus) that if we fail to bribe the great figures of UK PLC with absurd amounts of cash and kind they will flee the nest and thereby leave us in an even worse mess than the one into which they have already led us. It’s called blackmail; and it bludgeons most of our politicians and economic soothsayers into cowardly submissiveness. What would really happen if the feared scenario occurred, if we refused to pay Stephen Hester his £1 million and the entire RBS Board subsequently resigned? The answer is “nothing very much”. The remaining salaried executives would hold the fort while a new CEO and Board were recruited; and meanwhile RBS would continue to function just as well and maybe even better. CEOs and Boards don’t run large organizations on a daily basis. The staff do that. Apple Computer hasn’t collapsed with the sad demise of Steve Jobs; and Microsoft seems to manage okay without Bill Gates at the helm. These two are undeniably great entrepreneurs. Après Hester & Co. le déluge? Don’t buy it.

Executive compensation is not too difficult to control via marginal tax rates. Currently the UK top marginal rate of 50% kicks in at a ‘mere’ £150,000. That’s loose change to top executives who count their earnings in £millions. Why not introduce higher rates for higher earnings - with a discouragingly high marginal rate for income over a certain sum (say £1.5 million)? The main arguments against such a procedure are that it would frighten away the incomparable geniuses who run our major corporations, and that it would raise hardly any revenue anyway.

Revenue raising, however, is not the point. Think of it this way. Executives who are paid at stratospheric levels earn enough in a few years not to have to work again no matter what may happen to the company they lead. Provided they do not break the law, they are thus relieved of any serious financial penalty for the outcome of their actions. Some - they do not need to be named - end up playing monopoly with the livelihoods of employees and shareholders alike. Absurdly high remuneration is a gateway to irresponsibility - even if not all recipients head through it.

One of the most serious charges against our brand of capitalism is that it fosters the privatization of profits and the socialization of losses. Corporate efficiency is all-to-readily conflated with national or regional welfare as if the two were synonymous. In fact, they are different and can sometimes be mutually antagonistic. In a capitalist economy it is always efficient for the firm to produce at the lowest possible cost, and its techniques for doing so include maximizing sales, reducing labour costs (sometimes by shifting production elsewhere), and externalizing social costs. But it is not necessarily efficient at the national level for people to buy superfluities (and create the associated waste), nor for a nation to cope with employment instability, the displacement of small farmers and business-owners by multinationals, the ravages of industrial pollution, and the societal disruptions that accompany extremes of inequality. Inequality itself is arguably a spur to capitalist enterprise, but it may also become a charge on the social fabric. We need a way to assess the cost-benefits of corporate activity and to embed them in our tax system in a way that encourages community and environmental responsibility and discourages the reverse. As others have pointed out, the survival of our species may depend on our meeting this challenge. Human welfare and care of the environment will, in the end, have to displace individual enrichment as the principal objective of economic activity.

Thomas Jefferson, in a letter to James Madison, wrote that “a little rebellion, now and then, is a good thing, and as necessary in the political world as storms in the physical.” What we need is not a little tinkering with the existing system à la Wolf, but a root-and-branch reappraisal of its fundamental purpose. A little rebellion maybe...

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