Tag Archives: corporatism

This Isn’t Capitalism

A number of people who comment on this site are consistently critical of capitalism. I, on the other hand, am a committed capitalist, provided that economic system is properly defined and provided it is limited to economic areas in which competitive markets work.

The system in America today–the system that pisses off so many contemporary Americans– isn’t capitalism. It’s corporatism.

In a capitalist system, it is true that some people will do better than others. There is nothing wrong with that; the promise of a bigger reward for building a better mousetrap spurs innovation and benefits us all. It’s only when the rewards are disproportionate to the value of the activity involved– and  especially when those rewards become disconnected from actual economic productivity– that capitalism devolves into corporatism, and things get seriously out of whack.

Competitive markets have numerous advantages in the areas where they work. Unfortunately, in the United States, we have insisted on “competition” in areas where markets are demonstrably inappropriate. From health care to education to prisons, we have pursued a privatization agenda that benefits the entitled and well-connected without delivering any of the benefits of a true market.

That may be crony capitalism, but it sure isn’t the real deal. As I wrote a few years ago,

When what people make is a reflection of their connections and/or the success of their lobbyists, it’s time to consider whether we still have a capitalist system, or whether what America  currently has is corporatism–a system where power is exercised through large organizations in pursuit of their own economic agendas, to the detriment of the common good.

Capitalism creates opportunity; corporatism keeps it “all in the family,” exacerbating inequality.

If you have any doubt that the United States no longer practices capitalism, take a look at the recent, high-profile (arguably obscene) “competition” for Amazon’s second headquarters. As the Intercept recently reported,

Amazon’s announcement thisweek that it will open its new headquarters in New York City and northern Virginia came with the mind-boggling revelation that the corporate giant will rake in $2.1 billion in local government subsidies. But an analysisby the nation’s leading tracker of corporate subsidies finds that the government handouts will actually amount to at least $4.6 billion.

But even that figure, which accounts for state and local perks, doesn’t take into account a gift that Amazon will also enjoy from the federal government, a testament to the old adage that in Washington, bad ideas never die.

Enterprise Zones, one of those ideas that the Intercept characterizes as “bad,” has been resurrected in the GOP’s 2017 “gift to rich people” tax bill.

Under the tax overhaul signed by President Donald Trump last year, investors in opportunity zones can defer paymentsof capital gains taxes until 2026, and if they hold them for seven years, they can exclude 15 percent of the gains from taxation. If investors carry the opportunity zone investment for 10 years, they eliminate taxes on future appreciation entirely. Investment managers have been salivatingat the chance to take advantage of opportunity zones. Special funds have been built to cater to people holding unrealized capital gains — such as Amazon employees with large holdings of company stock.

The article details the goodies taxpayers are providing one of the most successful companies in the country, and notes that  Amazon has already received $1.6 billion in state and local subsidies for its warehouses and data centers.

On the same day as the New York and Virginia announcements, Amazon also announced a new “Operations Center of Excellence” in Nashville, Tennessee, a 5,000-worker facility for which the city gave Amazon $102 million in subsidies.

The report notes that these cash handouts don’t take into account “regulatory leniency and accelerated permitting” that Amazon projects routinely get.

We can quibble over what we should call an economy in which there is nothing remotely like a level playing field; an economy that enriches the already well-to-do at the expense of the rest of us and routinely socializes risks and privatizes profits, but we shouldn’t make the mistake of calling it capitalism.

 

Stakeholders Versus Shareholders

Several people who regularly comment on this blog are extremely critical of capitalism. That’s understandable, given the distorted version currently practiced in the U.S., but I would caution that broad-brush diatribes against a market economy and calls to abolish the entire system are misplaced.

The culprits that have led to what we actually have–a “system” more accurately described as “corporatism” or “crony capitalism” are twofold: a lack of understanding of  where markets work and where they don’t–and public policies based both on that misunderstanding and on the outsized influence of monied interests.

A good deal has been written about the lax enforcement of anti-trust laws, and the concentration of economic power, but there has been less attention paid to structural problems that provide perverse incentives.

Earlier this month, Elizabeth Warren introduced a bill intended to address those problems. Titled The Accountable Capitalism Act, Warren’s plan “starts from the premise that corporations that claim the legal rights of personhood should be legally required to accept the moral obligations of personhood.” Warren has described herself as a “huge” proponent of capitalism, whose goal is to make the system work properly for all stakeholders.

And “stakeholder” is the operative word.

Shareholder primacy—the belief that everything a corporation does must be for the benefit of shareholders (who should extract as much wealth from the company as possible) and no one else—is the dominant legal framework operating within firms today…. Ignoring the contributions of all stakeholders to corporate success, the shareholder primacy model has driven the deep-rooted economic inequality that we live with in America today.

The linked discussion from the Roosevelt Institute traces the origin of this focus on shareholders to the detriment of others who have important interests in the operation and health of the corporation.

Part of the problem is that in the U.S., states charter corporations. As any corporate lawyer will confirm, larger enterprises “shop” for states in which to incorporate by looking to see which states have laws that are most beneficial (i.e., least restrictive). States woo new businesses, and so corporate law has become a race to the bottom (which is Delaware).

Warren’s bill would require large corporations–those with revenues over one billion– to be chartered by the federal government.

Under current law, corporate boards are elected by, and represent, shareholders. The consequences are predictable:

Board members who want to hold onto their seats are going to do what they can to please short-term oriented shareholders. And chief executives are now largely compensated in ways that are tied to the price of shares, so they have an additional incentive to steer the board towards decisions that push up short-term share prices. The existing shareholder primacy model means that boards focus too much on increasing their share price. That’s why Goldman Sachs estimated that American corporations are on track to spend $1 trillion dollars in 2018 on stock buybacks,essentially propping up the entire stock market by repurchasing their own stock.

Stakeholder governance would recognize that many different groups contribute to a corporation’s success. Employees, customers, even the public, have a stake in that success along with the shareholders, and they all should play some role in the corporation’s decision-making, as they do in a number of other countries.

This means that employees have real representation on corporate boards, so that decision-making is shared among stakeholders, instead of shareholders electing all board members. Accountability to stakeholders also means that the board has to consider all of the company’s stakeholders when making decisions, including customers, suppliers, and the broader public.

The focus on shareholder returns to the exclusion of all else hasn’t always been a part of corporate behavior, as Vox points out. That single-minded focus has come to mean that

for executives to set aside shareholder profits in pursuit of some other goal like environmental protection, racial justice, community stability, or simple common decency would be a form of theft. If reformulating your product to be more addictive or less healthy increases sales, then it’s not only permissible but actually required to do so. If closing a profitable plant and outsourcing the work to a low-wage country could make your company even more profitable, then it’s the right thing to do.

There is nothing about market competition that requires government to allow rapacious business behaviors. For that matter, markets only work properly when government works properly– insuring a level playing field and requiring obedience to laws and regulations.

When government fails to work, capitalism devolves into what we see around us.

It Isn’t That Simple

We Americans tend to be “either/or” people. A policy is right or wrong; a system is good or bad, “those people” are all sterling characters or (more frequently) worthless bums.

Things aren’t going well, and need to change? We throw the baby out with the bathwater.

Speaking of throwing, the election of Donald Trump has thrown a number of the problems with American governance into stark relief;  it’s hard to deny the influence of money, or the venality of certain lawmakers. But rather than resolutions to correct the laws and political processes that have led to the current mess, I am increasingly reading diatribes from people who have decided that it is all capitalism’s fault, and want to replace the country’s system of market economics with socialism.

As the kids might say, let’s get real.

First of all, the worst aspects of our current, deeply dysfunctional economy aren’t capitalism. A genuinely capitalist system is regulated by an impartial “umpire” (the government) to ensure that enterprises compete on that all-important level playing field. What we have today is corporatism: Corporatism has been described as what you have when you lose the laws and regulations that have kept businesses from being able to buy politicians– a system where government is effectively “owned” by special interests.

Market capitalism encourages transactions between willing buyers and sellers, both of whom are in possession of all information relevant to those transactions. Socialism is a system for the collective provision of goods and services that don’t meet that criterion–goods and services that the market cannot supply efficiently or fairly.  We “socialize” things like infrastructure, police and fire protection, and protection of clean air and water.

A healthy, growing economy requires both. Virtually all western industrialized countries have mixed economies, meaning that the government socializes certain areas of the economy and leaves other areas to the market. The challenge is to get the mix right.

Both capitalism and socialism can be manipulated by greedy or unethical offiicials–that’s why electing people who demonstrate respect for ethics and the rule of law is so critical. Unregulated capitalism becomes corporatism, allowing the “big guys” to prey on smaller businesses and consumers. Socializing too much of the economy depresses innovation,  invites stagnation and encourages petty bureaucrats to abuse their authority.

If we want to fix our broken economic system–and not so incidentally, our broken government–there is no substitute for doing the hard work of re-regulating markets in those sectors where markets work well, and carefully socializing areas (like health care) where the evidence overwhelmingly demonstrates that markets do not and cannot work.

We can and should argue about the level of regulation we impose on market enterprises–what is too much, what is not enough?–and we can and should require hard evidence before moving to socialize additional areas of the economy. What we shouldn’t do is apply  bumper-sticker solutions to problems requiring careful analysis and measured policymaking.

We don’t need to throw the baby out–just the dirty bathwater.

Markets and Inequality

Those of us who believe in the efficacy of markets (a fundamental tenet of capitalism) must be prepared to accept a certain degree of inequality. Your invention of a better mousetrap will cause my older model to lose market share; your admirable work ethic will earn you a higher wage than my preference for taking long weekends.

Theoretically, in a genuinely capitalist system, the market will reward merit more liberally than it will reward mediocrity.

Of course, a genuinely capitalist system will not be rigged to benefit the powerful and/or well-connected at the expense of others. America has long since morphed from capitalism to corporatism, a system in which lobbyists for powerful interests are able to ensure that government regulations favor their well-heeled clients.

In capitalist systems, the theory is that the promise of greater rewards is an incentive for innovation and diligence; advocates justify the resulting inequalities by pointing out that everyone benefits from the resulting entrepreneurship. A rising tide, we are told, lifts all boats.

When capitalism devolves into corporatism, only the boats of the powerful and well-connected get lifted, and it becomes much more difficult to sustain the pretense of meritocracy.

In capitalist/corporatist systems, rampant inequality poses challenges that ideology cannot satisfactorily address. Social scientists and historians tell us that when the gap between rich and poor widens too much, there are very negative consequences for social and political stability. In order to manage the size of the disparities, most first-world countries today have “mixed” economies; governments socialize the services that markets cannot provide (public safety, environmental protection, healthcare, etc.) and—importantly—recognize the existence of an obligation to citizens who for one reason or another, cannot earn a living wage.

In the United States, we have a number of elected officials—in Congress, certainly, but also in statehouses around the country—who reject the logic of mixed economies, and refuse to recognize the threat that extreme inequality poses to social stability and national cohesion. Paul Ryan’s attacks on the Affordable Care Act, Trump’s brutal (kick ‘em when they’re down) budget proposals, the persistent efforts to defund organizations like Planned Parenthood that provide critical medical care to the needy, are assaults that strike many of us as indefensible—especially since they are almost always accompanied by tax giveaways to the rich.

Those arguing on behalf of these measures insist that their purpose is to defend market economics. Most of them know better; the rhetoric is an effort to divert attention from the fact that government is doing the bidding of powerful, rich and very greedy special interests.

Perhaps the most pernicious aspect of this assault on the poor is the not-so-subtle characterizing of needy Americans as “Other.” “They” are immigrants, living off the sweat of “real” Americans; “they” are lazy people of color. If “they” are female, they’re immoral sluts popping out babies in order to qualify for the public dole. It doesn’t matter that none of these characterizations are remotely factual; the dog-whistle references and dishonest descriptions find a willing audience among people who see themselves as part of an America that is rapidly losing cultural hegemony.

The “Other” is the shiny object that distracts attention from corporatist wheeling and dealing.

If current levels of material inequality are bad for America—and they are—this cynical effort to distract our attention by widening our social divisions is even worse.

The Words We Use…

Last night, I spoke to the student Economic Club at Ball State. Since numbers aren’t my thing, I focused on theory….Here (slightly condensed)are my remarks.

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Terms like conservative, liberal, socialist, progressive get used these days as accusations and insults rather than ways of defining a political or economic philosophy.

On today’s political spectrum, I consider myself liberal, but given the state of current discourse,  it might be worth explaining what I mean by that term—and why my kind of liberalism is compatible with genuine market capitalism, although not necessarily with what passes for capitalism in today’s America.

I am basically an 18th Century liberal, by which I mean a product of Enlightenment values like empirical inquiry, science, and the importance of facts—including facts I may find inconvenient.

It also means I place a high value on both individual autonomy and the common good. And that means I tend to analyze government’s activities through the hypothetical of Locke’s Social Contract.

The United States’ Constitution was crafted by men heavily influenced by Enlightenment ideas. Their belief in protecting a marketplace of ideas owed a debt to Adam Smith’s description of economic markets, a description supported by the experience of the colonists, many of whom were small merchants. Good ideas would win out over bad, in much the same way as that better mousetrap would win market share.

I believe market principles remain sound, but they have to be applied to “facts on the ground” that the Founders could never have anticipated.

There were around 4 million people scattered along the east coast when America won independence; there are now over 300 million. Technology, diversity, and globalization have changed the national landscape. Our job is to craft policies that protect the essential values of the Constitution and Bill Of Rights in new and very different environments. People of good will can disagree about how to do that –but I would argue that in order to disagree productively and civilly, we have to begin with a common basis in fact and history, and we have to agree on the definitions of the words we use.

For example, I consider myself a capitalist; I believe in markets—in those areas where markets can work properly.

Economists often define a free trade as a transaction between a willing buyer and a willing seller, both of whom are in possession of all information relevant to that transaction.

Understanding how markets work is important, because it defines the proper role of government in a capitalist system—as an “umpire” or referee, ensuring that everyone plays by the rules.

Teddy Roosevelt reminded us that monopolies distort markets; if one company can dominate a market, that company can dictate prices and other terms with the result that  transactions will no longer be truly voluntary. There are other behaviors that undermine markets: If Manufacturer A can avoid the cost of disposing of the waste produced by his factory by dumping it into the nearest river, he will be able to compete unfairly with Manufacturer B, who is following the rules governing proper waste disposal. If Chicken Farmer A is able to control his costs and gain market share by failing to keep his coops clean and his chickens free of disease, unwary consumers will become ill.

Most economists agree that in order for markets to operate properly, government must act as an “umpire,” assuring a level playing field.

Government also responds to what economists call “market failure.” There are three situations in which Adam Smith’s “invisible hand” simply doesn’t work: when monopolies or corrupt practices replace competition; when so-called “externalities” like pollution harm people who aren’t party to the transaction (who are neither buyer nor seller); and when there are “information asymmetries,” that is, when buyers don’t have access to information they need to bargain in their own interest. (Health care is an example.)

Since markets don’t have built-in mechanisms for dealing with these situations, most economists argue that regulation is needed.

Economists and policymakers can and do disagree about the need for particular regulations, but they agree that the absence of appropriate regulatory activity undermines capitalism. Unregulated markets lead to corporatism, where special interests can “buy” government regulations favoring them. You might think of it as a football game where one side has paid the umpire to make calls favorable to that team.

Socialism refers to the collective provision of goods and services, usually through government. There are some goods that free markets cannot or will not produce. Economists call them public goods, and define them as both “non-excludable” –meaning that individuals who haven’t paid for them cannot be effectively kept from using them—and “non-rivalrous,” meaning that use by one person does not reduce the availability of that good to others. Examples of public goods include fresh air, knowledge, lighthouses, national defense, flood control systems and street lighting. If we are to have these things, they must be supplied or protected by the whole society, usually through government.

Obviously, not all goods and services that we socialize meet the definition of public goods.  We socialize police and fire protection because doing so is generally more efficient and cost-effective, and because most of us believe that limiting such services to people who can afford to pay for them would be immoral. We socialize garbage collection in more densely populated urban areas in order to enhance the livability of our cities and to prevent disease transmission.

Getting the “mix” right between goods that we provide collectively and those we leave to the free market is important, because too much socialism hampers economic health. Just as unrestrained capitalism can turn into corporatism, socializing the provision of goods that the market can supply can reduce innovation and incentives to produce. During the 20th Century, many countries experimented with efforts to socialize major areas of their economies, and even implement  socialism’s extreme, communism, with uniformly poor results. Not only did economic productivity suffer, so did political freedom. (When governments have too much control over the means of production and distribution, they tend to become authoritarian.)

Virtually all countries today have mixed economies. The challenge is getting the right balance between socialized and free market provision of goods and services.

There’s lots of room for disagreement about things like how much regulation is too much, what level of national debt slows economic growth, what the tax burden should be and who should pay what. But in today’s America, these discussions tend to be all ideology and no understanding—all heat, no light. I wish I had a dollar for every TV pundit who clearly did not understand the difference between the deficit and the debt, or the difference between marginal and effective tax rates. We have people in Congress who quite obviously don’t understand what the debt ceiling is and isn’t.

It’s actually a good thing that Americans disagree—thoughtful disagreements often lead to better results. But it is really, really important that parties to a debate know what they are talking about. That is a lot harder today, thanks to the Internet and the collapse of that quaint exercise we used to call journalism. We live in an era of cherry-picking and confirmation bias—and our preferred realities are only a click away.

At the end of the day, policies based on ideology or wishful thinking just make things worse. And arguing about economics without agreeing on the meanings of the words we use is worse than useless.