Capitalism Is in Crisis
The financial crisis of 2008 was a wake-up call that capitalism was in trouble; then the movers and shakers of the corporate world hit the snooze button and went back to business as usual. New wealth is pouring into corporate coffers and leaking out to offshore accounts while the incomes of regular folks are stagnating. Part-time, insecure employment is creating tears in the social fabric that are exploited by populist politicians whose agendas are often extreme.
From Adam Smith to Milton Friedman
Paul Polman is the former Chief Executive Officer of the Anglo-Dutch company Unilever NV. It owns some of the world’s best-known brands – Becel, Vim, Lipton’s Tea, Dove, Hellman’s, etc.
In an interview with The Globe and Mail he stressed that the father of capitalism, Adam Smith, believed it “was intended for the greater good. When our generation grew up after the Second World War, our parents wanted the same kind of thing; they wanted us to go to university and have a better life. Most of them were working for the greater good of society.”
Now, Mr. Polman argues that capitalism began to lose its way in the 1980s when leaders in the United Kingdom, the United States, and other large economies started to follow the theories of economist Milton Friedman.
Friedman taught that capitalism worked best when it was free of government regulation. To him, profit and self-interest could solve all economic problems; unrestricted free markets would create a bonanza of wealth from which all people would benefit.
He found enthusiastic converts to his theories in Britain’s Prime Minister Margaret Thatcher and U.S. President Ronald Reagan. An era of deregulation began, anchored firmly in the belief that the market was self-correcting; corporations would act responsibly because to do otherwise would threaten their long-term prosperity.
The financial crisis of 2008 torpedoed the notion that enlightened self-interest would govern the actions of business leaders. Instead, they engaged in risky ventures, confident they could ensure someone else was holding the parcel when the music stopped.
Corporations Behaving Badly
Corporations were making huge money out of passing around dodgy financial packages and selling them to investors as low-risk, high-return instruments. But, they were high-risk and known to be so by their vendors.
Eventually, these investments turned sour, people lost their savings, financial institutions collapsed, and the Great Recession was triggered. That’s when, according to Paul Polman, smarter economists realized the way economic growth was being generated with “high levels of public and private debt and over-consumerism is not sustainable.”
He says the single-minded focus on short-term profit is a dangerous path for businesses to follow. It leads to cutting corners that cause such things as the Bhopal chemical leak disaster of 1984, the creative accounting at Enron of 2001, the BP oil disaster of 2010, switching horsemeat into “beef” products in 2013, the inadequate pilot training of Boeing 737 Max aircraft, and many other acts of corporate greed.
Single-Minded Pursuit of Profit
Investors take their money to the place where they think they’ll get the highest return; their cash does not have a conscience.
So, executives and their performance become part of the problem. They are under tremendous pressure from hedge funds and other investors to continue producing ever-larger quarterly profits.
This takes many businesses into a cost-cutting mode where they skirt around safety measures, ignore environmental regulations, source material from the lowest-cost suppliers, and lay off employees.
Since the Great Recession many companies have downsized staffing levels and forced their remaining employees to accept insecure, temporary status. This has created a large pool of unemployed and underemployed labour, with the heaviest burden falling on the young.
Social Stability Threatened
Paul Polman says he is concerned about the effect economic hardship is going to have on social cohesion; a permanent, disgruntled underclass with almost nothing to lose is a menace that should not be ignored.
History Professor Jerry Z. Muller comments that these are the sort of conditions that “can erode social order and generate a populist backlash against the capitalist system at large.”
And, even the World Economic Forum sees trouble brewing if the status quo isn’t changed.
The Swiss-based organization is ground zero for capitalism. Before its 2013 meeting it issued a report on threats to global financial and social stability. The consensus of the 1,000 experts polled was “The global risk that respondents rated most likely to manifest over the next 10 years is severe income disparity, while the risk rated as having the highest impact if it were to manifest is major systemic financial failure.”
Paul Polman says the solution is better corporate behaviour. He says that to be successful corporations have to be focused on the interests of society not solely on the interests of shareholders. He believes consumers will reward those companies that treat employees and suppliers ethically and those that respect the limits of the planet’s environment. Those that continue with business as usual, he says, will be punished.
Out of the Frying Pan …
The response of governments to the financial meltdown was to prop up the very businesses that had caused it.
The equivalent of $15 trillion was pumped into the global financial system, in a process called quantitative easing.
In addition to printing vast amounts of money, there were cuts to taxes on corporation and high-income earners. The thinking was that this increased liquidity would stimulate investment in productive activity and people would be called back to work with secure, well-paying jobs.
But, that didn’t happen. The sudden injection of money caused more speculation on stocks, bonds, real estate, and consumer debt. Instead of building new plants or buying new equipment, corporations have hoarded their profits. By the middle of 2017, Moody’s financial services company reported that U.S. businesses had stashed away $1.84 trillion.
There has also been a boom in lending; total global indebtedness now stands at 217 percent of Gross Domestic Product, the highest level on record.
Justin Welby, the Archbishop of Canterbury, was an oil executive before he became a man of the cloth. He told The Financial Times in September 2018 that he’s concerned the corporate world has learned nothing from its brush with catastrophe in 2008. He sees public anger turning against capitalism and fuelling extremism.
“Things could go very seriously wrong,” said the prelate. “So you can get a snap back of the elastic, which is not good for business or for society because it’s a revenge regulation.”
He advised that the corporate world has to develop a moral dimension.
A favourite concept of the political right and their corporate backers is trickle-down economics. The idea is that if the wealthy and rich businesses have more money they will spend it and the benefits of this will trickle down to the less well off. But Warren Buffett, one of the icons of capitalism, says it doesn’t work. In a January 2018 article in Time magazine he pointed out that since 1982 the wealth of the Fortune 400 companies increased 29-fold “while many millions of hardworking citizens remained stuck on an economic treadmill. During this period, the tsunami of wealth didn’t trickle down. It surged upward.”
Tsar Nicholas II of Russia is said to have been the richest person ever to have lived with an estimated fortune, in today’s terms, of about $290 billion. It didn’t do him any good because he was overthrown in the revolution of 1917 and executed.
An old Soviet Union saying: “Under capitalism one man exploits and oppresses the other; under communism it’s the other way around.”
- “Examples of Corporate Malfeasance.” Victoria Duff, Demand Media, undated.
- “Paul Polson: Rebuilding Capitalism from the Basic.” Gordon Pitts, The Globe and Mail, March 10, 2013.
- “Capitalism and Inequality.” Jerry Z. Muller, Foreign Affairs, March/April 2013.
- “Global Risks 2013.” World Economic Forum, 2013.
- “US Corporate Cash Pile $1.84 Trillion Says Moody’s – Doesn’t Matter A Darn, Not Even Apple’s Stash.” Tim Warstall, Forbes, July 19, 2017.
- “Ten Years on, the Crisis of Global Capitalism Never Really Ended.” Jerome Roos, Committee for the Abolition of Illegitimate Debt, September 14, 2018
- “Warren Buffett Shares the Secrets to Wealth in America.” Warren Buffett, Time, January 4, 2018.
- “UK Facing ‘Crisis of Capitalism’, Says Archbishop of Canterbury.” George Parker, Financial Times, September 7, 2018.
© 2019 Rupert Taylor