Shareholder capitalism’s ugly legacy

Jomo Kwame Sundaram

KUALA LUMPUR: Milton Friedman’s libertarian economics advocating shareholder capitalism has influenced generations trying to understand the economy, not only in the US, but all over the world.

He was not just an academic economist, but an enormously influential celebrity conservative ideologue who legitimized ideas for the like-minded, including the belief that ‘greed is good’. Now, shareholder capitalism’s consequences haunt the world and threaten humanity with stagnation and self-destruction.

Friedman’s lasting influence

In 1962, Friedman published his most influential book, Capitalism and Freedom. In September 1970, the New York Times Magazine published his essay, The Social Responsibility of Business is to Increase Its Profits. The fiftieth anniversary of its publication has triggered an international debate of its contemporary significance, especially with the resurgence of ethno-populist jingoism embracing his neoliberal economic agenda.

In 1962, Friedman published his most influential book, Capitalism and Freedom. In September 1970, the New York Times Magazine published his essay, The Social Responsibility of Business is to Increase Its Profits

The article -- reiterating the Friedman Doctrine, presuming perfectly functioning markets that only exist in the minds and writings of some economists -- is a manifesto for American shareholdercapitalism. It inspired the counter-revolution against Keynesianism, development economics and other state interventions.

The word ‘competition’ appears only once, in the last sentence. Yet, some supporters insist that Friedman was not ‘pro-business’, but rather ‘pro-market’. But, unlike capitalism, the market has been with us for several millennia and has happily co-existed with unfreedoms of various types.

Perfect competition rarely exists due to inherent tendencies undermining it. Hence, various challenges to Friedmanite wisdom. For half a century, information and behavioural economics have challenged his many assumptions, certainly much more than the Austrian School advocacy and defence of capitalism.

Thus, Friedman conveniently ignored ‘market imperfections’ in the real world, although or perhaps because they undermined the empirical bases for his reasoning. So, even if Friedman’s logic was true, reality prevents profit-maximizing firm behaviour from maximizing societal welfare, if not cause the converse.

Meanwhile, Friedman’s monetarist economics has been discredited, and has little practical influence anymore, especially with the turn to ‘unconventional monetary policies’, particularly after the 2008-2009 global financial crisis. Yet, his ideological sway remains strong, as it serves powerful interests.

Greed is good

Hence, Friedman’s 1970 essay remains influential in the world, and has long served as the mainstream manifesto on corporate governance. Even then, Friedman denounced dissenting CEOs as “unwitting puppets of the intellectual forces that have been undermining the basis of a free society”.

Generations of Friedmanites have insisted that ‘the only business of business is business’, and their sole responsibility to society is to make money. He emphasized, ‘‘there is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.’’

When Friedman insisted “make as much money as possible while conforming to the basic rules of the society”, he may have presumed that market imperfections do not exist, or were fully addressed by the ‘minimal’ state, although it is well-known that the rule of law has never been adequate to the challenge.

His singular focus on maximizing profits for shareholders justified ignoring all problems due to corporate practices. The doctrine thus absolved the firm of social responsibility. It justified and encouraged generations of corporate leaders committed to the primacy of ‘shareholder value’. Almost like religion, this thinking became the hegemonic ideology, legitimizing ‘greed-is-good’ behaviour.

Government the problem?

Friedman’s ideology spread throughout the world with the ‘neoliberal’ counter-revolution from the 1980s.

Unsurprisingly, neoliberal economists’ claims have been discredited by their policies’ failure to significantly increase investments in the real economy in recent decades.

And without sufficient investments to enhance productivity, growth has declined, if not stagnated, while dimming future economic prospects. With labour incomes declining relatively, if not absolutely, consumer spending has declined, reducing aggregate demand while feeding a vicious circle of stagnation.

Meanwhile, deregulatory initiatives have not increased real investments and output growth.Market finance ideology claims that the stock market can best allocate investment resources among companies. But share buybacks imply that US corporations have no better investment options than to further raise already high, over-valued financial asset prices, thus reducing resources for real investments and future growth.

The Friedman doctrine also celebrated and justified short-termism, and undermining protection for employees and the environment to maximize shareholder value by increasing corporate profits. This type of capitalism has spread throughout the world with the ‘neoliberal’ counter-revolution since the 1980s.

‘Getting government out of the way’, the neoliberal ‘free market’ mantra, was supposed to boost private investments. But more handsome corporate profits due to cost savings – from weaker anti-trust and other regulations, lower wages and taxes – have not significantly increased real investments in the US.

The 2007-2009 US financial crisis exposed some problems of short-termism, particularly related to financialization and ‘shareholder value extraction’. The crisis cast doubt on Friedman’s legacy and its implications, encouraging new challenges to corporate governance norms and regulations.

Business and politics

Friedman would have us believe that power and politics are not exercised in free markets. But this ostensible insulation of politics from supposedly power-free markets is a fiction which thoughtful Friedmanites knew only too well, not least from their own advocacy, behaviour and conduct.

All markets are shaped by various historical and contemporary influences, economic, cultural, social and political. These are often driven by business and other lobbies. Thus, politics, collective action and advocacy shape policies, in terms of design, implementation and enforcement.

To be fair, Friedman’s view of politics and business seems contradictory. His writings argue that business should stay out of politics, and not use shareholder money to influence politics. But he is remarkably understanding when it happens:

“I can’t blame a businessman who goes to Washington and tries to get special privileges for his company”. “If the rules of the game are that you go to Washington to get a special privilege, I can’t blame him for doing that. Blame the rest of us for being so foolish as to let him get away with it.”

Neoliberal inequality

Former Clinton Labor Secretary Robert Reich has argued that larger US corporations have acquired so much influence over government, undermining US democracy. Instead, he argues for public financing of electoral campaigns while curbing corporate influence, e.g., via lobbying and campaign spending.

He cites an old study of 1,779 policy issues during 1981-2002 which found lawmakers acceding to the demands of big businesses with the most lobbying capabilities while the average American had “only a miniscule, near-zero, statistically nonsignificant impact upon public policy”.

With the Citizens United ruling in the new century, the US Supreme Court has legally enabled powerful corporate interests to lobby politically. Unsurprisingly, corporate taxation has been dramatically reduced, while social protection and public investments, e.g., in health and education, have declined further.

Instead of gains being shared by top executives and shareholders with workers, as during the post-Second World War Golden Age, benefits have become increasingly skewed to the very wealthy in the past four decades, thanks to Friedman’s increased influence.

From 1948 to 1979, US worker productivity more than doubled while wages fell slightly behind as the stock market grew over six-fold. But from 1979 to 2018, worker productivity rose 70 per cent, as worker pay rose by only 11.6 per cent, while CEO compensation rose almost ten-fold and the stock market 22-fold!

Regressive taxation must be reversed

Jomo Kwame Sundaram

KUALA LUMPUR: With many in the world experiencing declining living standards, there has been growing frustration. Many hope that progressive taxation will improve things. While some economies once had progressive tax systems, recent decades have seen regression.

Competing, contradictory trends

Triumph of Injustice, the recent book by Emmanuel Saez and Gabriel Zucman, both associates of ‘rock-star’ economist Thomas Piketty, calls for a US return to progressive taxation. The duo show that the US had one of the world’s most progressive tax systems, but now, the richest pay a lower tax rate than the poorest.

The two French economists at Berkeley consider the two major competing US ideologies on taxation based on rival claims with contemporary echoes. The socially regressive, ostensibly libertarian tradition has its roots in property, including slaves, who once accounted for 40% of the population of the US South.

Plantation owners and slaveholders opposed property taxes in the name of freedom and liberty. Meanwhile, the myth of the wealthy that low taxes have long been part of US history and tradition has become far more influential.

Another more progressive tax ideology can be traced to more egalitarian traditions, including some involving wealth taxation. The US has actually had some of the highest tax rates on the rich in world history, as taxation became more progressive from the 1930s, especially after the Second World War.

Regressive turn

Those most responsible for the U-turn from the 1980s have been US Presidents Ronald Reagan and Donald Trump. The authors attribute the great recent increase in US economic inequality to the “negative spiral” involving regressive tax reforms over the last four decades.

However, empirical support for their claim is suspect as the ‘primary’ distribution of income before taxation is hardly egalitarian. Besides the traditional division between capital and labour, rentier incomes and much higher executive remuneration have become far more significant in recent decades.

While regressive tax incidence has undoubtedly made things worse, exaggerating the fiscal system’s redistributive impact detracts from a more comprehensive understanding of contemporary inequality.

Avoidance and evasion

Successive US governments have also enabled tax evasion and avoidance by not investing enough to effectively enforce what remains of the US tax code. These have been portrayed by beneficiaries and their propagandists as ‘unavoidable’.

They then claim that the best option to ensure greater compliance is to lower ‘headline’ tax rates. Thus, instead of greater efforts to reduce tax avoidance and evasion, they urge further reduction of tax rates.

Saez and Zucman insist that governments, especially the world’s most powerful one in Washington, DC, must come down hard on tax dodgers, pointing out that not doing so is due to political choices made. They propose a Federal Protection Bureau to enhance capacity against tax evasion and avoidance.

Corporate taxation

The duo show that corporate taxes were crucial in narrowing the gap between rich and poor during the Keynesian Golden Age for a quarter century or so in the mid-20th century after World War Two.

While very high top personal income tax rates, and much more inheritance and property taxes can help, they show that corporate taxation was crucial. The corporate income tax rate then was 50%, taking half of firm profits.

The high tax rate also encouraged re-investing profits, rather than paying dividends and bonuses, encouraging firm growth with higher capital accumulation in the long-term.

Meanwhile, progressive government expenditure complemented progressive taxation, including more direct taxes, for a comprehensively progressive fiscal system, reducing overall economic inequality. 

Proposals to reduce inequalities

Saez and Zucman persuasively offer a comprehensive set of proposals to reverse the downward spiral to rebuild a much more progressive US tax system, with many lessons very relevant elsewhere as well. Importantly, they discuss various options for the US, including many not requiring international cooperation.

They acknowledge that the US has already shown the way with its Foreign Account Tax Compliance Act (FATCA). FATCA compels all US citizens, both at home and abroad, to file annual reports on all their foreign holdings, ensuring greater financial transparency in the age of globalization.

Nevertheless, they insist it is not enough, arguing that “when it comes to regulating the tax industry, the Internal Revenue Service (IRS) brings a knife to a gunfight”, instead of enhancing US tax capacities and capabilities.

‘Tax all incomes equally’

The first principle of taxation for them is that all income should be taxed equally, whether from work or assets. Today, capital income is taxed much less than labour income, increasing inequality contrary to the popular presumption that taxation is progressively redistributive. 

Saez and Zucman also show that the rich can afford to pay 4% of national income, or US$750 billion more in tax. Four sets of taxes would double their current average tax rate from 30% to 60%.

They propose a steeply progressive income tax, arguing that a top rate of 75% is most viable. The duo also recommend strongly enforced corporate tax, doubling inheritance tax revenues, and introducing a wealth tax.

Wealth tax necessary

The duo also insist that it will be impossible to reduce inequality in the contemporary world only by raising corporate, inheritance and income taxes, as important as these are to the overall effort.

At the rates recommended, a wealth tax would raise significant sums, but still would not radically reduce inequality or extreme wealth concentration. Hence, the authors argue for higher rates, not only to raise more government revenue, but also to reduce extreme wealth inequality and concentration.

Saez and Zucman argue that extreme wealth concentration has led to growth benefits being captured by a few. They argue for taxing the rich, not only to enhance revenue, but also to reduce extreme wealth concentration.

For them, “a radical wealth tax would lead to a reduction in the number of multibillionaires. More than collecting revenue, it would deconcentrate wealth”. They suggest a 10% rate on fortunes over US$1 billion.

This would not only make it harder to be a billionaire, but also much harder to become and remain a multi-billionaire. If their proposed wealth tax was in place from 1982, most of the 400 richest Americans would still be billionaires, but worth much less.

Their wealth shares would be closer to what they were in 1982, before the rapid rise of wealth inequality. Mark Zuckerberg would still have US$21 billion, instead of US$61 billion, while Bill Gates would be worth US$4 billion, instead of US$97 billion.

Inequalities linked

Under President Franklin Delano Roosevelt in the 1930s, an income tax top rate of 94% was introduced, apparently not to raise revenue, but rather, to limit high incomes and wealth concentration.

This effectively limited income differentials between the highest and lowest paid to far more reasonable levels. As top tax rates have drastically fallen since, executives now get several hundred times more than their lowest paid employees.

In a recent interview, Gates commented, “I’m all for super-progressive tax systems…I’ve paid over $10bn in taxes. I’ve paid more than anyone in taxes. If I had to pay $20bn, it’s fine. But when you say I should pay $100bn, then I’m starting to do a little math about what I have left over.” 

Trump undermines WHO, UN system

Jomo Kwame Sundaram and Anis Chowdhury

KUALA LUMPUR, SYDNEY: After accusing the World Health Organization (WHO) of pro-China bias, President Donald Trump announced US withdrawal from the UN agency. Although the US created the UN system for the post-Second World War new international order, Washington has often had to struggle in recent decades to ensure that it continues to serve changing US interests.

Invisible virus trumps POTUS

In early July, Washington gave the required one-year notice officially advising the UN of its intention to withdraw from the WHO, created by the US as the global counterpart to the now century-old Pan-American Health Organization (PAHO).

However, the White House decision violates US law as it does not have express approval of the US Congress required by the 1948 joint resolution of both US legislative houses enabling US membership of the WHO.

Trump had already refused to meet US financial commitments. This too violates the 1948 resolution requiring the US to fully meet its financial obligations for the current fiscal year before leaving, probably presuming that earlier dues have been fully paid up.

The WHO needs more funding than ever to address the COVID-19 pandemic by increasing cooperation, coordination and awareness, establishing standards and protocols, and securing medical supplies for all, especially needy countries.

The world would have been much worse off without the WHO, e.g., as it tries to ensure that COVID-19 vaccines are affordably accessible to all. By contrast, Trump’s jingoistic policies and actions have even involved piracy.

After concluding a favourable trade deal early in the new year, Trump praised China on 24 January: “China has been working very hard to contain the Coronavirus. The United States greatly appreciates their efforts and transparency”.

As POTUS’s failure to better handle the COVID-19 pandemic has become apparent to most, he has created scapegoats to gloss over his gross mismanagement, demonizing China to also serve larger political purposes. Growing Western paranoia about China’s rise has contributed to collective amnesia.

POTUS has accused the WHO of deference to China and deliberate failure to provide accurate information about COVID-19. Despite disproven and unproven allegations, Trump’s allegations of WHO bias for China have dominated international public opinion.

WHO’s mixed record

WHO policy decisions are made by the World Health Assembly (WHA) with almost 200 Member States. As in other UN bodies, decisions adopted with developing countries in the majority have often not been to Washington’s liking. 

Without the bullying US presence, WHO’s functioning may improve, but the WHO will be weakened by reduced resources and possibly, sabotage. It will increasingly depend on other sources of funding, many private, US-based, which is likely to compromise its policies and practices.

Already, the WHO Secretariat has been widely criticised for favouring US interests, e.g., by procuring from US companies. US and other transnational companies greatly influence WHO policy and management decisions in their own favour.

Halfdan Mahler, a three-term WHO Director-General, warned that the pharmaceutical industry’s “unhealthy influence” was “taking over WHO”. Thus, any balanced inquiry of WHO bias should include the influence of big pharmaceutical corporations, especially as the agency increasingly depends on private funding.

Despite an official inquiry finding “no wrong doing” after a Council of Europe committee alleged possible conflicts of interest in WHO’s declaration of an A/H1N1 swine flu pandemic, criticisms of conflicts of interest remain.

The British Medical Journal found that key WHO influenza pandemic planning scientific advisers had been paid by pharmaceutical firms that stood to gain from the guidance they were preparing, i.e., possibly involving conflicts of interest never publicly declared.

Financial blackmail

UN organizations depend on mandatory annual contributions by Member States, determined according to agreed scales of assessment relative to their wealth and population. When a Member State fails to pay dues for the preceding two years, it loses voting rights.

The US should pay 22% of WHO’s annual budget, and the European Union 30%. Of the total of US$489 million for 2020, the assessed contribution for the US came to US$115 million.

However, the US has regularly defaulted, partially or wholly, on contributions due to the WHO and the UN secretariat among others. For instance, the US only paid a third of its assessed WHO contribution for 2019.

Thus, while low-income countries duly pay their statutory contributions, the world’s largest economy selectively withholds payments due in order to influence UN agencies’ policies, decisions and practices. 

Nonetheless, a larger share of WHO expenditure than the assessed US budgetary contribution ends up in the US to procure medicines, equipment and services.

US threatens UN multilateralism

Washington’s refusal to pay its WHO and other UN dues reflects its attitude to the democratization of the multilateral organizations it once created. US efforts to financially squeeze UN agencies are nothing new, having long refused to pay dues to the UN secretariat on various dubious grounds.

With its veto, the US has been able to ensure that the UN’s most strategic organ, the Security Council, could never undermine its interests despite the nominal ‘one-country-one-vote’ governance of much of the UN system. 

Undoubtedly, like much of the rest of UN system, the WHO needs reform, e.g., to improve accountability in decision-making, but progress has been blocked by various divides, with support for Trump’s accusations and vague reform demands driven primarily by political considerations.

The United Nations Educational, Scientific and Cultural Organization (UNESCO) has also come under US arm-twisting, with the US and Israel pulling out in December 2018 following its overwhelming General Conference decision to admit Palestine as a member.

When Ronald Reagan was president, the US had quit UNESCO in 1984 after claiming that then Senegalese Director-General Amadou-Mahtar M’Bow had been “politicizing” the organization. The US only rejoined in 2003 during the first George W. Bush presidential term, i.e., before the Iraq War.

Meanwhile, the US remains outside many other global multilateral initiatives, including the Convention on Biological Diversity, the Kyoto Protocol, the International Criminal Court and the Basel Convention, and has also withdrawn from the UN Framework Convention on Climate Change (UNFCCC) Paris Agreement and the UN Human Rights Council.

Even if he concedes the presidency in January, Trump’s jingoistic legacy has already irreversibly poisoned US public sentiment and international politics. Multilateralism and the UN system may well suffer irreversible collateral damage until an unlikely new ‘coalition of the willing’ rises to the challenge.