Is Capitalism Rotting From the Inside?
By Dick Martin
When corporate speechwriters lift their heads from their keyboards these days, they are all abuzz about a book that has topped the New York Times best-seller list for four weeks.
Capital in the Twenty-First Century by the French economist Thomas Piketty is one of those 685-page tomes that few buy, fewer read, but everyone talks about.
I am in the first and second categories and, in this posting, I join the third.
It’s my obligation as a blogger. After all, there hasn’t been so much excitement about a book no one’s read since Marx hammered out Das Kapital (another book that few people acted as if they’d read, to disastrous effect). It’s clear why corporate speechwriters are paying attention. The author’s central thesis questions the very system under which they and their bosses make their living.
Piketty says that for three centuries, except for a few periods of war, the people who owned “capital”—assets like businesses, housing, and land—have been able to squeeze profits out of it at a rate higher than the economy grew overall. The result, he says, is that capitalism by definition creates relatively few “haves” and a mess of “have-nots.” And he warns that we are moving toward a future with “levels of inequality never before seen.”
That’s an issue that business leaders—and their PR counselors—need to address.
To ignore it is to lose even more of the public’s trust and to invite even more government regulation. The recent Edelman Trust Barometer shows that nearly half of “informed publics” already believe that “there is too little regulation of business,” and more than half would like to see more regulation of financial and energy companies. In some countries, those numbers approach near unanimity—73 percent of Brits say energy companies aren’t regulated enough; 66 percent of Germans feel that way about financial services.
People smarter than I am (some of whom may have actually read the book) have risen to condemn or defend Piketty. I do neither. Rather, I raise a question: Is the form of capitalism he criticizes really operative today?
Piketty’s capitalism seems to be one in which capitalists produce something they can sell or rent at a profit. Some may be greedy. Some may ignore the costs that their operations impose on the general public (pollution, for example). But at least they produce something people want. Capital is their tool to accomplish that; any profits are their reward. Competition keeps everyone honest.
Most businesspeople are comfortable defending such a system, even if it means calling out an occasional bad actor in their ranks.
But that’s not the kind of capitalism that makes the wheels of the economy turn these days. And it’s not what has so much of the public up in arms, from Occupy Wall Street protestors railing against the One Percent to Tea Partyers who want their country back. What feeds their distrust is more insidious. If business leaders don’t address it head on, they’ll be tilting at windmills.
As law professor Lawrence E. Mitchell has observed, our economy has become "deracinated." That is, the equity markets—which are theoretically the primary source of investment capital—have little to do with the activities they purport to finance. Recently, as we’ve seen, some securities have been so far removed from their underlying assets that practically no one understands them fully. Finance and production have become detached from one another. As Mitchell puts it, “The result is that finance finances finance.”
To some extent, this financialization of the economy is the unintended consequence of well-meaning reforms like the widespread adoption of tax-advantaged savings plans, such as 401(k)s in the 1970s, which in turn led to the growth of mutual funds in the 1980s. It’s also the product of the leveraged buyout boom in that same decade, which led to the unquestioned preeminence of “shareowner value” as a measure of corporate success.
To cement shareowner value as the coin of the realm, boards of directors tied executive compensation to their companies’ stock performance. Since the stock market rewarded predictable earnings growth, those executives did everything they could to deliver ever-rising quarterly profits. In some extreme cases, it led to outright fraud.
But even where companies weren’t cooking their books, it led to earnings management, downsizing, outsourcing, and all manner of financial engineering. It also produced a historical disconnect between employee compensation and productivity increases, resulting in wage stagnation and a decline in economic mobility.
We’ve become our own worst enemy as we all chase higher returns, in the process giving today’s CEOs and boards a major case of short-termism.
So what can business leaders and their PR counselors do about it? I’m tempted to paraphrase Shakespeare’s advice and suggest we “kill all the investment bankers.” But the real answer is to engage corporate leaders in the debate Piketty ignited.
CEOs need to address the very real issue of rising inequality. As economist James Galbraith suggests, inequality is not a necessary consequence of capitalism. On the contrary, if it results from a lack of economic mobility, it's a real problem for capitalists because it means that their markets are shrinking. A growing middle class is every capitalist’s friend.
I had lunch with one of the grand old men of PR recently. He noted that back in the 1960s and 1970s, the corporate world had a number of CEO statesmen (back then, they were all men) who saw capitalism as the best way to improve people’s lives. They didn’t count time in quarters, and they saw the company stock price as a means, not an end. In fact, they worried less about the stock market than about their customers, employees, and the communities in which they lived and worked.
Sadly, my lunch companion could only come up with one current CEO who fits that bill. PR people should make it their job to help restore the kind of statesmanship he was talking about.
If nothing else, that could restore capitalism’s good name and help prove Piketty wrong.