I’d like to connect two articles and show how the quite disconnected pieces are actually linked. The first would suggest that I am anti-capitalist (which I am not) and the second suggests that our ‘system’ is polarizing what capitalism is all about.
In today’s US print edition of the Wall Street Journal there is an Opinion piece by William Galston titled, “A voter revolt against shareholder value“. The article refers to the clamor we all see every day in TV with folks no longer happy about how our country is going economically. Mr Galston makes a good point- we are all very concerned with how things are going. But he misses a point.
The author suggests that there was a time when American firms did well by their employees. For example, when GM’s CEO said, between the wars, that what is good for GM is good for the country, many people agreed with him. But the next 40 years went wrong in that due to effort to maximize shareholder value at all costs, firms have avoided paying a fair wage for a day’s work. This is not correct. Firms have never operated as a not-for-profit charity.
The author assumes that CEOs of today are mercenaries and extracting value for shareholders at everyone else’s expense. Again, this is not correct. The pursuit of profit is a wonderful way to allocate most resources. What Mr Galston is missing in his analysis is the environment in which firms operate has changed hugely in the last 40 years, and not all to the good.
Now the second article. In this week’s Economist there is a special report on the state of the world economy. One article is titled, “A lapse of concentration.” This interesting article highlights “an intriguing line of research”. The interesting point concerns an increasing incidence of economic “rents” (profits over and above the levels needed to justify investments or input of work). It turns out that the top 10% of forms by profits are pulling ahead of all the others by a large margin. Almost all forms are improving but the top 10% are dramatically pulling away.
This is interesting because this result may be occurring due to a number of issues. One is the concentration of firms in industry. As firms concentrate scale, so their market power increases (and vice versa) and such power permits greater pricing power. Such concentration will also lead to less completion and this may stem from increased lobbying power that comes with increased profits.
Another aspect of the report cited in the Economist article suggests that these massive increases in rent have persisted. More than four-fifth of the firms that made a return of 25% or more in 2003 were still doing so ten years later. This again seems to favor large firms that just keep getting larger.
So can we connect the two articles in this way: increased centralized power of larger firms creates a bureaucratic power-base that favors government collaboration that reinforces the sustainment snd even growth of the larger firms. In so growing those firms are somewhat protected by the very system that was meant to set them free.
Now these large firms can appease their shareholder goals for return on capital (these rents easily exceed return on capital) without much investment it even risk. With reduced risk and competition there is little need or incentive to innovate the traditional ways with increments in people or equipment. And so wages remain depressed.
The conclusion is that the very heart of capitalism has been supplanted by a dangerous two-party cabal comprising ever larger government and ever larger firms. Competing has been stifled. So we have evidence of this? Yes we do.
In the US the number new start-ups has collapsed and remains near to all time lows. This is as a result of a number of policy failures spanning regulation, tax, and now even social stigma. Regulation remains complex and cost prohibitive, including persistent attempts to increase minimum wages. Tax incentives remain weak a s do not encourage the effort given the alternative capital investment paths. And look at the first article for the current social stigma attached with being successful.
We have jointly been too successful and created now a system that seeks to assure is own elitist survival. We need to break this unhappy cabal apart; cut government spending and size; curtail cronyism, and unleash the invisible hand. Right now the hand of government and big business is in the till. And we can all see it.