Restraining capital

Martin Wolf argues that Milton Friedman was wrong to claim that the only social responsibility of business is to increase profits. I agree with him, but I fear he under-rates two important facts: historical context and class power.

Friedman thought (pdf) that profit maximization promoted the social good only under two conditions.

One, stressed by Luigi Zingales, is that markets must be competitive. Where this is the case, corporations have little power to egregiously exploit consumers or workers. In fact, they must maximize profits or go bust - and going bust is rarely in the public interest.

The second is that profit-seeking is only socially desirable so long as the firm “stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” This echoes Adam Smith, especially as interpreted by Jesse Norman (pdf) – that a well-functioning market economy depends upon social norms.

However, things have changed since the 1970s so that even if Friedman was right then, he no longer is. There are four, inter-related developments here.

First, markets have become less competitive, as Thomas Philippon has shown.

Secondly, social norms have eroded. In the 1970s, pharmaceutical companies did not deliberately sell addictive opiates as they do today*. And whilst misreporting of earnings was rare in the 70s, it is more common (pdf) today, albeit less so than a few years ago.

Thirdly, firms are makers and not just takers of the “rules of the game”. As Martin says, they successfully lobby for favourable rules. The US healthcare industry alone spends over £500bn on lobbying, and employs five lobbyists for every one Congressman. Which is just profit maximizing behaviour. If it’s cheaper to campaign for handouts or lax regulation than to develop good products then profit maximization requires that firms do just this. The upshot is that as Martin Gilens and Benjamin I. Page say (pdf):

Economic elites and organized groups representing business interests have substantial independent impacts on U.S. government policy, while average citizens and mass-based interest groups have little or no independent influence

Fourthly, trades unions have greatly declined. In 1970 firms faced a countervailing power which inhibited them from cutting workers pay and conditions or jacking up CEO pay. Today, they no longer do so.

Now, these developments have been more pronounced in the US than in the UK or Europe. Their overall effect, though, Is to remove the conditions in which Friedman’s claim made sense. Which leads to Martin’s conclusion:

The challenge is to create good rules of the game, via politics. Today, we cannot.

That word “cannot” is important. Creating better rules of the game isn’t primarily about technocratic fixes such as rules again lobbying, breaking up the tech giants, raising banks’ capital requirements or (in the US) reforming healthcare. Any fool can have good ideas.

Instead, the issue here is power. The same forces that empower big corporations to make the rules also empower them to inhibit reform – or even to reduce the chances of a reforming government being elected at all; some of these forces are of course not under the deliberate control of specific capitalists but are rather emergent processes.

A lot of technocratic politics and economics is idle fantasising: “here’s what I’d do if I were king”. It misses the point: how do we achieve the power to restrain big capital?

Centrists criticise the left for failing to see that good ideas are useless unless you win elections. But we can turn this jibe around. From the point of view of restraining capital, there’s a difference between winning office and winning power. As I’ve long complained, technocrats are too often blind to the realities of capitalist power.

The challenge for anybody wanting a healthy capitalism, then, is how to achieve the power, the leverage, to do so? Insofar as capitalism operated in the wider public interest at the time that Friedman was writing (which of course is a matter of dispute) it did so because it faced countervailing power. Today, it no longer does so to the same extent.

Here, the left has an insight, if not a successful application thereof – the need to build an anti-capitalist hegemony, something which can only be done outside of parliamentary politics.

There’s general agreement that non-parliamentary action can create such hegemony. Rightists who complain about “wokeness” allege that the left has just done this in cultural domains. Perhaps a better example, though is Brexit. Farage and Ukip were negligible as a parliamentary presence, but achieved their aims anyway.

Neither of these hegemonies, however, have greatly challenged capitalist power: although Brexit is not in the material interest of some segments of capital, it has the redeeming virtue of having deflected blame for stagnation from capitalism onto the EU and migrants.

Which leaves the question: is it possible to create an anti-capitalist hegemony, and if so how? Technocrats have been insufficiently interested in this question.

* Corporations did, however, produce thalidomide and DDT, though the adverse effects of these might have been partly unintended.

Comments

[ltr]

Insofar as capitalism operated in the wider public interest at the time that Friedman was writing (which of course is a matter of dispute) it did so because it faced countervailing power....

[ Rachel Carson published Silent Spring in 1962, and only John Kennedy rescued the work. ]

[ltr]

Amending my comment; Rachel Carson was supported by John Kennedy, but had important publishing and public support prior to successfully testifying before the President's Science Advisory Committee in 1963.

[Nanikore]

"Neither of these hegemonies, however, have greatly challenged capitalist power: although Brexit is not in the material interest of some segments of capital, it has the redeeming virtue of having deflected blame for stagnation from capitalism onto the EU and migrants."

An interesting piece, and a good companion piece to Nasrine Mali's column in today's Guardian

"That is how to understand Brexit: not an irrational rightwing populism, not a derangement of post-truth politics, but the predictable outcome of a concerted political and media campaign that capitalised on a colossal failure of our economic model."

He also points out that the technocracy and New Labour always made the case for immigration from the perspective of a pro-globalisation view and 'economic benefits' view. This is contrast to the leadership of Merkel, who made the case to accept 1 million refugees into Germany solely on what are unanswerable compassionate and moral grounds. She won the argument with her honesty.

it is one thing to be pro-immigration or pro-globalisation. But it must be for the right reasons.

https://www.theguardian.com/commentisfree/2020/dec/14/liberals-brexit-politics-resentment

[Jan Wiklund]

The answer of that is social movements practicing what Charles Tilly called movement repertoires. There is a huge academic literature about that, but I have deflated it into just one volume, including also a 2000 years history of social movements: http://www.folkrorelser.org/demokratins/carriers-book-2019.pdf

(This is a pdf translation of a paper book in Swedish: https://www.bokus.com/bok/9789197869607/demokratins-barare-det-globala-folkrorelsesystemet/)

[James Charles]

"Thirdly, firms are makers and not just takers of the “rules of the game”. As Martin says, they successfully lobby for favourable rules."
“Testing Theories of American Politics: Elites, Interest Groups, and Average Citizens
Martin Gilens and Benjamin I. Page
Each of four theoretical traditions in the study of American politics—which can be characterized as theories of Majoritarian Electoral Democracy, Economic-Elite Domination, and two types of interest-group pluralism, Majoritarian Pluralism and Biased Pluralism—offers different predictions about which sets of actors have how much influence over public policy: average citizens; economic elites; and organized interest groups, mass-based or business-oriented. A great deal of empirical research speaks to the policy influence of one or another set of actors, but until recently it has not been possible to test these contrasting theoretical predictions against each other within a single statistical model. We report on an effort to do so, using a unique data set that includes measures of the key variables for 1,779 policy issues. Multivariate analysis indicates that economic elites and organized groups representing business interests have substantial independent impacts on U.S. government policy, while average citizens and mass-based interest groups have little or no independent influence. The results provide substantial support for theories of Economic-Elite Domination and for theories of Biased Pluralism, but not for theories of Majoritarian Electoral Democracy or Majoritarian Pluralism. “
https://scholar.princeton.edu/sites/default/files/mgilens/files/gilens_and_page_2014_-testing_theories_of_american_politics.doc.pdf

[Jim]

The old balance of power:

One side
Ability to squeeze the King
Ownership of production assets
Ownership of the system of trade

The other
The market
Ability to deny/take elsewhere ones labour
The law

Other factors
Fear of God and/or disgrace
Social bad odour
Independent press.

Individual Governments are easily picked off - except the very big ones. Production for products or services can be outsourced or automated. The system of trade is in the hands of big business and global regulators. Smaller governments don't matter - do as they are told.

The market is manipulable through advertising, pricing, lobbying and revolving door. Withdrawal of labour only matters to the public sector. Big business will simply walk away. The law is very variable, tends to favour big business but slow and tends to hold up morality - for a while.

Few who matter care about God or disgrace - money has no smell. Very hard/impossible to disgrace the big players. Social bad odour is manipulated by the media - pay them and you can do anything. Independent press is very weak but a bit like the law - sometimes surprises.

So what are bullies frightened of? Large scale riot not really practical, requires the middle class and too leaky - easily picked off. But a clue here - the middle class. IMHO Labour is either finished as a political force or else it engages with the middle class and offers a credible alternative to Toryism. The LibDems were never much good and got suckered by Cameron.

Tory MPs are taking a huge salary+expenses for screwing over the people they are meant to support. No use claiming they could get bigger wages elsewhere - doing us a favour being an MP! - they are useless and we can see it. But to do it Labour (or its replacement) needs to reject the parliamentary machine. Start afresh and blow the whistle on all forms of corruption and cronyism - make life really really uncomfortable for all at the top. Pull away all the screens of secrecy and stand naked (metaphorically).

[aragon]

What is the purpose of Government?

Just as in China, it is to suppress and control the population.

1. Economic suppression.

The Chicago School of Economic thought.
The rich should get an even bigger slice of the national cake.

* Globalization.
* Outsourcing.
* Austerity for the non-asset holders.

2. Social Suppression.

* Woke. (Anti-white racism; Gammon, Karens etc)
* Cancel people with the wrong views on race, women, gays, transgender.
* Promote victims interests. Even when relatively speaking they are doing well.
* Hate crimes.

https://www.spiked-online.com/2020/12/14/scotlands-hate-crime-bill-will-tear-society-apart/

"This legislation affords SNP misanthropy the status of a legal norm. It promotes social division and encourages

individuals to see themselves as victims, and other people as aggressors."

[...]

"The bill undermines the idea of equality in the law, which is necessary to combat inequalities and injustices.

This will create greater inequality and provide the legal basis for further attacks on Scotland’s rights,

liberties and freedoms."

[...]

"Rule by law conceives of society as fractured and broken, made up of individuals who are constantly at each

other’s throats and who cannot be trusted. As such, legislators seek to impose new codes of conduct and value

systems that have little if anything to do with the way people actually live."

3. Immigration.

* Cheap labour to reduce wages (See 1)
* Opponents are bigots and must be cancelled and ignored.
Angela Merkel went over the heads of the German people and they do have buyers remorse!

Some Immigrants to Germany want to come to the UK to escape racism in Germany. (Previously covered)

Islamification of Europe; France, Sweden, and now Germany?

The UK has offered over three million Hong Kong residents the right come to the UK, many may take it up.

4. Environmental Suppression.

* Poor can't have warm homes, privatised energy is too expensive.
* Air source heat pumps, not a solution to anything.
* Top 1% have 11 times footprint of average person, poor have less.
We are lectured to by super privileged Price Harry (Note to Harry: Speak to Air Miles Andy?) from a Hollywood mansion.

Just a few unspeakable thoughts. Before they become non-crime hate incidents or crimes ... too late!

We need a new party of the people, for the people, but not the one Jeremy Corbin is proposing.

Democracy... well it was a nice thought...The rich are suppressing the populace as for all time,
I do not welcome our new Chinese overlords.

[Peter Shaw]

Points 1,2 and 3 are all fair. But could all be addressed by some decent trustbusting and actua enforcement of common law duties.

Item 4 is just humbug. Unions are just another monopoly and you don’t fight monopoly with monopoly.

Unfortunately Chris advocates more statist nonsense which would create more problems than it solves.

[ltr]

What is the purpose of Government?

Just as in China, it is to suppress and control the population.

[ Crazily racist rubbish. ]

[Paulc156]

"Unfortunately Chris advocates more statist nonsense which would create more problems than it solves."
Irony alert! Extra parliamentary action (Chris) advocated is not 'statist', Whereas 'trustbusting and enforcement' is statist.
Unions are justified and sorely missed precisely because of corporate monopoly of markets and the unopposed and pernicious influence on governance and legislature.

[Chris Purnell]

"Corporations did, however, produce thalidomide and DDT, though the adverse effects of these might have been partly unintended."

I think this is the most obnoxious use of the concept 'might' that I have ever seen. I think it's unworthy of you.

[asdad]

http://www.mintme.com
MintMe

[ltr]

Corporations did, however, produce thalidomide and DDT, though the adverse effects of these might have been partly unintended.

[ An offensive sentence, that makes this essay impossible for me to ever recommend. I suggest changing this sentence, which I prefer to believe was just a mistake. ]

[aragon]

What can I say, it's official.

No not my insanity, that is a given.

https://www.gatestoneinstitute.org/16794/china-britain-threat

"McCallum said that countries such as China and Russia were no longer focused just on traditional espionage activities, such as stealing government secrets, but also on targeting Britain's economy, infrastructure and academic research, while seeking to undermine its democracy."

[ltr]

What can I say, it's official.

[ Sorry to have been annoyed, but the stuff about China is of course wrong and awful. There are people who gain by fostering prejudice, gain at the expense of others. Try to understand. No matter though, since China will prosper regardless of British political maneuvering.

What is necessary for Britain however is to work with China as a partner.

I wish you well, and should have been temperate. ]

[rsm]

The best way is to express anti-capitalist views using existing and developing market mechanisms. I want to stop logging; can I get backing from private environmental funds (Bezos Earth Fund, Microsoft Climate Innovation Fund) and/or the Fed (Municipal Liquidity Facility funds or the like) to corner the lumber futures market and raise prices to $infinity?

Can I self-fund the purchase of lumber futures contracts by lending them out via repo?

We should educate ourselves about finance and use it to destroy capitalist excess. The Fed should backstop my experiments just as it backstops other financial innovations such as securitization.

[ltr]

What is the purpose of Government?

Just as in China, it is to suppress and control the population.

[ Well, having thought further about these remarks, I realize just how crazily racist they are. No use regretting being honest about such rubbish, since racism tends to be infectious. ]

[Talking Head]

I'm confused. I thought the long-term trend in profitability was downwards?

[RGP]

An interesting article, but:

The Philippon article says that the US has slipped behind Europe in the competitiveness of its markets. Then the US should do something about that, but I'm in Britain, which is also the author's nationality apparently.

I'm not sure how the author thinks that having stronger trade unions would constrain CEO pay. That's never seemed to be their focus, but has been of more interest to engaged investors and financial journalists. And if the problem is wages being cut, there's a simple technocratic solution - make that illegal. So people will just lose their jobs instead. Not necessarily a great result.

Citing DDT as an example of bad capitalism ignores its effect on malaria, which was its purpose. For Geigy to develop DDT wasn't a bad thing, but people died in Africa because of the campaign against it, which sounds like the sort of thing the author favours.

With thalidomide, the tragedy was to miss its effect on unborn babies and this was a failure of both Distillers and of European regulators. A more cautious regulator in the US never approved it for pregnancy. But the moral was a more careful approach to releasing new drugs, the sort of technocratic fix dismissed by the author.

To say that Brexiteers blame a high level of immigration for economic stagnation is wrong - the argument against high immigration is social. But most intelligent Brexiteers have spotted that the heavily-regulated economies of continental Europe have underperformed the rest of the world for decades.

Today's economic system no longer has the fair competition and moral behaviour required by Adam Smith and Milton Friedman. However, the solution offered is illogical: to fight something we no longer have. A better solution would be to build a "hegemony" to restore decent capitalism.

[Blissex]

https://www.independent.co.uk/news/uk/politics/capitalism-teaching-school-racism-violence-democracy-gavin-williamson-b625480.html

«Teaching material calling for end of capitalism banned from schools as ministers brand it ‘extreme’
[...] New guidance puts groups wanting to replace the economic system on a par with those endorsing racism, antisemitism and violence, or the overthrow of democracy. Even material that is “not extreme” has been outlawed if it has been produced by organisations on the banned list, because that could “imply endorsement”.»