Francis has done it again. In 2015, at the COP21, the Holy See was one the most articulate supporters of the Paris Agreement, the 197 nations’ treaty to stem climate change. The Holy Father was outspoken in his criticism of the Trump administration. He approved of civil law unions for same-sex couples. And early in December he endorsed a group of companies like Bank of America, Johnson & Johnson, Visa and BP, which had joined forces to form the Council for Inclusive Capitalism, a group of asset managers and industrialists determined to curb capitalist excesses threatening overall prosperity, equality and our environment.
To demand moral behaviour of corporations is legitimate and straightforward. The question how to achieve it and what this may entail is more complicated. We don’t want corporations to poison our groundwater. We don’t want them to enslave labour. We don’t want them to profit from public works when they don’t pay their fair share of taxes or bribe politicians. But do we want them to keep people in employment when they are no longer needed? Do we want them to pay salaries the business cannot afford? Do we want them to built homes for employees, kindergardens or art collections, at the expense of their investors?
We know that Marxism thought the best way to eradicate corporate evil was to do away with private property, a theory that was violently enforced in Communist countries without ever achieving affluence. It did not work, and neither did the idea born in the crippling stagflation of the 1970s that the state had to come to the rescue of unsuccessful companies. The Soviet experiment to plan production, dictate consumption and to guarantee equal wealth for everybody incarcerated hundreds of millions in a poorhouse and ended in bankruptcy.
It was against this background that in 1970, economist Milton Friedman published his notorious paper ‘The Social Responsibility of Business is to Increase Its Profits’. “There is one, and only one social responsibility of business,” he wrote, “ – to use its resources and engage in activities designed to increase its profits as long as it stays within the rules of the game, which is to say, engages in open and free competition without deception and fraud.” His concept paved the way we have taken over the last 50 years – easing regulations, promoting free enterprise, free trade, and the role of the markets as ultimate arbiter.
In consequence, wealth has been created on an unprecedented scale. China alone has lifted 400 million people out of poverty. Consumers have been inundated with bewildering choices. Employment would regularly bounce back from even severe recessions – the oil price shock, the cost of German unification, or the financial crisis.
This success came at a cost, alas. Salaries in the industrial world have stagnated. Employment became more precarious and income disparity more pronounced, engendering populism, racism and nationalism, which is not only condoned by business, but welcomed as a diversionary tactic. Corporations are the prime paymasters of politicians, seeking tax cuts, deregulation, subsidies and the condoning of negative externalities in exchange for their money.
Even hard-nosed entrepreneurs started to worry about a backlash – if not in the form of social upheavals, then in costly reputational damage. To “Occupy Wall Street” is fine, but what if the public became more vocal, demanding rectification by lawmakers and courts? Capitalism itself is on the dock. The economic landscape on which Friedman modelled his theory has changed, devaluating many of his assumptions.
Enterprises in the 1960s were still a paternalistic affair. After the bloodletting of WWII, labour was scarce and therefore fawned over. Workers were not only paid decently as a matter of fact, they had a seat at the table. Many a capitalist engaged in activities which would be labelled ‘stakeholder’ capitalism today: they engaged with the wellbeing of their workers’ families, their communities and their environment.
Environmental, social and governance discipline is now not only window dressing
Employees were not hired to soon be fired, but enticed to stay until retirement. When I was a child we spent summer vacations on a lakeside and winter on the ski slopes, all paid for by my father’s employer in company-owned hotels. To keep consumers loyal, they were wooed with services unimaginable today. A trip to the petrol station would regularly include oil checks and windscreen washing, for instance, and groceries were sold on credit and carried home for you. Suppliers were considered part of the corporate family, granted long-term business at a decent profit. Capitalist ‘kindness’ was a matter-of-fact, to the extent that market theorists took it for granted.
We live in a different world today. Deep labour pools in Asia, tapped by outsourcing or transfer of manufacturing, kept a lid on salaries and made labour a fungible resource. Corporations today have the power to strangle their workforce, suffocate their suppliers, milk their consumers and soil the environment while skirting their tax obligations. They have the power to dictate prices, stifle competition and dodge supervision. They finance politics to make sure they are regulated lightly, taxed with negligence and that lawmakers will legislate predominantly in their favour.
Corporations are not rule takers anymore, but rule makers. Governments are confined to bail them out when things go wrong, to clean up the mess when dams break and banks fail. Business, in the meantime, builds planes which crash, diesel engines which defy environmental standards, and turn millions into opiate addicts, as was the case with Purdue Pharma, a drug company that could go bust, but not to jail.
More robust, internationally concerted regulations are needed. The dismantling of US agencies tasked with environmental, food and consumer safety by the Trump administration was a painful setback. We need more control and more checks and balances, not less. Yet regulation alone will not get the genie back into the bottle. Voluntary, corporate initiatives like the one to which the Pope has given his blessing, are essential. Corporate behaviour cannot be only legislated, it has to be willed.
Corporations and powerful investors see the writing on the wall. Artificial intelligence and robotics will make many more jobs redundant than merely the people who used to manufacture our stuff in the past. Companies understand that in order to thrive they’ll have to make sure that we possess the will and the means to buy their product. For them, environmental, social and governance discipline is now not only window dressing. They know to their chagrin: we are in this together.
The purpose of this column is to broaden readers’ general financial knowledge and it should not be interpreted as presenting investment advice, or advice on the buying and selling of financial products.
andreas.weitzer@timesofmalta.com
Andreas Weitzer, independent journalist based in Malta