Last week, the US tech giants reported profits the size of a small country’s GDP.
At around the same time, news broke that Conservative donors were paying to bend the ears and influence the policies of our Prime Minister and Chancellor. It wasn’t hard to conclude that something is rotten in the state of capitalism today.
It is unsurprising, at times like these, that some call for something completely different. “Burn capitalism not petrol,” read the banners of the Extinction rebels. But they would do well to heed the words of John Kenneth Galbraith. “Under capitalism, man exploits man,” he said, “under communism, it’s just the opposite.”
Others hope a new, kinder variant of capitalism will emerge and displace the old one. They want companies to answer not only to their shareholders, as the arch-capitalist Milton Friedman argued, but to myriad other “stakeholders”: employees, customers, the communities in which they operate, and society at large.
This “stakeholder capitalism” comes with its own problems however. Whether it actually delivers for society, for instance, is far from proven. In 2019, the members of the US Business Roundtable – a club of America’s biggest businesses – put their signatures to this new philosophy.
When KKS Advisors, an environmental consultancy, studied their actions in 2020 they saw no “fundamental shift” in corporate behaviour when Covid struck. When the interests of shareholders came into conflict with other stakeholders, the shareholders prevailed.
Whether this new capitalism delivers even for shareholders is questionable.
Japan has long practiced the model of capitalism that the stakeholder capitalists now preach. For decades, it has been home to deflation and sluggish growth.
The real winners have been Japan’s ossifying corporations. Under Japanese corporatism, stakeholder capitalism has become anti-shareholderism. Witness the Toshiba executive who recently asked a contact in the Japanese government to “beat up” a hedge fund on his behalf.
It is surely of note that, as the wider world signals a move towards stakeholder capitalism, Japan is seeking to escape it. Central to “Abenomics”, the economic reforms of the former Prime Minister Shinzo Abe, was an attempt to encourage investors to push executives for higher returns.
The answer is not the end of capitalism, nor a new variant. It is instead time to strip it back to basics. To do so, capitalism must rediscover its lifeblood: competition.
Competition is how capitalism serves society best. To beat competitors, companies must respond to the wants and needs of their customers, creating useful products and services in the process. When customers demand higher environmental or social standards, companies compete to provide them. In competition with each other, they whittle down each other’s profits and deliver the greatest possible value. In the process, they create jobs and pay taxes. Three quarters of Britain’s workforce is employed in the private sector. Corporation tax rakes in £60bn to the exchequer each year.
We are some way from this utopian ideal, of course. Eye-watering profits suggest monopolies not competitive markets, and President Biden’s apparent efforts to breakup the tech monopolies should be lauded by capitalists everywhere.
Tax loopholes across the world must be closed, and again the Biden administration’s efforts are to be praised. And the cosy relationships between government and executives reek of an uneven playing field. Before he was engulfed by one, David Cameron predicted that lobbying would be the next great scandal. It is time his successors did something about it.
If this sounds like a trenchant defence of capitalism, it is meant to be a humbler one too.
Stakeholder capitalists labour under the delusion that companies can solve every social problem, if they were only accountable to us all. In doing so, they arrogate powers to business that it has no right holding. They should leave the policymaking to those we elect to do it. No business can save the world, but in competition they can serve it better.