CAPITALISM HAS PROVED ITSELF AN AMAZING SYSTEM FOR ORGANISING the provision of a wide range of goods and services of many kinds. And many of its less fortunate side-effects can often either be self-correcting or can be mitigated with remarkably little cost through regulation or some other form of limited intervention.
Perhaps capitalism’s greatest virtue is its intrinsic ability to evolve, both through promoting innovation and through providing the signals that enable institutions no longer functioning to be shut down. I’ve always believed (partly because I was working for IBM when it happened) that it was the upping of the innovation stakes resulting from the emergence of decentralised information technology in the 1980s that proved the hammer blow that broke Soviet-style communism and led to its collapse.
But capitalism also has plenty of weaknesses which need to be managed. Often critics of capitalism imagine that a pro-capitalist is essentially anti-government. In fact the opposite is true.
Capitalism cannot operate in any real sense without strong governmental institutions. For example without strong enforcement of property rights, accumulation of capital will not take place because the capitalist has no incentive to accumulate if there is no legal title to what he owns or legal protection. One of the problems in post-Soviet Russia has been the impact of gangster capitalism discouraging business investment where the government has been unable (or possibly unwilling) to step in to protect the business from the gangster.1 A healthy capitalist sector and a healthy government sector go hand in hand.
Another claim is that capitalism goes hand in hand with a selfishness in behaviour which is socially damaging. Here the position is more mixed. It is certainly true that the two can go together. Adam Smith pointed out that the special trick of capitalism was harnessing self-interest to the public good in this famous quote: ‘It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own interest.’2
However, capitalism works best when those operating it have a sense of moral purpose. In my own specialist commercial field, economic consultancy, I have always found that it is much more profitable to aim to be the best economic consultant that I possibly can be rather than simply to aim to make more money. I have also found that applying ethical principles to business in the sense of not exploiting customers or clients and ensuring that the company pays its corporate dues to society has been useful in helping the business succeed commercially.3 Indeed, when we had a tax investigation, the conclusion was that HMRC ended up paying us money, though in between they wasted a lot of time and money and showed a greed which reminded me that governments originally evolved out of protection rackets.
When I was the Chief Economic Adviser to the Confederation of British Industry in the UK, I always argued that business ethics were merely the application of personal ethics in the business context. If you believe that you shouldn’t steal, in business this means that you shouldn’t take money that ought to be your shareholders’, your employees’ or your customers’. You shouldn’t overcharge, underpay your employees or pay yourself too much of the shareholders’ money. Equally you should ensure that the government’s tax take is the right one. Because the fiscal authorities often try it on with little regard for common sense or the profitability of the underlying business (and seem to pick on smaller businesses which they see as soft targets), you have to use tax advice make sure that you fight your corner. But you should be careful about using tax-avoidance advice to extremes. If you think taxes are unfair or too high (which they are to a surprising extent), the right thing to do is to campaign for lower taxes rather than trying to find a loophole.
The great capitalists of the 19th and 20th centuries saw their role as making the world a better place, and making money was only incidental to this end. Many of their modern successors still largely share this goal and give most of their wealth to charity – Bill Gates and Warren Buffett are good examples. But in the modern era the pursuit of monopolistic power (although partly necessary to offset the impact of supereconomies of scale in information) and aggressive tax-avoidance policies make many modern corporations seem unnecessarily grasping. And often people from countries where wealth has emerged more quickly than behaviour has evolved and where gangsterism and business are mixed together find this ethics thing quite hard to grasp.
For capitalism to continue to exist in a form that makes it workable in a democracy requires that capitalists behave in a way that builds public support for it. Every person running a business needs to see herself or himself as an ambassador for the system that helps them flourish and therefore needs to behave accordingly. This means a corporate culture of self-restraint and ethical behaviour when doing their day jobs.
It most emphatically does not mean huge corporate social responsibility programmes – the biggest such programmes are often run by the corporates with a public reputation for the least ethical behaviour towards their employees, their customers and the tax authorities.
One of the most visible aspects of the worst kinds of capitalism is when people overpay themselves.
There are other forms of behaviour which seem unacceptable in the extreme. Equifax, the data company that was hacked while this book was being written, both has a business model that seems abusive of peoples’ rights over their own data and appears to have sleazy executives. The company discovered it had been badly hacked in late July 2017 and three senior executives including the CFO between them sold $2 million in shares about three days later. This looks sleazy and criminal, though I know from my own experience that the rules on insiders selling shares can often be surprisingly and unintentionally hard to satisfy. One year when I was on the Marconi Board the directors were insiders for over nine months, which made company share ownership difficult.
I would still argue that the vast majority of capitalists behave ethically. This is because of the importance of reputation. In a competitive market a company with a reputation for cheating its customers will lose them, those with a reputation for cheating their shareholders will find it hard to raise money, and those with a reputation for cheating their employees will find it hard to get anyone to work for them. Many on the left will find this hard to believe, but I can assure them that my real-world experience in large companies and of running my own business for 25 years says that businesses are largely ethical. One example of this is that in 25 years I have only had ten bad debts, of which only three proved completely irretrievable, and I must have issued many thousands of invoices.
Where reputation really matters is when there is competition. This is why the preservation of competition is intrinsic to making capitalism work. The competition authorities need to work hard to create adequate competition because most of the benefits of capitalism come from the capitalists competing. Capitalist monopolies can be dangerous because of the way in which monopolies abuse power. Aggressive and competitive capitalist monopolies can often be more dangerous to the public interest than government monopolies, although both have their disadvantages.
Moreover, when capitalism works badly it tends (as Marx pointed out) towards monopolistic profits. This exacerbates inequality because of the high returns to the monopolist and the higher cost of living which is passed on to everyone else, as well as through inhibiting innovation and growth which will certainly exacerbate poverty if not necessarily inequality. As I will show in Chapter 15, high costs of living affect the poor most.
So part of the battle to minimise inequality is making capitalism work properly. Chapter 9 identified failures of capitalism. This chapter shows what could be done.
In one area, although the market has worked painfully slowly, it may be possible to let the market work its way through. Bankers’ pay and CEO pay is now falling as investors realise that they are often overpaying. We need to keep a watching brief, but the problem at this stage is definitely making progress in solving itself.
There is a slightly different problem, which is the abuse of professional status in financial services. There should be a code of conduct for financial advice that insists that the advice is based on the interest of the client, not the adviser. It seems unclear that many of the financial service firms have been professional in that sense. I would be tempted to be rather more brutal than the financial authorities have been and shut down some of the least acceptable firms. Getting away with persistent anti-social behaviour sends the wrong message.
Cronyism is not exactly a problem of capitalism but has some features in common and can be considered under the same heading. The problem for Western economies is largely one of misbehaviour in other countries. The difficulty for the West is due process. With zero likelihood of a fair trial, measures will invariably be arbitrary. And with political power involved, it may be very difficult to be fair. It may be possible to apply sanctions to groups in one country where the political clout is less that cannot be applied to those from another country with considerable political power. Political power is a reality and pretending it doesn’t exist doesn’t fit with the real world. The combination of selective action and media scrutiny may be the best we can do. The measures are likely to be mainly asset freezes and travel bans. These can be surprisingly effective.
Competition policy is likely to grow in importance in the coming years. As many businesses become information based, the tendency for them to be subject to network effects and to supereconomies of scale increases. This in turn is liable to create a winner-takes-all situation and hence monopolies.
Table 7. The Tech giants by market size and capitalisation
| Rank by Revenue | Revenue($B) | FY | Employees | Market cap ($B) | Headquarters | ||
| 1 | United States | Apple Inc. | $215.6 | 2016 | 116,000 | $815 | Cupertino, CA, US |
| 2 | South Korea | Samsung Electronics | $173.9 | 2016 | 325,000 | $311 | Suwon, South Korea |
| 3 | United States | Amazon.com | $135.9 | 2016 | 341,400 | $478 | Seattle, WA, US |
| 4 | Taiwan | Foxconn | $135.1 | 2016 | 726,772 | $66 | New Taipei City, Taiwan |
| 5 | United States | Alphabet Inc. | $90.2 | 2016 | 72,053 | $676 | Mountain View, CA, US |
| 6 | United States | Microsoft | $85.3 | 2016 | 114,000 | $561 | Redmond, WA, US |
| 7 | Japan | Hitachi | $84.5 | 2016 | 303,887 | $32 | Tokyo, Japan |
| 8 | United States | IBM | $79.9 | 2016 | 414,400 | $145 | Armonk, NY, US |
| 9 | China | Huawei | $78.5 | 2016 | 180,000 | N/A (Private) | Shenzhen, China |
| 10 | Japan | Sony | $70.1 | 2016 | 128,400 | $51 | Tokyo, Japan |
| 11 | Japan | Panasonic | $67.7 | 2016 | 257,533 | $33 | Osaka, Japan |
| 12 | United States | Dell Technologies | $64.8 | 2016 | 138,000 | $14 | Austin, TX, US |
| 13 | United States | Intel | $59.3 | 2016 | 106,000 | $163 | Santa Clara, CA, US |
| 14 | United States | Hewlett Packard Enterprise | $50.1 | 2016 | 195,000 | $30 | Palo Alto, CA, US |
| $27.6 | $492 |
Source: Taken from the Fortune Global 500 2017 but adjusted to include Facebook. An even more up-to-date list is available at https://en.wikipedia.org/wiki/List_of_the_largest_information_technology_companies
Table 7 shows the top tech giants, their revenues and their market capitalisation. To declare my interests, I was once Chief Economist for IBM in the UK and when I was on the main board of Marconi we got sufficiently close to Huawei (one of the companies on this list) to consider merging, an outcome that they eventually shied away from over what they delicately called different accounting practices.
Two big issues arise from the emergence of the tech giants. The first is the emergence of excessive market power where some of them might have too much control over markets, and the second is to do with the use of customer data.
A third, but at this stage less important, issue is the use of the profits of the tech companies to lobby in their own interest. It can be seen from their quarterly disclosures that Apple, Amazon and Google alone are spending at an annual rate of $40 million a year in lobbying in the US.4 This still puts them well below the pharmaceutical industry and many others in their US lobbying spend but the amount spent is rising fast.
Discussions about what to do with tech giants range from regulation to breaking up to letting technological change provide the regulation.
When I worked for IBM in the mid-to late 1980s I was a strong believer in leaving regulation of the IT sector to the markets and the advance of technology. One might respond, ‘Well, you would say that, working for IBM.’ Yet IBM at that time was moving from having made the largest corporate profit ever recorded (1985) to the largest loss ever recorded (1989). The fact that this decline from grace almost exactly mirrored the period over which I worked for the company is unfortunate, though it might be stretching the bounds of causation to suggest that someone in as lowly a position as the Chief Economist in the UK could have a significant influence on the worldwide profits of a company as big (then) as IBM. This was the period when people were starting to suggest that IBM meant ‘I Blame Microsoft’ rather than ‘I’ve Been Moved’.
But IBM was a comparatively gentlemanly outfit, once described as the largest ever troop of boy scouts.5 Modern IT companies driven by aggressive venture capitalists are much more aggressive in their pursuit of profit than IBM ever was and pose much greater public interest risks. I am now unconvinced that, even with ever-changing technology, it is safe to leave the top tech companies alone.
My conclusion is that both breaking up and regulation will be necessary. I would aim to break up any tech firm that persistently (say over three years) holds a market share of over 25%. And I would also place considerable restrictions on the uses to which tech firms can put the data that they collect on customers. There will be a significant cost from this. But the cost of the alternative, to allow a monopoly to develop and to intimidate competition and entrench itself, will almost certainly be higher.
Achieving this will ultimately require regulation of tech companies in a similar way to that in which financial institutions are regulated. For financial institutions there tend to be two types of regulation. The first type is that relating to all listed companies, which is that the stock exchange where they are listed takes the lead responsibility in ensuring corporate governance. The second relates to where they operate to ensure that their impact on the local financial system does not create problems. Every country in which financial institutions operate takes responsibility for the operating practices of these institutions in those countries. The tech companies will need to be regulated in an analogous way. This will require agreement at OECD or G-20 level on who takes responsibility for which company. At present most of the companies involved are US-based, though over the next 20 years there is likely to be an emergence of companies from elsewhere, especially China. The US (and this will probably need a more internationally sensitive President than Trump) will need to take account of corporate behaviour elsewhere as well as in the US. And the US will need a new Teddy Roosevelt to bust the trusts.
Conclusion
The case is made here for quite an aggressive approach to those who abuse capitalism. Suggested solutions range from shutting down investment banks that persistently behave unethically to breaking up tech giants, with travel sanctions and asset freezes for crony capitalists. In addition, strict enforcement of regulations and competition policy will become increasingly important to prevent capitalism from being abused.