My last two posts dealt with the devolution of liberalism to a system of unchecked economic power and individualism that account for both widespread inequality and the rise of all-powerful business oligarchs. I would like now to offer some thoughts that address two questions: why society should and how it can start moving toward regaining its right and power to harness the influence of private interests over our present and future course.
The Whys can be found in these concerns: Who has the right to control transformative technologies that allows us to tinker with nature, including the human body? Who has the right to control outlets of speech and expression? Who has the right to control our personal data? Who has the right to control decisions of existential importance related to climate change and ecological risks? And, finally, who has the right to control the political power that will determine the answers to these questions?
Liberalism withers when citizens feel that their fundamental rights slip away from their ownership. That’s when people start to grow disillusioned about their status in the decision making and deliberative process that bears on their rights. So, we have to ask “why are we in danger of losing our control over the above areas of concern?” Then, we can start thinking how we can reclaim our right to be in the table of decision making.
My first culprit for our diminishing voice is the growing control of oligopolistic and monopolistic firms by powerful individuals, who behave as oligarchs. The second is the deficit of accountability and representation in corporate governance. And the third is excessive accumulation of private wealth. All three are interconnected and mutually reinforced, and all three are built on an abusive exercise of the right to property. This, of course, is not necessarily an exhaustive list.
Despite the lofty ideal of perfect competition, left to themselves markets have the tendency to veer toward oligopolies and monopolies. This after all is the secret dream of every entrepreneur. Already in the 1930s, the famous economist Joan Robinson, had coined the term oligopolistic capitalism to describe the market system. Case and Deaton (authors of Deaths of Despair and the Future of Capitalism) argue that monopolistic rents (that is, profits over what competition would allow) are at the heart of inordinate wealth creation and economic and social inequality. With the tolerance and acquiescence of governments, critical business sectors (even in health care) have been left to devolve into oligopolies if not monopolies. Thus, persistent inaction in anti-trust enforcement has removed the checks and balances of the market system. Whatever limitations the markets have to function as external monitors of abusive corporate power these limitations are further reinforced by the hands-off policy of government authorities.
We also have insufficient checks and balances within corporations because of a deficit in accountability and representation in corporate boards. Let’s start with the extraordinary power CEOs (at least in the US) have on the composition of their boards. Separating the position of CEO from that of board chair would better align CEO power with responsibility and accountability. The fact that American corporations are resistant to this change in governance is more indicative of the influence of CEOs and less of any evidence regarding the long-run performance of firms.
There is also a deficit in stakeholder representation in corporate governance which can be addressed by expanding the diversity of stakeholders on boards. We can start by introducing the voice of labor in the boardroom as it is in Germany, Austria and the Nordic countries. This system of “co-determination” extends the principle of inclusivity in corporate decisions in which both capital and labor have vital stakes. We can also reduce the influence of very large shareholders by scaling down their voting rights as the firm grows bigger or more consequential. This can check the power of dominant shareholders and give voice to smaller shareholders who can check self-aggrandizing behavior. * We can also require that beyond a given size a firm operate as a public corporation subject to the rules and regulations of capital market authorities, like the Securities and Exchange Commission in the US. Regulatory scrutiny will add transparency and accountability in the running of businesses.
Finally, we need to curb the power of private wealth. It is high time we moderated, even better reversed, the fast growth of private wealth of the last 40 years – a period during which wages have remained stagnant – by returning to the tradition of steep progressivity in tax rates this country had until the 1980s. Many Americans are unaware or forget that after adopting an income tax with a maximum rate of 7% in 1913, the US quickly moved to tax very high incomes at rates as high as 94% in 1944. Even in the 1970s the maximum rate was over 70%. The worn- out argument that high marginal rates impede economic growth or innovation has scant evidence on its side. Immense private wealth leads to wasteful conspicuous consumption (bad for the environment), exclusive control over critical sectors (bad for accountability) and inordinate influence over politics (bad for democracy).
The present state of excessive private economic power and sense of entitlement regarding the accumulation and the deployment of wealth is because of the influence of a political and economic school of thought which, despite all reasonable evidence, is convinced that the sum-total of individual interests and actions converge toward ends that are socially desirable and good. By further believing that the right to property confers only privileges but no social responsibilities, this view is willing to countenance to the encroachment of participatory and pluralistic decision making by private interests. The truth is that property rights are constructs of law and political dynamics. They are not self-ordained or free of constraints. For example, the very capitalistic and economically successful Germany declares in its constitution that the legitimacy of the right to property is conditional on serving the public good. Thus, we must disabuse ourselves of the idea that these rights have no social purpose to serve.
Today’s unimpeded accumulation of wealth and its unchecked deployment is the product of deliberate distortions of how markets ought to work for the benefit of all and how the interests of society ought to have a voice within a democratic and participatory order. Restoring this order is all the more important for liberal states with market economies as they are being challenged by authoritarian, one party, states like China as to how effectively they deliver for all of their citizens.
* Some of these proposals come from the book A Brief History of Equality by Thomas Piketty. I would like to expand on the idea of diminishing shareholding rights as firm size or importance rises because of the widespread belief in the logic of the one share-one vote rule. First, we already have different classes of shares that confer differential rights over the control and the profits of the firm. For example, founders of new firms often issue to themselves B shares with enhanced voting rights in order to control critical firm decisions. The market prices of different classes of shares reflect their relative power over control and cash flow, respectively. Thus, reducing the control of shareholders by ceding some control to labor or reducing the voting power of large shareholdings as the firm grows bigger or more consequential are not ideas without similar precedent.
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