Are we feeding a constipated capital cow at the expense of other interests in society?
Let this article begin with a quote: “It's time to focus on creating value, not profit”.
Now before you run for the hills screaming “not that again!” in the belief that I’m simply repeating an often covered subject in my writing, let me source that quote as being from Henry Blodget, CEO and Editor-In Chief of Business Insider, a rapidly growing business and tech news site and also a former top-ranked Wall Street analyst.
It must have taken a lot of courage for Blodget to challenge the profit motive in the land of libertarians and tea parties. I know all too well how one touches a raw, neurotic and often hysterical nerve when one questions a concept that has somehow become a bastion of ideology and an economic system. After my article of a few weeks ago on the magic of markets, I had hoped to have put to bed the assumption that I am a reborn Marxist, but a subsequent article on the feasibility of employee owned companies brought out a lunatic fringe again that labelled the idea as “communist”.
The question posed in the headline to this article is certainly valid. Blodget is one of many that reflect growing disquiet about the imbalance in national economies – a disquiet that started way back in the early 80’s with Freer Spreckley’s Triple Bottom line. Blodget puts it more convincingly than I may have done: “Since the late 1970s, when American companies were fat and complacent, the focus of American capitalism has been on the bottom line. Spurred on by activist shareholders, private-equity firms, and bonuses based on stock prices, corporate managers have become obsessed with maximizing quarterly profits.” He illustrates it with this graph of post war American company profits to GDP:
On the other hand, post war wages as a percentage of the American economy have hit an all-time low.
South Africa has traditionally tended to follow the American model and has experienced a similar trend.
In defence of executive pay and as evidence of companies being well run, Labour economist Loane Sharpe celebrates the fact that the real risk-adjusted return on capital of South African listed businesses is currently 10% – the highest in the world. This may be too narrow a view, especially if one considers the next, ILO sourced graphic which shows that the labour share of national income has been declining over a similar period.
Indexed at 100 in 1970, this shows a 15% decline in labour’s share of GDP to amount to just over half in recent times.
There is perhaps no greater threat to free markets and freedom of choice than this imbalance which is clearly one of the root causes of global concern around income disparities. As Blodget puts it: “By focusing their entire effort on the bottom line, many American companies have reduced their value to the other constituencies that great companies serve, namely: customers, employees, and society.”
At the same time one must concede that there are many other trends that have contributed to the wage/profit swing, among them:
· The shrinking of “blue-collar” work with increased technology.
· The growth of financial service industries.
· Global restrictions on the movement of goods, services and labour, while volatile capital is free to move around like “a wrecking ball”.
· Greater centralisation and power of global capital and the squeezing out of small businesses.
· Blunted domestic competitiveness and customer focus.
· Intense paper speculation, exploding debt, a contaminated banking and money system, and volatile stock markets that often force executive management to focus on matching short term investor earnings expectations.
So it may be one-dimensional and narrow to argue that the skewed growth of profit is “squeezing out” other interests. But the conundrum that this leaves for profit maximisation champions is that corporate savings continue to mount (some R600bn in S.A. alone) and executives get paid exorbitant amounts simply to feed a constipated corporate cow with more profit carbohydrates.
What must really irk is the negligible “trickle down” effect and that the long held argument that profit maximisation is the invisible hand that feeds all, is patently untrue and a gross warping of Adam Smith’s original postulate.
This has never made sense to me. There’s a lack of logic in trying to lift prosperity and wealth with such a narrow profit lever that sees the other constituents of wealth creation as a burden to it. The more appropriate understanding of wealth creation sees the main economic estates of business, labour and state as partners in this effort.
To use another physics example, it is always easier to move an object by pulling it rather than pushing it. Profits, wages and government income should be pulled by serving the market, not by pushing them through one narrow interest. This is the difference between the popular M.B.A concept of “exploiting” the market as opposed to serving it.
The failure to achieve a greater and more fitting spread of wealth in many Western capitalist countries today is not the fault of free markets, but rather inappropriate behaviour during the last four decades or so. Identifying and recognising the failure is the easy part. Analysing and finding consensus around the myriad of causes is far more difficult and I have hopelessly inadequately touched on only a few.
But the most difficult of all will be avoiding default recourse to government intervention – often in collusion with corporate capital; or unilateral and coercive wage adjustments. That would be the absolute worst response. The former will simply see capital swallowed by a bloated, often corrupt, inefficient monster. The latter, already featuring strongly in current belligerent wage demands, will have obvious “unintended” consequences in increasing production costs and inflation, blunting competitiveness, reducing jobs and indeed exacerbating the imbalance. They will simply fuel the adversarial posturing, and in that conflict capital always wins.
With monetary and fiscal discipline, and a much tightened legal framework to protect competition and counter collusive, centralised and anti-competitive behaviour, we should be able to rely on free markets themselves to restore balance. But this exposes the biggest flaw in the profit driven argument: it has been defined as a “system” in itself. The profit motive speaks to intent and behaviour, not a system. To be profit driven (or even wage driven for that matter) is not the same as being market driven: the former is purely self-centred, the latter inherently noble. The laws of legitimate transaction (supply, demand and price) are there to nurture the latter, not to warp it.
The way we think individually and collectively creates the world we experience. We simply have to ask ourselves what is the true nature of ourselves and what is best for the human condition. Are we instinctively and intuitively benevolent or malevolent?
Therein lies the key and a subject for a future article.