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We in the Western world face two crises: the collapse of trust in our democratic political system and the threat to the planet’s environment. The former requires updating the family’s shared goals. The latter requires not only shared domestic goals, but also shared global goals. These are things that businesses cannot offer. Instead, it will require effective politics. A big question is whether businesses can push the political solutions needed, or just create political problems.
A report published today by the Cambridge Centre for the Future of Democracy sheds some light on politics, titled big resetA poll of 27 countries, including all Western democracies, concluded that the pandemic has bolstered trust in government and severely damaged the credibility of populists. But so far, it has not increased support for democracy. This is at least moderately encouraging. Trust in government is necessary for action, especially when it comes to the environment, and that means sacrifice.
A big question, however, is where the business fits. It’s a question that’s particularly appropriate to ask this week, as the World Economic Forum, an organization that brings together global business leaders, is meeting, albeit virtually,.
Businesses operate within a system: market capitalism. This system is now dominant globally, at least in the economic realm. Even in China today. The essence of capitalism is competition. This has far-reaching implications: Competitive for-profit entities are inherently unethical, even if they are law-abiding. They do not easily do unprofitable but socially desirable things, or refuse to do profitable but socially undesirable things. If some people try to do any of these things, others will outcompete them. Their shareholders may also rebel. Being or pretending to be virtuous may benefit the company. But others might do just fine because it’s cheaper. Society – at local, national and global levels – A framework for business operations must be created. This applies to all aspects – labor law, social insurance, regional policy, financial regulation, competition policy, innovation policy, supporting basic research, responding to emergencies, the environment, etc.
This could mean the topic of capitalism in the latest issue of the Oxford Economic Policy Review, which contains papers that do challenging research into the economics of contemporary capitalism. Crucially, the assumptions about the development of capitalism in recent decades are questionable and have produced some very perverse results. This is a very important book (and I’m a part of it).
Of particular importance are the papers by Anat Admati of Stanford University and Martin Hellwig of the Max Planck Institute. Both see the role of business leaders as influential but self-serving voices in shaping public policy in corporate law, competition law, taxation, financial regulation, environmental regulation and many other areas. The result, they and other authors argue, is an opportunistic rent extraction system that creates uninsurable risks for the majority and large rewards for the few. This, in turn, played a major role in eroding confidence in democracy and increasing support for populists.
Crucially, this shatters the naive idea that the role of profit-maximizing business can be distinguished from that of politics. Milton Friedman’s famous “rules of the game”. Businesses use their influence to set the rules of the game, which can then be played according to those rules. Of course, it’s not the only voice, but it’s a resourceful and influential voice. It is especially influential in the United States, the most important Western country.
The result is a form of capitalism that, while economically superior to alternative systems, creates a highly unequal distribution of returns and transfers uncontrollable risks to the average person. The result is today’s politics of anxiety and anger. The 2007-12 financial crisis played a major role in fueling this anxiety and anger, with tens of millions of innocent people suffering and the institutions that led to the implosion being rescued. This is undoubtedly why right-wing populists, especially Donald Trump, ended up replacing more traditional conservatives.
Now, however, the pandemic has created an opportunity for a politics of competence and shared purpose. This at least gives us a chance to do better.
I believe there is a need for substantial reform of our form of capitalism, while retaining its innovative and competitive nature. This will not be unprecedented. Setting up a limited liability company was once a controversial innovation. The same goes for the creation of social insurance. However, in my opinion, the biggest issue today is the relationship between business, society and politics.
Therefore, I suggest that business leaders participating in the World Economic Forum should ask themselves the following questions. As an influential individual, business leader and member of a business organization, what am I doing to improve my country and the world’s ability to make informed decisions for the benefit of all? Am I lobbying for special tax and regulatory treatment primarily for our own benefit, or do I support political actions and activities that unite the people of my divided country? Am I prepared to pay reasonable taxes for our success, or am I exploiting every loophole that allows me to distribute profits to tax havens that contribute nothing to our success? What are I, my business, and the organizations I’m involved in preventing online harm, corruption, money laundering, and other forms of dangerous or even criminal activity? What am I doing to support laws that will bring accountability to rogue business organizations and their leaders? Most importantly, what am I doing to strengthen the political system upon which successful collective action depends?
The pandemic has taught many lessons. But perhaps most importantly, what can be done if the skills of the private sector are combined with public resources for urgent purposes. That’s why the vaccine story is so uplifting (and the anti-vaccine response so frustrating). Business leaders are rational people in charge of important institutions. They must recognize the need to strengthen our ability to make informed collective decisions. Like it or not, they are powerful actors in our fragile democracies and in global decision-making. They need to take this role seriously and play it in a decent and responsible way. For all the rhetoric we’ve heard, that’s not what we’ve seen yet.
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