Tuesday, August 27, 2019

Palliatives will not address capitalism's problems

I had blogged earlier about Bridgewater's Ray Dalio's explanation of capitalism's problem as one of excesses that have built-up over the years,
Dalio's diagnosis is that capitalism's dynamics, especially since it has been taken to its extremes (say, in seeking profits, efficiency, productivity, market share etc) is now "producing self-reinforcing spirals up for the haves and dow for the not-haves, which are leading to harmful excesses at the top and harmful deprivations at the bottom". In effect, Dalio blames the dysfunctional nature of modern capitalism to an impersonal contributor, some inexorable dynamic of capitalism, say peak capitalism.
So there have been efforts from within in recent times to respond to these excesses. Innovations like the Universal Basic Income (UBI), impact investing, philanthro-capitalism, B-corporations, gender-lens investing, corporate social responsibility, responsible-sourcing, circular economy, carbon footprint tagging etc are examples. 

The use of environment, social, and governance (ESG) criteria in investing by financial institutions is another example
Businesspeople, being people, like to feel they are doing good. Until the financial crisis, though, for a generation or so most had been happy to think that they did good simply by doing well. They subscribed to the view that treating their shareholders’ need for profit as paramount represented their highest purpose... It is a view of the world... which has faced increasing pressure over the past decade. Environmental, social and governance (ESG) criteria have come to play a role in more and more decisions about how to allocate financial investment. The assets managed under such criteria in Europe, America, Canada, Japan, Australia and New Zealand rose from $22.9trn in 2016 to $30.7trn at the start of 2018, according to the Global Sustainable Investment Alliance... The discontent does not end with investors. Bright young workers of the sort businesses most desire expect to work in a place that reflects their values much more than their parents’ generation did...
On August 19th the great and good of ceo-land announced a change of heart about what public companies are for. They now believe that firms should indeed serve stakeholders as well as shareholders. They should offer good value to customers; support their workers with training; be inclusive in matters of gender and race; deal fairly and ethically with all their suppliers; support the communities in which they work; and protect the environment... Last year, employees at Google forced the firm to stop providing the Pentagon with ai technology for drone strikes and to drop out of the procurement process for JEDI, a cloud-computing facility for the armed forces. Google depends, perhaps more than any of its peers, on a smallish number of cutting-edge data scientists and software engineers; their views carry weight. Microsoft, despite similar misgivings from its employees, is still in the running for the JEDI contract. Amazon, for its part, is facing employee pressure over contracts with oil and gas companies.
For a start, it may be useful to scratch the surface and examine the ESG consideration details behind the trillions mentioned. Chances are that they would be so superfluous as to be meaningless.

This Harvard Business School case study and this discussion involving the professors concerned is a great example of how top-notch academic ideologues feel comforted by what are at best ultra-marginal tinkering on fund allocation processes of large investors. Such long-route to change can be interminably long. Most likely much ado about nothing!

In general, corporates have sought to deploy "virtue signalling" and initiated "feel-good" measures. These are not even token measures. In fact, they are perhaps downright disingenuous obfuscations. They are worse than band-aid on gangrene. Such song and dance at non-issues are on many occasions conscious efforts by the corporate elites and their ideological cheerleaders to distract attention from the core issue.

The Economist falls back on more of the capitalist medicine - accountability and competition. It proposes taking decision-making away from managers and vesting with shareholders even as shareholder base is broadened, on the grounds that this would bring in accountability and therefore demand for real change. And competition would help keep corporates honest in pursuing the interests of workers, consumers, and regulators. This is a great example of suggesting remedies, knowing fully well that they are both impractical and have little evidence of being effective.

Instead, a meaningful enough attempt will have to involve at least some corporate leaders showing the way with actions on issues like abjuring from tax avoidance, efficiency focused lay-offs and off-shoring, monopoly seeking or oligopolistic actions, providing decent wages and proportionate wage increases for workers, investing in and promoting the rights of lower level workers, ensuring adequate financing of pensions and other worker liabilities and so on. Now these would constitute real progress in addressing capitalism's excesses.

But then the argument would go that these are collective action or free-rider problems. No one corporate or group of corporates would want to pursue them since that would be shooting themselves in the feet. Never mind the reality of today's oligopolistic markets where just the 2-3 leaders could take the lead and show meaningful impact without compromising significantly on their commercial interests. 

Anyways, the collective action problem presents a convenient fig-leaf for liberal opinion makers blame the favourite whipping boy, government, for not putting in place appropriate policies. But if some government tries to engage with the problem, the same liberals accuse governments of meddling with markets or favouring one group over other. The lack of any broad-based ideological support and hair-splitting among opinion leaders (including The Economist) for the actions on European Union in the direction of anti-trust (whatever their real intentions) is a case in point. 

I think we need paradigm shifts. And these shifts are unlikely to emerge from within. The house has to burn down. 

No comments: