Opinion – Martin Wolf: Business leaders need to take better political action

We in the Western world face two crises: a collapse in trust in our democratic political system and a planetary environmental threat. The first requires the renewal of a common objective in the country. The second requires not just a common goal within the country, but a shared global goal. These are things that companies cannot offer. You need an effective policy. A big question is whether companies will be able to promote the necessary political solutions or will they just create political problems.

A small ray of light on the policy comes from a report released Tuesday by the Center for the Future of Democracy in Cambridge entitled “The Great Restart”. He concludes from opinion polls taken in 27 countries, including all Western democracies, that the pandemic has bolstered confidence in the government and significantly damaged the credibility of populists. But so far support for democracy has not increased. This is at least moderately encouraging. Trust in government is a necessary condition for action, especially when it means sacrifice, as in the case of the environment.

A big question, however, is where the companies fit in. That is an especially appropriate question to ask this week, when the World Economic Forum, an organization that brings together global business leaders, is being held, albeit virtually.

Companies operate within a system: market capitalism. This system is globally prevalent today, at least in the economic field. This is true even in China today. The essence of capitalism is competition. This has profound implications: entities that compete for profit are basically amoral, even if they are law-abiding. They will not easily do things that are unprofitable, however socially desirable, or they will refuse to do things that are profitable yet socially undesirable. If some try to do any of these things, the others will knock them out of the competition. Its shareholders can also rebel.

Being or pretending to be virtuous can bring benefits to a company. But others can do well just by being cheaper. Society—at the local, national, and global levels—needs to create the framework within which these companies operate. This applies to all dimensions—labor law, social security, regional policies, financial regulation, competition policies, innovation policies, fundamental research support, emergency response, the environment, and so on.

What this might mean is the subject of a recent issue of the Oxford Review of Economic Policy on capitalism, which contains essays that undertake a challenging analysis of the economics of contemporary capitalism. Crucially, the assumptions under which capitalism has evolved in recent decades are questionable and have had some highly perverse results. This is a really important volume (which I also participated in).

Especially important are the essays by Anat Admati of Stanford and Martin Hellwig of the Max Planck Institute. Both consider the role of business leaders as influential but self-interested voices in shaping public policy in business law, competition law, financial regulation, environmental regulation and many other areas. The result, they and others suggest, has been the emergence of an opportunistic rent-extraction system that creates uninsurable risks for the many and vast rewards for the few. This in turn played a large role in undermining confidence in democracy and increasing support for populists.

Crucially, this destroys the naive idea that it is possible to separate the role of profit-maximizing companies from that of politics by defining the “rules of the game,” as Milton Friedman famously recommended. Companies can use their influence to establish the rules of the game under which they can then act. It is not the only voice, of course, but it is a well-resourced and influential one, particularly in the United States, the most important Western country.

The results are a form of capitalism that, for all its undoubted economic superiority over alternative systems, creates a highly unequal distribution of rewards and transfers unmanageable risks to ordinary people. The result was the current politics of nervousness and anger. The 2007-2012 financial crisis played a big role in fueling this nervousness and anger as tens of millions of innocent people suffered and the institutions whose behavior caused the implosion were saved. This is certainly why right-wing populists, notably Donald Trump, ended up replacing more traditional conservatives.

Today, however, the pandemic has created an opportunity for a policy of competence and common purpose. This gives us at least a chance to do better.

I believe there is a thesis for substantial reform of our form of capitalism, while preserving its essence of innovation and competition. That would not be unheard of. The creation of the limited liability company with equity capital was once a highly controversial innovation. Today, however, the biggest issue, in my opinion, is the relationship between business, society and politics.

So here are questions that I think business leaders involved with WEF should ask themselves: What am I, as an influential individual, business leader and member of business organizations, doing to increase the capacity of my country and the world? to make sensible decisions in the interests of all? Am I primarily lobbying for special tax and regulatory treatment for our own benefit, or am I supporting political action and activities that will unite the people of my divided country? Am I prepared to pay the taxes that our success makes justifiable, or am I exploiting every loophole that allows me to send profits to tax havens that have contributed nothing to our success? What are I, my company and the organizations I belong to doing to discourage online harm, corruption, money laundering and other forms of dangerous and even criminal activity? What am I doing to support laws that will hold villainous business organizations and their leaders to account? And, most importantly, what am I doing to reinforce the political systems on which the success of collective action depends?

The pandemic has brought many lessons. But perhaps most important is what can be done if the capabilities of private companies are combined with public resources to achieve urgent goals. This is what makes the vaccine story so exciting (and the anti-vaccine reaction so depressing); business leaders are rational people in charge of important institutions. They need to assess the need to strengthen our ability to make collective decisions sensibly. Like it or not, they are powerful actors in our fragile democratic politics, as well as global decision-making. They need to take this role seriously and do it decently and responsibly. Despite all the rhetoric we hear, it’s still not what we see.

Translated by Luiz Roberto M. Gonçalves