Soulless capitalism is now global

In the last three years, CEOs’ combined compensation has expanded at a compound annual growth rate (CAGR) of 18.3 per cent, against 13.3 per cent growth in corporate earnings, 4.8 per cent CAGR in net sales and 10.1 per cent annual rise in the total salary and wages bill. [Link]

There are at least seven top executives among listed companies who earn more than a thousand times the compensation of their median employees….The gap at the very top of this ranking was actually higher in this larger sample, with the top executive earning over 25685 times the pay of the median employee.

The top companies in terms of this difference for 2017-18 include information technology, auto and engineering companies.

There are also no women in the top ten list of remuneration multiples for either year. [Link]

The above two are from Indian corporate sector!

Nearly 50% of the US Foreign Direct Investment Income for the United States come from five tax havens. In other words, profits-shifting by US corporations overseas is rampant. [Link]

Gabriel Zucman, Professor at University of California, Berkeley, author of the paper above, has this to say:

If globalization means ever-lower taxes for the rich and for multinational companies, and ever-higher taxes for those who presently don’t benefit from globalization—for retirees, for small businesses—then it’s a scam. It doesn’t work. [Link]

Check out this discussion of a paper by Thomas Piketty published in April 2018. The link to the paper is here.

Piketty says that both the Left and the Right mainstream parties have been captured by elites – intellectual or moneyed or both. He takes three countries – US, UK and France. So, the only option left for the people is to go with the populists because there is no consideration for their concerns in the mainstream parties of the Left and the Right. It is not about the Left vs. Right but Globalists vs. Nativists. Makes sense.

Instead, both the left- and right-wing parties have come to represent two distinct elites whose interests diverge from the rest of the electorate: the intellectual elite (“Brahmin Left”) and the business elite (“Merchant Right”). Piketty calls this a “multiple-elite party system”: the highly educated elite votes one way, and the high-income, high-wealth elite votes another.

There is a very good summary of the critique of the Piketty paper and other related papers by Thomas Edsall here. But, I personally believe that Piketty is on the ball here, notwithstanding the neglected role of race in Piketty’s analysis, as his critics charge.

I don’t think it is a white vs. black thing in America or white vs. non-white (black or brown). It is about ‘globalists’ and ‘nativists’ as Piketty put it. Globalists are comfortable with racial and religious minorities and immigrants as they see these minorities as similar to them although they are not in economic terms. Far from it. It assuages their guilt at being self-centred globalists, unrooted locally and unconcerned about local issues where they reside.

Thomas Edsall’s NYT article had a link to this very interesting sounding paper, ‘Why Hasn’t Democracy Slowed Rising Inequality?’. The paper is co-authored by four  academics and can be found here. Have not read it yet.

On a related note, the interview with Dani Rodrik, also by promarket.org, a month before the discussion of the paper by Piketty took place is also interesting. In this interview, Dani Rodrik distinguishes between economic populism (‘good’ populism) and political populism (‘bad’ populism).

He defines economic populism, in the context of the United States as follows:

Today in the US, economic populism would take the form of bringing the financial sector down to size, reducing the influence of Wall Street in political institutions, and having much greater regulation of the financial sector. It would mean taking aim at concentrations of power in high-tech and digital industries. It would mean taking aim at our current pattern of trade agreements, which often privilege particular corporate interests and investors. [Link]

Gulzar Natarajan deal with some of the elements of ‘economic populism’, as outlined by Dani Rodrik above, in our forthcoming book, ‘The Rise of Finance – Causes, Consequences and Cures’.

As for market concentration, high-tech and digital power, lest we forget, here is the story of Barry Lynn of (formerly) the New America think-tank who was fired (in 2017) because they had dared mention Google by name:

In the run up to that event, the leadership at New America became very concerned about the fact that some of our work was focused on Google, and they asked us to maybe add different people to the panels, to frame panel discussions in different ways, to give them a heads up, to let other organizations have a say in what we’re doing. That had never happened before and it was very clear that it had to do with Google. Because we’ve done events in which we’ve really hammered Wal-Mart or Anheuser-Busch or Amazon, and there were no problems. But that event, it was the fact that we were mentioning Google by name that got people really upset. [Link]

UNCTAD’s annual report for 2017 presents the evidence for and the consequences of market concentration:

Concentration has increased markedly in terms of revenues, assets (both physical and non-physical), and market capitalization: in 2015, the combined market cap of the world’s top 100 firms was 7,000 times that of the bottom 2,000 firms, whereas in 1995 the same multiple was 31. At the same time, the share of surplus profits grew significantly for all firms in the database, from 4 percent of total profits in 1995–2000 to 23 percent in 2009–2015. For the top 100 firms, the share of surplus profits grew from 16 percent of total profits in 1995–2000 to 40 percent in 2009–2015.

The trend toward concentration, the authors note, has not extended to employment. Between 1995 and 2015, as the market cap of the world’s top 100 firms quadrupled, their share of the job market didn’t even double… [Link]

There is a counter-argument that much of the surplus that accrues to market concentration is not rent but due to technology leadership and productivity. But, it is strange that such critics do not acknowledge that both arguments need not be mutually exclusive.

A former Google Scientist tells Senate to act over Google’s unethical and unaccountable China censorship plan. Bravo!

Finally, this review of Walter Scheidel’s book, ‘The Great Leveler’ is worth a read. I had not heard of the book until my good friend Ajit Ranade mentioned it to me. Walter Schidel, I understand, thinks that violent levelers have been more often the answer to inequality – Four Horsemen’ – warfare; revolution; state collapse; and pandemics – have been the primary mode through which income levelling has occurred throughout history.

Despite overwhelming evidence, this LSE blog expresses the hope that peaceful levelers will achieve the job as they have done sporadically and feebly in a couple of minor instances.

But, let me end this blog post on that hopeful note.

The hilarious paragraph of the year

Earlier this year, HMRC was embarrassed when it emerged that it had refused to assist a French investigation into suspected money-laundering and tax fraud by the UK telecoms giant Lycamobile, citing the fact that the company was the “biggest corporate donor to the Conservative Party”.

HMRC initially denied the Lycamobile story, saying: “This is the United Kingdom for God’s sake, not some Third World banana republic where the organs of state are in hock to some sort of kleptocracy.” It later conceded that the story was accurate. [Link]

Socialism defined by rage to replace Capitalism defined by greed?

I think it has become important to re-interpret Adam Smith or interpret him correctly. About eleven days ago, this blog had posted about an article in Aeon on the visibly famous Adam Smith for his ‘invisible hand’. It turns out that he was not a big fan of ‘Invisible hand’ and certainly, not in isolation or independent of social norms and values. The blog post had also referred to a review by John Kay of a book by the British Conservative MP Jesse Norman.

It turns out that a good summary of his book is provided by Jesse Norman himself in an article he had penned for FT in June this year (ht: Gulzar Natarajan).

He wants to dispel five myths or point out five facts about Adam Smith and his famous work, ‘The Wealth of Nations’ (a short hand, no doubt):

(1) ‘Wealth of Nations’ is important because Smith is the first person to put markets at the centre of economics.

(2) “Markets are living institutions embedded in specific cultures and mediated by social norms and trust.” (verbatim quote from Jesse Norman’s article)

(3) What matters to a market economy is not empty rhetoric but the reality of effective competition and its most important feature is that companies internalise their costs. Something that banks are terribly adept at passing on, for example. Privatisation of gains and socialisation of losses is the anti-thesis of free markets.

(4) “Markets constitute a socially constructed and evolving order that exists and must exist not by divine right but because it serves the public good”. Again, a verbatim quote. This is important because once imperfections – that exist – are allowed, many of the supposed benefits of free markets (for public good) disappear.

(5) “Both individual markets and the free market order itself rely on the state.”

These five key aspects or elements of a market order are very important for its very survival and existence. Slowly,  the ‘capitalism defined by greed’ is being replaced by ‘socialism defined by rage’. It will be hard to choose between the two as to which is the bigger evil. Very hard.

Bagehot has a timely warning on the leftward lurch in British politics:

The compensation of the average boss of a FTSE 100 company increased by 11% in 2017, to £3.9m, while the pay of the average worker failed to keep up with inflation. Banking in Britain is a game played by insiders who enjoy a large implicit subsidy from taxpayers, who have to bail them out if they get into trouble. The same banks have little connection with the real economy: only about 10% of their lending is to businesses outside commercial property. Global companies such as Amazon and Google get away with paying little tax by the ruthless use of tax havens and transfer pricing.

No political party or leader in the world is able to convince or persuade businesses to understand that capitalism without conscience is a crime. By the time they realise it, it may well be too late. The world is responding or reacting, accordingly.

Reuters has a story out on the popularity of the incarcerated Brazilian leader Lula da Silva. It is unlikely he will become President. But, his party candidate might win, under his blessing or on ‘imported popularity’. But, PT, unlike in 2002-08 will be clearly Left-oriented.

In South Africa, there is fear about takeover of land from white farmers. Most of the media report might be slanted and that the South African government might be pursuing reasonable policies. Or, may be not. But, it may well be impossible to divine the truth for quite some time. Headlines mention the Zimbabwe parallel, of course. See here for the issues at stake.

Summary: Land can be taken over without compensation but such takeover can be challenged too in courts.

In America, Bernie Sanders and Elizabeth Warren are the most popular Democratic party leaders. Alexandria Ocasio-Cortez, the young democratic socialist firebrand ousted established Rep. Joe Crowley in the New York House Democratic primary in June.

These are enough warning signs. Capitalists must admit to their follies and reform themselves.

Higher taxes for higher incomes and for capital gains are in order. Higher wages are in order too. The march of artificial intelligence that takes away jobs and psychological security must be slowed and reversed, if possible. Eroding self-worth lowers life expectancy and the living begin to live unhealthily too.

If capitalists fail to read the tea leaves correctly and ignore warning signs, it may be too late. They may be swept away and the world will have replaced one form of lawlessness with another.

Wrong solution for a distant problem

I was happy to read Harsh Vora’s piece and it is good that he was thinking far ahead – 10 to 20 years down the line.

I just have the following comments:

The case for freer capital flows, however, does not follow from his argument. If global economies are in a far advanced state of demographic decline – which they are – how do freer l capital flows help overcome the low natural rate of interest problem induced by the aging of the population?

Second, in India’s case, it will still be a developing nation and potential GDP growth improvements will occur through many other channels. In advanced nations, their potential growth is already exhausted. It is between 0.0% and 2.0%. The demographic transition to old age compounds the situation. It is not so in India.

Third, even if the supposed benefit of freer capital flows is that it allows the country to circumvent the domestic interest rate ceiling imposed by aging population is true, it comes with other bigger costs. Monetary policy autonomy is gone, in the presence of capital flows. It is the famous impossible trinity. In fact, it is an impossible duality. The exchange rate regime does not matter at all.

It might amount to burning down the house to get read of the bed bug.

A tragedy and a travesty if…

In today’s MINT, Ajit Ranade argues clearly and convincingly against the Government or the Parliament diluting RBI’ norms issued in February for recognition of non-performing debt. He is right and I agree with him. I had written on this right after RBI came out with its NPA recognition norms in February 2018.

This story in MINT on how the ICICI Bank had made an accounting rule change that enabled it to keep its non-performing loan ratio low and that too without disclosing the rule change to shareholders only strengthens the RBI directive issued in February.

It is all about a culture of accountability that is sorely lacking in India. It is missing almost everywhere, especially in public space.

It will be a travesty and a tragedy to dilute RBI norms issued in February.

Dilemma on Rodrik’s trilemma

More than eleven years ago, Professor Dani Rodrik had posted the ‘inescapable trilemma of the world economy’. You can see the chart in his post.

He wrote:

I have an “impossibility theorem” for the global economy that is like that. It says that democracy, national sovereignty and global economic integration are mutually incompatible: we can combine any two of the three, but never have all three simultaneously and in full. [Link]

My question is this: Regardless of whether the government is a democracy or authoritarian, is it possible to have global eocnomic integration and national sovereignty which means national policy autonomy?

I think not. So, it is really a dilemma. One can have global economic integration or one can have national policy autonomy/sovereignty but not both.

By the way, Paul Tucker’s book ‘Unelected Power’ is also about a form of ‘Global Economic Integration’ inasumuch as policy is increasingly made by unelected elites in global forums that then become binding on nations. No debates; Democracy or not – does not matter. These norms apply to India; apply to Russia.

Paul Tucker, summarising his book, for promarket.org wrote,

central banking has drifted into being, or always was, a vehicle serving the interests of a globalized metropolitan elite: policy by and for “Davos Man.” [Link]

In other words, if policy elites stayed away from Davos, Rodrik’ trilemma (or, dilemma) can be largely addressed or attenuated.

Read Paul Tucker’s interview with promarket.org here. I doubt if many would read his (needlessly) dense book. In fact, I think Willem Buiter’s paper written in 2012 anticipates much of Paul Tucker’s arguments on democratic non-accountability in the domestic context. So, if you do not have time to read Tucker’s book, reading Buiter’s paper (speech) will do just fine.

Food Inc. and ethics in business

Morgan Housel’s twitter handle took me to a NYT article on a Mexico village that is drowning in coke because they have no water! From there, I read articles about Colombia’s fight against the soda industry , Chile’s fight against obesity, etc.

The article on Malaysia where nutritionists take money from food giants opens up interesting questions on ethics vs. prgmatism.

All the articles are brilliant fodder for B-Schools, for students of pubic policy and for the food industry practitioners.

Many questions arise in my head:

Precisely, who are the food industry leaders trying to benefit? The managers themselves? The shareholders? Who are these shareholders? Mutual Funds? Asset Management Companies? Pension Funds or managers themselves again, as shareholders?

Don’t they have children and grandchildren and do they feed them soda, burgers and sugar, regularly?

How would they like to be remembered by posterity?

What should a laissez faire government do?

Should it let the food industry do what it does while it runs educational campaigns against sugar, soda and fat? Is that feasible? Will the government do it? Are governments somehow insulated from capture, coercion and co-dependencies with the industry? In some of the cases above, even educational campaigns have been muzzled, campaigners threatened or the campaign diluted.

Do these staid campaigns run by government departments stand a chance against cartoons, animations that lure children to consume unhealthy foods?

In the world where information is available at the touch of a few key strokes or punching of buttons in the phone, can parents not do a better job of informing themselve and their children? Or, am I underestimating the seduction of ‘sins’ in these times?

What is the moral equivalent of tempting children to consumer sugar, fat and soda and luring them to smoke? I am watching the 4-hour ‘Century of the Self’ documentary that aired on BBC. I have watched two episodes. Ed Barnays, the nephew of Sigmund Freud, came up with the tactic to get women to smoke, calling it the ‘torch of freedom’! More on that later and in a separate post.

These issues and conflicts open up dilemmas for management education and educators. Multinationals and big domestic companies fund these institutions. Students there learn business ethics. They go and work for these companies too. Look how fiendishly complex all these become?

Is it possible at all for someone to reform these institutions from inside and is there a win-win solution that exists? If it does, is it grasp-able within a horizon that is relevant, meaningful and profitable for management and managers to personally gain from it? Otherwise, they have no incentive to pursue them.

Even activists who come to office promising to reform such practices and make society more humane immediately realise the gravity of the challenges and their internal contradictions. They depend on these companies for employment generation – direct and ancillary. How does one arrive at a meaningful costs and benefits? Costs are immediate – when these businesses threaten to and do close down  but benefits in terms of better health for children and citizens are more diffuse and long-term and hard to measure.

Even in Chile, where the battle appears to have been won, notice the possiblity of a reversal after the elections. Where and when does one declare victory? Or is it ephemeral? Or, are these initiatives doomed to failure and that martyrdom is the only glory? Am I being too pessimistic? Or, that some children and some parents will have irrversibly lerant their lessons for the better and they will carry on the torch and that the message will slowly diffuse? May be, it will.

Amidst all this, is the nutritionist in Malaysia, the most pragmtic where idealism might not produce results but will produce news-stories and secure martyrdom but not much else beyond that?

For his part, Dr. Tee said the obesity risk in Malaysia would be worse without companies’ help, and he couldn’t accomplish his goals without their support.

“There are some people who say that we should not accept money for projects, for research studies. I’m aware of that,” Dr. Tee said. “I have two choices: Either I don’t do anything or I work with companies.” [Link]