Making Markets Moral

Richard Roberts
Nov 28, 2019 · 12 min read

‘Modern capitalism has the potential to lift us all to unprecedented prosperity, but it is morally bankrupt and on track for tragedy.’

Paul Collier, The Future of Capitalism (2018)

The biggest threat to capitalism today comes from within. The people doing most to destabilise the capitalist system are not anti-capitalist ideologues; they are the self-avowed capitalists who have distorted markets in ways that allow them to enrich themselves at the expense of society and of future generations. The undermining of social and natural capital has brought capitalism — human civilisation, even — to the brink of collapse.

Markets have become unmoored from morality. This is the root cause of the unfair and unsustainable outcomes produced by today’s global economy. (Re-)tethering capitalism to moral values is a vital and urgent task.

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Photo by Wes Grant on Unsplash

Well-functioning, well-regulated markets can be a powerful force for good, with the potential to improve lives and solve societal challenges at a pace and scale unmatched by any other model for organising human activity yet discovered.

That doesn’t mean markets belong in every corner of our lives. Some things shouldn’t be monetised, privatised or optimised for profitability, efficiency and growth. But, within the context of a mixed economy, markets and for-profit enterprises have an essential role to play. Capitalism needs to be reformed, not abolished.

So what are the reforms needed to make capitalism moral? What are the flaws in the fabric of contemporary capitalism that are causing the system to unravel — and how can we fix them?

Complexity is often the enemy of change. Reform packages that comprise dozens of ideas are rarely as effective as those whose priority actions you can count on one hand. Just look at the stunning success of neoliberalism across the globe since the 1970s — an agenda that is basically comprised of four imperatives (three for governments; the fourth for companies):

  1. Privatise as much of the economy as possible.
  2. Deregulate the private sector.
  3. Minimise welfare spending.
  4. Maximise shareholder value.

I believe that the reform agenda now required to make capitalism fair and sustainable can, similarly, be boiled down to four basic ideas:

  1. Ensure “externalities” are properly priced into market transactions.
  2. Run companies for the benefit of all stakeholders — not just shareholders.
  3. Delegitimise tax avoidance.
  4. Challenge excessive market power and break up monopolies.

Let’s take a look at each of these ideas in turn.

‘Our sustainability predicament arises from the fact that we have increasingly organized society around a half-baked measure of profit, and then behaved as if it were the real thing.’

Duncan Austin, ‘Greenwish: The Wishful Thinking Undermining the Ambition of Sustainable Business’ (2019)

That companies create both positive and negative spillover effects (known as externalities), which are not reflected in traditional profit and loss statements, is not a recent discovery. The British economist Arthur Pigou argued for a tax on negative externalities as long ago as 1920.

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Photo by Thijs Stoop on Unsplash

Greenhouse gas emissions are the mother of all negative externalities. The majority of global greenhouse gas emissions remain unpriced today — and most of those that are covered by carbon taxes or cap and trade schemes are subject to a price that is well below the level that experts consider necessary to meet the aims of the Paris Agreement — let alone levels of emission control likely to be effective in reversing global warming.

Carbon pricing is simple in principle, much harder in practice. Without global coordination — or, more promisingly, well-designed ‘border carbon adjustments’ — the risk of ‘carbon leakage’ is high. [In plain English: when different countries have carbon prices set at different levels, this can create an incentive for heavy-emitting industries, like cement or steel production, to relocate to countries with lower (or non-existent) carbon prices. When this happens, there is no actual benefit to the climate, since emissions (and jobs) have simply been outsourced to a different location. To prevent this from happening, countries with higher carbon prices can impose tariffs on imports from countries with lower carbon prices to equalise the cost of carbon emissions for goods produced domestically and overseas.]

Despite the practical hurdles, it is feasible to envisage a market system in which businesses are obliged to internalise the full long-term cost to society of emitting greenhouse gases and damaging natural ecosystems.

This is not so much a case of fixing a ‘market failure’ as intervening to set the right moral parameters within which markets can work their magic to solve problems efficiently. Left to their own devices, markets will ignore the rights and interests of nature, and of future generations. Pricing externalities is a way of ensuring that nature and future generations get a fair deal.

The imposition of mechanisms to ensure environmental costs are priced into market transactions would trigger a wave of creative destruction. Many companies — for example, fossil fuel firms that have not adequately diversified — will be driven out of business, while other sectors — for example, renewables — will grow very rapidly.

Contrary to conventional wisdom, the economy as a whole need not suffer. For sure, there will be winners and losers. Some assets will be stranded (that is to say, current valuations of these assets will be proven to be fictional because they have failed to factor in non-fictional ecological limits). But the aggregate effect will be a mass reallocation of resources towards economic activities that do not undermine the natural world of which we are part — not a period of Soviet-style immiseration.

‘The private sector can be transformed by the simple but profound expedient of replacing shareholder value with stakeholder value.’

Mariana Mazzucato, The Value of Everything (2018)

Milton Friedman has a lot to answer for. It was Friedman who argued in a famous 1970 op-ed that ‘the social responsibility of business is to increase its profits’. In Friedman’s view, companies belong to their shareholders and therefore the job of corporate managers is to make as much money for their shareholders as possible — the rest be damned. This is precisely what generations of corporate managers have been trained to do — with disastrous consequences for society and the planet.

Consider Boeing. A total of 346 people died as a result of two crashes of Boeing 737 Max aircraft within five months in 2018–19. In May, Bloomberg Businessweek reported that ‘the crisis … is best understood as part of a larger drama that’s played out as Boeing has reshaped its workforce in an all-consuming focus on shareholder value.’

There are countless other examples of shareholder-value-maximising firms creating bad outcomes for customers, workers, communities and the natural world.

It doesn’t have to be like this. As Professor Colin Mayer writes in his 2018 book, Prosperity:

‘The Friedman doctrine is not a law of nature… Corporations, business, and public policy do not and should not revolve around their shareholders any more than the planets revolve around the earth.’

A growing number of business leaders agree. In August, the Business Roundtable, a coalition of almost 200 CEOs of large American firms, issued a revised statement on corporate purpose espousing the view that businesses should serve all stakeholders, not just shareholders.

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Meanwhile, thousands of businesses in the US have become ‘benefit corporations’ since 2010. Benefit corporations are required to consider all stakeholders in their decisions. By making this requirement explicit in their company charter, benefit corporations create a protection against the vagaries of the marketplace. Their purpose — which is to create public benefit, not to maximise profit — is not up for negotiation when a new CEO or a new investor comes on board.

This is not an exclusively US phenomenon. Other jurisdictions — from Italy to Puerto Rico — are also creating laws to enable companies to become benefit corporations. And many companies have created ownership and governance structures that commit them to maximising fulfilment of their social purpose, rather than maximising profit — something they can do in most countries without waiting for changes to the law.

For example, several European companies — such as IKEA and Novo Nordisk — are part-owned by non-profit foundations. Others — from the John Lewis Partnership to Handelsbanken — are either partially- or wholly-owned by employees. These and other ownership models give companies a degree of protection from the aggressive Friedmanism of so many public and private equity investors.

Ultimately, though, the plague of shareholder value maximisation needs to be tackled through structural, political reform. Individual companies may be able to opt out of shareholder primacy, but if they still have to operate in markets where maximising shareholder value is the norm, a more enlightened form of capitalism will struggle to take root.

The monomaniacal pursuit of shareholder value by just one or two companies in a market can trigger a race to the bottom in terms of social and environmental standards. Companies that exist only to maximise shareholder value will externalise costs wherever possible, undermining the competitiveness of other companies that take a more holistic view of corporate purpose.

‘Taxes, taxes, taxes: all the rest is bullshit in my opinion.’

Rutger Bregman, in a speech at the 2019 World Economic Forum in Davos that subsequently went viral

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Rutger Bregman at the World Economic Forum in Davos, January 2019

Professor Richard Murphy, a tax expert, estimates that the UK’s ‘tax gap’ (the amount that tax evasion and avoidance costs the UK exchequer every year) is approximately £90 billion. In the US, 60 Fortune 500 companies — including Amazon, Chevron, General Motors and Halliburton, among others — paid no federal income tax at all in 2018. In fact, on US revenues of more than $79 billion, these companies paid an effective tax rate of -5%: that is to say, the government paid money to them, rather than vice versa. (The Trump Administration’s decision to cut the corporate tax rate from 35% to 21% was a factor in this, but the effective tax rate paid by US corporations had already been in decline for decades before Trump’s tax cuts were passed.)

Corporate tax avoidance has become so normalised that these figures scarcely register as a cause for public concern — and a significant proportion of corporate executives have internalised the idea that minimising your tax bill by any legal means is simply good business.

Yet, even if technically legal, corporate tax avoidance is a moral outrage and an existential threat to the stability of our economic and political system. It undermines the ability of governments to provide high quality, universal public services, and it erodes trust in all institutions, fuelling angry populism.

As investigative journalist Oliver Bullough writes in his book Moneyland, ‘[tax avoidance] has neutered the core functions of democracy — taxing citizens, and using the proceeds for the common good — which in turn has disillusioned many people with the democratic experiment altogether.’

Clamping down on tax avoidance is essential if we are to make capitalism sustainable and equitable. Doing so requires government action, for sure, but it also requires action from a much broader coalition of citizens, consumers and enlightened corporate leaders to challenge the social and cultural norms that make tax avoidance seem both expected and acceptable.

This is not a party political issue. Whether the tax rate should be higher or lower is a subject for legitimate political debate. Whether every individual and every business should pay tax at the required rate — without hiding profits offshore, or employing expensive lobbyists and lawyers to create, and then take advantage of, loopholes in the tax code — is not.

‘Capitalism without competition is not capitalism.’

Jonathan Tepper and Denise Hearn, The Myth of Capitalism (2019)

The best argument for free markets is that competition between companies drives continuous improvement in the quality and affordability of goods and services — something we all benefit from. Monopolies — whether public or private — do not face the same pressure to innovate and improve that companies in competitive markets do.

Unfortunately though, competitive markets in today’s world are an endangered species. Writing about the contemporary United States, Jonathan Tepper and Denise Hearn conclude that ‘competition has not so much declined as thudded into the abyss.’

Examples of the negative consequences of excessive market concentration abound across a wide range of industries. The way the Big Tech firms use their stranglehold on markets to crush would-be competitors is well documented and a political backlash is building. But the distorting effect of excessive concentration and anti-competitive practices is not exclusively a tech industry problem.

Fast-food chains (ab)use non-compete clauses to stop workers from defecting to a competitor. In theory, this is to protect intellectual property; in practice, it serves to diminish workers’ bargaining power, making it easier to suppress wage growth.

Pharmaceutical companies (ab)use patent protections to keep generic drugs off the market for as long as possible, allowing them to charge sky-high prices. The industry refers to ‘value-based pricing’; critics argue this is nothing but a smokescreen for monopoly rent-seeking that harms health services and, ultimately, patients.

Many of the solutions to this problem — like stronger enforcement of antitrust laws — may seem technocratic, but the issue is, again, a fundamentally moral one. When markets are dominated by a small number of big players, consumers suffer, workers suffer, local communities suffer, innovation is suppressed and inequality goes up.

Yet, at least in contemporary Western culture, we tend to revere private monopolists as paragons of success. Even when public opinion turns against them — as it has against Mark Zuckerberg, for example — we focus on their failure to mitigate the negative side-effects of monopoly power (which, in Facebook’s case, include undermining privacy and destabilising democracy), rather than on the ethics of setting out to create a monopoly in the first place.

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Photo by Yang Jing on Unsplash

Economists like Joseph Stiglitz and Mariana Mazzucato have called for a clearer distinction to be made between profits and rents, and between value creation and value extraction. Likewise, we need to become more discerning about the difference between corporate behaviour designed to beat the competition in a fair fight and corporate behaviour designed to eliminate competition altogether. The latter is both anti-capitalist and morally reprehensible.

Re-tethering capitalism to moral values will require a very broad coalition of different actors — from grassroots activists to progressive business leaders; consumer groups to political parties — to work together, not exactly as one, but certainly in harmony.

Different groups will use different tactics and different language. The coalition will contain both ideologues and pragmatists; people who identify as progressives and people who identify as conservatives. Inevitably, there will be tensions and divisions. Ultimately though, diversity — of thought, of experience, of approach — is a strength.

Clearly, there is a strong political dimension to this manifesto for reforming capitalism, but it is not a partisan agenda. None of these ideas belongs exclusively to the left or the right. New laws are certainly needed in some areas, but, just as importantly, so are new social and cultural norms.

And, crucially, because this is about a transformation in how we behave — and what behaviours we expect of others — nobody can stay neutral. You are either for a more moral form of capitalism or you are against it. If you are for it, you have a duty to make your voice heard wherever you can — be that in the street, the boardroom or the voting booth.

At first, this may seem like an exercise in futility — railing against seemingly immovable social, political and economic structures. But, as scholars of transformative change have long observed, transformation is not a linear process.

Real root-and-branch reform only becomes possible when a crisis of the status quo creates a window of opportunity for a new set of political, cultural and economic rules to emerge. To quote Milton Friedman:

‘Only a crisis — actual or perceived — produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around… [our job is] to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable.’

For once, I agree.


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