Category: Commentary

Our friend and counselor, Paul A. Volcker, passed away this week at age 92. Most recall him as the determined Chairman of the Federal Reserve Board who broke the back of inflation in the late 1970s and early 1980s. Paul was an archetype of an older kind of leader – taciturn, blunt, insightful, always probing for the underlying facts and the truth of things and events. He was an idealist without starry eyes, that rugged kind of American mind which never lost sight of aspirations but, wisely, always grounded his hopes and dreams in reality.

I would visit him in his New York office from time to time to get his advice and thoughts on financial capitalism. I always left our conversations the wiser for his observations and admonitions.

He brought me up short one time. I walked in and he was slouched back in his chair behind his desk. As I was sitting down across from him, he looked me coldly in the eye and asked with a grim expression: “Steve, are you preparing the funeral of the United States yet?”

I was stunned. I had come to him for answers to my country’s problems only to find him not sanguine at all about America’s future.

I responded: “Mr. Volcker, I don’t do funerals.”

He smiled and said “Good.” And we started talking about strategic options to get more constructive outcomes from Wall Street.

Paul established the Volcker Alliance to bring together experienced and practical minds to improve two important infrastructures – public service and financial services. He had sensed that the aggrandizement of our bureaucratic state had abandoned a culture of true public service and had become too dependent on rational expertise and too absorbed with technicalities and self-righteous pedantry. Government had cut itself off from the people it was hired to serve. He wanted moral reform in schools of public administration.

He believed that Wall Street had crossed some Rubicon to inject too much speculation into financial markets. Such financialization serves financiers and those with liquidity much more than it does the real economy and middle class. Had his instincts been followed, the world would have avoided the 2008 collapse of credit markets.

I will personally miss Paul Volcker and I fear that all of us will have a harder time of it without his moral courage and wisdom pointing us in the right direction.

Years ago, while an undergraduate and hanging out with friends in Students for a Democratic Society, I read about the history of socialism and studied with the noted American Marxist scholar Barrington Moore his dismissive, even bitter, take on capitalism as intentional, systemic extraction of the surplus from peasants and workers. I remember vague references to the general strike as a tactic of institutional change where the “people” refused to participate in the elite’s system of extraction.

Last week, I was in Paris for Bruno Roche’s conference on the economics of mutuality. My time there was then diverted by the need to adjust to a “general strike” called for Thursday December 5th. The strikers were the people; the oppressor was the Macron government. I did not want to risk a trip to Amsterdam on the 4th to see colleagues there for fear that the railroads would not run in the evening for my return to Paris if the workers walked off before the official time for the strike had begun.

On the 5th, public transportation was not available; streets were empty of traffic; stores were closed; taxis were unavailable. You could walk around looking at closed shop windows until you got bored and returned to your hotel. A few stores for tourists were open near Montmartre, not far from our hotel.

An avenue near our hotel was filled with people in protest – walking, singing, carrying signs, all quite well behaved. But there I was in the streets of Paris thinking about uprisings of the past – the capture of the Bastille, the 1832 insurrection made vivid by Victor Hugo in Les Miserables, the Commune of 1871 – real instances of acting on the idealism of the “people” taking national destiny into their own hands. I realized I was in the middle of French history repeating itself. What could be academic and the stuff of fiction was an actuality.

Why a general strike? As I understood the issues, President Macron wants to reduce retirement benefits out of fiscal prudence. The age of retirement for many workers would be pushed back from age 50 and their monthly retirement benefits would no longer be the equivalent of full salary. Public transport workers object. They like retiring young and having the state maintain them quite comfortably.

Then, I was told that students also objected. They were quite visible among the strikers. They very much like the idea of early retirement for the older generation to make those jobs available for themselves. They like giving older workers incentives to retire early.

I was watching a general strike demanding entitlements, not an end to oppression. But then, of course these days, being denied what one desires is, a priori, cruel-hearted oppression on the part of those who are to pay for the entitlements, a hardship for the dispossessed not to be tolerated.

The moral question of who should be entitled to how much of what and on what terms of reciprocity – what should be given in exchange for the benefit – is a difficult one for me.

Secondly, it’s not at all clear to me how systemic entitlements can ever be provided if wealth is not created to finance them. And how can such wealth be created without enterprise and the sale of goods and services at a profit?

Two days ago, the World Economic Forum – “Davos Man” – affirmed the vision of the Caux Round Table for Moral Capitalism’s (CRT) 1994 Principles for Business in their “Davos Manifesto 2020.”

Another domino of establishment opinion has fallen away from conventional wisdom.

I welcome Klaus Schwab to the movement and thank him for his support.

Klaus also issued a statement on Sunday explaining the reasons for more robustly affirming the approach to global capitalism advocated by the CRT.

I note that in his view, the three options open to global civilization for economic growth – social Darwinism for shareholders, nationalized socialism or moral capitalism – are the very same ones that were discussed at our Global Dialogue a couple of weeks ago.

Some say money makes the world go round. Saint Paul advised that “love” of money is the root of all evil. I would say that prices create transactions, transactions create markets and markets create wealth.

So, depending on price, the world gets richer and people get or don’t get what they need or want (and if prices are too high, transfer payments of one kind or another are necessary to empower those without money so that they can access goods and services).

I recently read that the Institute for Clinical and Economic Review uses a novel way to set a price for expensive drugs. It puts a dollar figure (an assumption) on a year of healthy life, calculated how much health a drug restores to a sick person and then prices the drug according to the benefit bestowed on the patient. This method, said Dave Lennon, President of a Novartis unit, brings uniformity and transparency to drug prices, reducing the rent extraction available to makers due to their IP rights. Drug company prices can be compared to the computed “benefit” price.

But, how does one put a dollar amount to a year of my life – say, at age 36 or at 55 or at 87?

The intangibles of a life well-lived seem hard to evaluate in market terms.

Secondly, the Saudi state oil company, Saudi Aramco, launched its first public offering of shares, some 2% to 5% of its total shares. What is a share of Aramco worth today? What factors should be taken into account in coming up with a cash figure? The shares will first be sold domestically in Saudi Arabi and then internationally. Saudi Arabia’s Crown Prince has valued the company at $2 trillion, but market-savvy advisors don’t agree that potential purchasers will want to pay that much per share. They estimate buyer acceptance in the $1.6 to $1.8 trillion range.

Thirdly, the value of shares in still privately held, high-tech start-up companies is uncertain. Many mutual funds which invested in high-tech start-ups saw the value of their shares drop after the companies went public. Investors did not accept the valuations previously put on the prospects of such companies by their initial owners. Multiple funds valued Uber before a public sale of shares at $56.02 per share. Its initial offering price was only $45 and its share prices dropped after that.

The collapse of the initial public offering of We Company, the parent of WeWork, was a second notable example of mispricing by early owners of the company.

Mutual funds have invested $6.7 billion in unicorn companies – privately held start-ups estimated to be worth $1 billion or more. Mutual funds carried these investments on their balance sheets at estimated values, as they have to value their holdings daily. Thus, fund managers must write down the estimates and so take a theoretical loss in the value of their holdings.

The We Company saga of misvaluation was dramatic. WeWork’s estimated value plunged from $47 billion in January 2019 to $8 billion in October. An initial owner and promoter, SoftBank’s Venture Fund led by Rajeev Misra, had to step in with $10 billion to restructure the company and so forestall greater losses. The founder, Adam Neumann, agreed to leave and give up his voting rights in return for $1.7 billion – a nice price for one man’s human capital.

This past summer, France took a happy step in the current march towards rethinking capitalism as a complex, interdependent system of mutual advantage.

The French National Assembly passed a law permitting companies to define for themselves their “raison d’etre” – their more transcendent meaning for the owners, customers, employees and society. This will give companies clear focus for their organizational mission and the ability to create cultures of achievement around that mission.

One commentator has written:

“Under the new law on Business Growth and Transformation (the so-called “PACTE Law”), the management of French companies must take into consideration social and environmental issues. Companies are also encouraged to incorporate social objectives into their corporate purpose.

The PACTE Law contains multiple provisions, some of which are of particular interest for those who follow business and human rights developments. Indeed, the PACTE Law provides (i) for “social and environmental issues” to be taken into account in French companies’ management alongside the corporate interests and (ii) for the possibility of enshrining the company’s “purpose” (raison d’être) in the corporate bylaws.”

More precisely, Article 169 of the PACTE Law introduces the following amendments into French law:

-Article 1833 of the French Civil Code now has a second paragraph stating that corporations must be managed in their own “corporate interests” by taking into consideration the “social and environmental issues” related to their operations.

-Article 1835 of the French Civil Code has been amended to allow corporations to specify in their bylaws a “purpose” for the corporate operations; this means that companies are encouraged to incorporate social objectives to their corporate purpose as part of their bylaws.

-Articles L. 225-35 and L. 225-64 of the French Commercial Code have been adjusted so that corporate and management boards take into consideration “social and environmental issues” as part of their respective managerial assignments.

In short, if the PACTE Law will not directly change the nature and objectives of corporations, it explicitly intends to give them the possibility to go beyond the objective of being profitable.

I find the French express of “raison d’etre” – literally a reason for being – more powerful and existentially directive than the English word “purpose.”

Today marks 70 years since the end of a civil war among the Chinese. The nationalists, mostly politically organized by Chiang Kai-shek and his Kuomintang party and army, collapsed before a relentless mobilization of other Chinese by Mao Zedong and his Communist Party.

During the last 70 years of the Communist organized People’s Republic of China, China has lived under two different forms of Communism. The first was Mao’s experiment in radical reconstruction of persons and the social order. The second began after Mao’s death under the leadership of Deng Xiaoping, who opened China up economically to markets and culturally to more acceptance of commonplace human nature.

Where Mao insisted on everyone thinking in ideological terms, with the certainty and passion of religious converts living righteously and bringing down evil, Deng was far more open-minded, famously asking who cares if a cat is black or white as long as it catches mice. Deng also proposed that it is glorious to get rich.

Mao was spiritual in the Western sense of having a Kantian insistence of us only acting from the purist of universal motives without any concern for self, while Deng was utilitarian.

By following Deng’s moral philosophy, China has become a wonder in human history for economic growth. The Chinese people are now well on their way to becoming the world’s leading nation state, with more wealth and global power than ever before in history.

In a way, both Mao and Deng nationalized socialism. Deng’s formula for the Chinese state was to build socialism with “Chinese characteristics.” In his time, Mao was not a follower of Stalin and the Soviet version of Marxism. He was too Chinese to do that. Mao split with the Soviet leadership after the death of Stalin.

To me, Mao, too, sought to build a socialism with Chinese characteristics. His selection of Chinese values and behaviors to guide his party, which would use the state to mold the people, favored the millennialism of the White Lotus religious sect. The White Lotus sect had given birth to the Ming Dynasty of imperial control of thought and culture. White Lotus beliefs are Manichean, where people must choose between good and evil, between the light and the dark. There can be no compromise between these realms and each person must incorporate in his or her mind and heart only the tenets of the good and repress all contrary thoughts and actions.

Deng, on the other hand, was more practical and took his sense of what “good” Chinese characteristics were from ancient thinkers like MoZi, GuanZi and Shang Yang. These thinkers were influenced by the realism of Yin and Yang, where life results from natural forces. But they proposed ways of manipulating human nature to subordinate the individual to the state. The role of the state is to channel what is natural to the people – like getting rich – in order that the state could grow stronger. Deng released the latent psycho-social energies of the Chinese people and the rest is history.

Both Mao and Deng adopted the Chinese imperial order for the country under which the state set the agenda and made sure individual egoism would never have the power to drive any political agenda. This central premise of Chinese socialism dictated Deng’s response to the 1989 Tiananmen demonstrations. He allegedly said, “Comrades, don’t you understand? When Chinese blood starts to flow, the South China Sea will turn red.” And so, the popular movement was repressed with relentless determination.

Today, Xi Jinping follows this imperial Chinese pattern of rule with great devotion and attention to detail, creating the world’s first surveillance state.

Thus, China under the Communists has created an effective form of state capitalism or nationalized socialism, where private economic interests are coordinated by the party for the good of the state.

The moral capitalism of Confucius, Mencius, the Yin/Yang school and the Taoists only exists in the ancient texts and, maybe, in the hearts of the Chinese people.

A premise of our thinking about prospects for a moral capitalism is restraint on power – restraints suggested by the moral sense, restraints from market preferences and restraints from law. As in most things moral, personal character and good leadership values are indispensable drivers of responsible behaviors. Comfort with restraint is a disposition of character most conducive to moral outcomes.

Accordingly, restraint of market power is a necessary check and balance in the constitutional arrangement of capitalism. In the U.S., thinking more favorably about more rigorous enforcement of antitrust laws is on the rise.

From 1981 to 2017, antitrust cases filed by the U.S. Department of Justice decreased 61%, while mergers and acquisitions, a key means of consolidating private market power, increased by 750%.

I also just read of the drugmaker AbbVie buying its rival Allergan for $63 billion. As a business strategy of growth by merger, AbbVie had bought Pharmacyclics for $21 billion in 2015 and Stemcentrx for $10 billion a year later.

Previously, Bristol-Myers Squibb bought Celgene for $90 billion, Pfizer bought Array BioPharma for $11.4 billion and Eli Lilly bought Loxo Oncology for $8 billion. How is declining competition in drugs good for consumers?

In many industries, a handful of firms now dominate sales.

I have read several academic articles concluding that increased concentration explains recent trends in wage stagnation, rising economic inequality and sluggish productivity.

In step with 1980s economic theory that made a firm primarily responsible for making short-term profits for shareholders, thinking about having too much or too little market power gave priority to making money from consumers. If a merger had advantages for consumers and the market approved of its prospects for enhanced share value, it was held to be a good merger beyond the reach of antitrust laws.

Just as we are now moving on from the theory of the firm as a cooperative enterprise funded to make profits, we are on the cusp of moving away from the theory that bigger firms are better for society.

This past Tuesday, September 17th, was Constitution Day here in the U.S. While I am hesitant as an American to write about my country in the abstract, the idea of a written constitution providing for citizen sovereignty, checks and balances and rights for individuals against the state has universal ethical implications.

Today, we see great commotions over these issues around our world: a test of an unwritten constitution in the U.K., the evolution of a constitutional order in the European Union as a federation, the unconstitutional order in Venezuela and autocracy in Turkey, theological supervision of the state in Iran, protests against the state apparatus in Hong Kong and Moscow and progressive American presidential candidates such as Bernie Sanders and Elizabeth Warren suggesting that checks and balances are oppressive and should be abandoned or bypassed so that a majority can enjoy its will to power.

The points to contemplate, I suggest, are two: one is the purpose of a state as set forth in our Constitution. This is an ethical statement about the use of public power in trust. The preamble sets forth the legitimate business of government:

“We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.”

(I am, I hope, not unduly immodest in these days of political discord in my country to acknowledge my pride that one of my mother’s forebearers, Gouverneur Morris, wrote these words.)

The legal form of the U.S. Constitution, I suggest, is a deed of trust. The sovereign people, acting through state conventions, entrust limited powers to a government for all of them. The powers are to be used in trust so the Constitution provided the text of an oath which qualifies a person to become president. That person must swear to rise above party, religion, self-interest and all personal prejudices in order that he or she may “faithfully execute the office” of president.

Constitutional government is one of office, not of will. Constitutional government rejects the will-to-power ethics of Herbert Spencer’s social Darwinism and of Nietzsche’s nihilism.

The reason for this constraint lies in keen and truthful conclusions about our human nature. In Federalist Paper No.55, written by James Madison, it holds that:

“As there is a degree of depravity in mankind which requires a certain degree of circumspection and distrust, so there are other qualities in human nature which justify a certain portion of esteem and confidence. Republican government presupposes the existence of these qualities in a higher degree than any other form. Were the pictures which have been drawn by the political jealousy of some among us faithful likenesses of the human character, the inference would be, that there is not sufficient virtue among men for self-government; and that nothing less than the chains of despotism can restrain them from destroying and devouring one another.”

I recently saw a report on real income growth in Russia. American capitalism is not alone in favoring the top over the middle and bottom of the socioeconomic order. In Russia, from 1989 to 2018, income for the top 1% grew 429% and for the top 10% by 171%, but for the bottom 50%, income shrank 20%.

Overall growth in income was 41%.

Political power everywhere is fungible with money and power. One breeds the other.