Saving Capitalism from Implosion

Capitalism, the economic Operating System of the world for centuries, finds itself at a crossroads in its current form, facing a profound crisis. Its undeniably numerous fruits should not make us forget the major dysfunctions that undermine its essence and threaten both ecological balances and political and social stability worldwide. Since the 1970s, the distribution of profits and incomes has radically changed, favoring a techno-financial elite capturing an ever-increasing share of added value and disconnected from social realities, to the detriment of workers and the middle class.

The Conquest of Capitalism by Shareholder Profits

In the early days of industrial capitalism, workers had no protection, and industrialists took their profits without regard for their labor force. However, after World War II, companies adopted a more inclusive model of capitalism, where profits were shared among employees, managers, and shareholders. This led to a flourishing middle class, benefiting from and contributing to the success of companies.

Since the 1970s, this model has been replaced by a system where profits are less widely shared, causing major upheavals in society and the fortunes of workers and the middle class. In the United States, labor's share of income was close to 70% until the 1970s, but it decreased in the early 1980s while profits increased. In 2000, labor's share of income was 66%, while corporate profits accounted for a little over 8%. Today, labor's share has fallen to 62%, while profits have risen to 12%. The same phenomenon is repeated in the United Kingdom, where labor's share of income has decreased from nearly 70% in the 1970s to around 55% today.

The Rise of Inequality

For decades, real incomes for workers have stagnated, while those of top executives have skyrocketed. In 2017, top executives of America's largest companies enjoyed an average pay increase of 17.6%, while workers' pay in those companies rose by only 0.3%. In 1965, the CEOs of the top 350 US companies earned salaries 20 times that of their workers. By 1989, this ratio had risen to 58 times, and in 2017, it was 312 times.

This situation has led to increasing inequality in society. Capitalism has been hijacked by a narrow elite, and the question is whether society can find an alternative approach that shares wealth more equitably.

The Hegemony of Shareholder Value: A Slow Poison

One of the major sources of the current crisis of capitalism lies in the hegemony of shareholder value, which has become the dominant ethos of managerial culture. Since the 1970s, the primary objective of companies has become the maximization of profits for shareholders, to the detriment of other stakeholders: employees, customers, suppliers, society, and the environment. Executives, under constant pressure to meet short-term financial performance targets, are incentivized to prioritize short-sighted strategic choices, stock buybacks, and dividend distributions over investment in innovation, employee training, and sustainable development.

This orientation, far from being virtuous, proves to be perverse and destructive. It leads to wage stagnation, a multiplication of layoffs, a reduction in productive investments, and a frantic race towards outsourcing and offshoring. Employees, disregarded and seen as costs rather than resources, fall victim to a race to lower production costs that favors immediate profits at the expense of the company's sustainability and social stability.

The frantic race for short-term profits also leads to underinvestment in innovation and research. Companies, obsessed with financial performance for the next quarter, no longer have the time or the will to invest in ambitious and long-term projects that could lead to major technological and social advances.

At the same time, the predominance of shareholder value promotes the financialization of the economy. Financial markets become the crucible of short-term speculation, fueling artificial bubbles that eventually burst, causing devastating economic crises. The deregulated and greedy financial system feeds on the profits generated by the real economy without contributing to its long-term prosperity.

The Illusion of a Self-Regulating Market

One of the most tenacious myths of economic liberalism is that of the self-regulating market. The idea, popularized by Adam Smith, is that the "invisible hand" of the market, guided by the pursuit of individual profit, would naturally lead to an optimization of resources and an optimal allocation of goods and services.

Empirical reality has shattered this idyllic vision. The market, far from being an equitable and virtuous force, can be manipulated and hijacked by special interests.

Corporate lobbying has significantly weakened the independence of public authorities and regulatory bodies. Companies exert increasing influence over political decisions, biasing regulations and laws to serve their interests. Hidden financing and privileged access to politicians, along with the asymmetry of expert resources, allow companies to prioritize their interests over those of citizens and the real economy.

Excessive financialization of the economy has also contributed to market drift. The explosion of derivatives, short-term speculation, and the development of increasingly complex financial markets have destabilized markets and led to recurring economic crises. The 2008 financial crisis is a striking example. Banks, freed from regulatory constraints, took reckless risks, causing a global financial catastrophe whose consequences are still felt today.

The Confusion Between Value and Price Leads to Value Extraction at the Expense of Creation

The dominant economic discourse maintains the confusion between price and value. The market, as it is currently structured, is not capable of distinguishing value-creating activities from those that merely extract it. Finance, for example, is considered a value-creating activity when it is often merely a vehicle for speculation and rents.

Instead of serving the real economy by financing it and enabling investment in projects that promote progress and social well-being, finance has transformed into an autonomous system, obsessed with the pursuit of short-term profits. It feeds on the profits generated by the real economy without contributing to its prosperity, exacerbating inequalities and leading to recurring economic crises.

It is urgent to rethink value creation by taking into account externalities, both positive and negative, on the environment and society. The current model of capitalism is not capable of accounting for the social and environmental costs of certain economic activities. The unsustainable extraction of natural resources, water and air pollution, climate change, and social inequalities are all evidence that the race for financial profitability is not always compatible with sustainable and inclusive development.

Getting Out of the Rut: Some Paths

Faced with the spectacular rise of populism and the threat of a resurgence of fascism following the massive decline of the middle classes, it is essential to rethink capitalism and reform it to make it fairer, more sustainable, and more inclusive. Here are some concrete paths for a transition to a more responsible and equitable economic model:

• Strengthen the Power of Citizens and Employees: It is imperative to give citizens an active role in economic and political decisions by granting employees a greater voting right in company boards. This would empower workers to have a say in the decisions that directly affect them, serving as a powerful lever to make their voices heard and integrate them into the decision-making process within companies.

• Strengthen Regulatory Institutions: It is crucial to strengthen regulatory institutions to combat anti-competitive practices, corruption, and excessive financialization. Stricter rules on competition, transparency, and financial responsibility are necessary. This involves establishing a more effective and transparent control system to limit market abuses and drifts.

• Rethink Taxation to Favor Long-Term Investments and Limit Short-Term Speculation: The goal is to create an investment system that prioritizes sustainable value creation and considers externalities. The framework should encourage companies to invest in long-term projects that contribute to social and environmental progress, rather than focusing on immediate profits.

• Rethink the Role of the State: Current disruptions call for a more active state in value creation and market regulation. The state must invest in innovation, training, and infrastructure, and promote a fairer fiscal policy aimed at restoring a balance between market forces and collective interests.

• Promote an Ethic of the Common Good: It is necessary to promote an ethic of the common good that places the well-being of society as a whole at the heart of economic and political decisions. Civic education and the development of citizen awareness are essential to reconcile capitalism with democratic ethical principles. Education should teach citizens the mechanisms of capitalism and its philosophical, social, and political historicity.

The Need for a Copernican Revolution

The 2008 global financial crisis triggered numerous criticisms of the modern capitalist system, and the ecological crisis has intensified debates on unsustainable growth, with concerns not only about the growth rate but also its direction.

But to achieve a true Copernican revolution, we must go beyond solving isolated problems and develop a framework that allows us to shape a new type of economy: an economy that works for the common good.

The change must be profound. It is not enough to redefine GDP to include quality-of-life indicators, including measures of happiness, the imputed value of unpaid care work, and free information, education, and electronic communications. It is also not enough to tax wealth. While these measures are important in themselves, they do not address the greatest challenge: defining and measuring the collective contribution to wealth creation so that value extraction is less able to pass for value creation.

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Sources and References

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