22 August 2018

Elizabeth Warren’s plan to hobble capitalism


Pledges to “fix capitalism”, “save capitalism” and “reform capitalism” are usually a good sign that a politician wants to make more than a few tweaks to the rules of the economic game.

That’s not always a bad thing. But such proposals deserve close scrutiny. When they come from a politician with a track record of hostility to business, it’s worth asking whether their plan to “save capitalism” would really end up hobbling it.

Elizabeth Warren, the left-wing Democratic Senator from Massachusetts is one such politician. She recently unveiled her Accountable Capitalism Act, a set of proposals that would rewrite the relationship between American companies, their employees and the US government.

According to Warren, all was well in American capitalism until the Eighties. “For most of our country’s history, American corporations balanced their responsibilities to all of their stakeholders – employees, shareholders, communities – in corporate decisions. It worked: profits went up, productivity went up, wages went up, and America built a thriving middle class,” says a statement from Warren’s office.

But then, according to Warren, “a new idea quickly took hold: American corporations should focus only on maximising returns to their shareholders.” And, as Warren sees it, that change is to blame for the ensuing stagnant wages and inequality.

The villain of Warren’s story is Milton Friedman, the Chicago school economist who she holds responsible for this ruthless focus on delivering for shareholders. Warren is right that Friedman is the undisputed progenitor and promulgator of this idea, which he famously introduced to a wide audience in a 1970 New York Times article provocatively titled “The Social Responsibility of Business is to Increase its Profits”.

It is undoubtedly a compelling and influential idea. But was it as transformative as Warren suggests?

For all that this idea is supposed to have dictated corporate decision making, there’s surprisingly little in the way of legal obligations for directors to maximise shareholder value. Boards can, generally speaking, do what they think is best for the company, and define “best for the company” any number of ways.

If businesses have been entirely focused on what is best for shareholders since the 1980s, then what explains burgeoning corporate social responsibility departments? Or the eagerness with which some of the world’s largest corporations demonstrate their ethical credentials to consumers? Profit, perhaps. But if the market rewards such behaviour, then the left’s caricature of profit-hungry capitalists misses an important part of the story.

And how seriously are we supposed to take Warren’s sepia-tinted view of economic life before Friedman came along and ruined it all? It is hard to believe that, say, a 1950s Elizabeth Warren would have surveyed the economy and thought, this is fine. Far more likely she would have railed against grotesque inequality, a rigged system and the other problems she identifies in America today. In other words, there is every reason to believe that her account of the past is nothing more than a device to win an argument in the present.

So, what is Warren actually proposing?

Her Accountable Capitalism Act would require American firms with an annual revenue of more than $1 billion to obtain a “federal charter” to operate from a newly minted Office of United States Corporations. This charter would force firms to “consider the interests of all corporate stakeholders – including employees, customers, shareholders, and the communities in which the company operates”.

The Bill would also compel corporations to ensure at least 40 per cent of its directors are chosen by employees; force executives to wait five years before selling any company shares; and prevent corporations from making any political donations without the approval of three-quarters of its directors and shareholders.

There are many sensible reasons to oppose Warren’s proposals. You could point out that her federal charter system would make large firms accountable to politicians – not the people. And that, given the current occupant of the White House, it is surprising that someone from the left of the Democratic party cannot see how this isn’t just deeply illiberal but really rather dangerous.

You might also suggest that forcing firms to “consider the interests” of various groups is unlikely to change much beyond the imposition of costly and inefficient box-ticking exercises. Firms will hold meetings with communities, conduct internal reviews and, in all likelihood, reach the same decision they would have reached anyway. Only more slowly and at greater expense.

You could ask why, if no such rules existed when – according to Warren – American capitalism was working properly, they are necessary now?

You could even engage with the moral basis of the Bill and argue, as Friedman did, that as long as a company obeys the law, why shouldn’t it do whatever is in the best interests of its owners, the shareholders?

But the real mystery about the Accountable Capitalism Act is why its proposer thinks it will fix the problems she identifies in the US economy.

Warren claims, first and foremost, to be worried about slow wage growth. If you are worried about stagnating wages, you should be preoccupied by one thing above all else: how to boost productivity.

Warren’s vision for “accountable capitalism” not only has nothing to say on the issue, it would chip at way at the dynamism that has been the engine of America’s economic success. After all, it is generally the large firms that find themselves in Warren’s crosshairs that are responsible for higher R&D spending, big productivity gains and – ironically – better wages for their employees.

The proposals in the Accountable Capitalism Act are drawn up by someone interested in how the pie is sliced up, not the size of the pie. Elizabeth Warren describes herself as a capitalist and has said that she “believes in markets” and “loves what markets can do”. If that’s the case, she should realise that it’s the latter that really matters.

According to the economist William Nordhaus, innovators keep just 2 per cent of the social value of their innovations. The rest of us enjoy 98 per cent of the upside.

The socially responsible thing for lawmakers to do isn’t to draw up charters and force companies to sign them. It’s to do what they can to unleash as much of that innovation as possible.

Oliver Wiseman is Editor of CapX.