A new critique of the corporate state has been the focus of extensive media attention. It is intellectually vacuousby Martin Wolf / July 20, 2001 / Leave a comment
There, on the cover of The Silent Takeover, sits a young woman. She sprawls in an armchair, with a booted leg draped nonchalantly over one arm. The chair is placed, incongruously, on muddy ground by a small river. Our prophetess looks at the reader, mouth slightly parted. Thus do we meet the pundit as poseuse. Infantile leftism takes on a new and attractive form.
What is Noreena Hertz-an academic at the Judge Institute, Cambridge University-trying to tell us? The “silent takeover” began, she writes, with Margaret Thatcher in 1979. Global corporations were apparently, invisible and uninfluential before then. But capitalism has now taken over the world. In the process it has destroyed democratic politics. “Governments’ hands are tied and we are increasingly dependent on corporations.” The result is an eroding tax base and crumbling public services, as “our elected representatives kowtow to business.”
Hertz says she is not anti-capitalist, since “capitalism is clearly the best system for generating wealth.” She is “unashamedly pro-people, pro-democracy and pro-justice.” This, naturally, differentiates her from opponents who are unashamedly anti-people, anti-democracy and anti-justice. Her core worry is this: “as business has extended its role, it has come to define the public realm? Governments, by not even acknowledging the takeover, risk shattering the implicit contract between state and citizen that lies at the heart of a democratic society, making the rejection of the ballot box and support for non-traditional forms of political expression increasingly attractive.”
The new capitalist economy has, she claims, undermined the prosperity of the unskilled in advanced countries and increased job insecurity. It has failed to benefit the poor, as inequality has risen. By threatening to move abroad, companies have driven down taxes and regulatory standards. “The levying of taxes? the most fundamental right of the nation state and a potential means of redressing inequality, is squeezed by corporate pressure? The mindset is one of ‘beggar thy neighbour.'”
Corporate interests dictate to government, which makes it impossible to pursue an ethical foreign policy. The WTO puts our health at risk. Our politics are sold to the highest bidder. Our media are monopolised. “Many people have simply lost their faith in politics.”
Then, quite suddenly, we are told that the all-powerful corporation is not all-powerful, after all. Monsanto’s campaign for GM food is crushed by media-fed hysteria. Shell abandons its plans to sink the Brent Spar platform in the Atlantic. Campaigns by shoppers force companies to change their ways. Evangelical entrepreneurs, such as George Soros, and the movement for corporate social responsibility emerge.
Yet corporate social responsibility is not enough, since “business will never place customer service, ethical trading and social investment above moneymaking whenever the two come into conflict.” And protest, for all its attractions, “does not provide a long-term solution to the silent takeover,” since the “majority risks being disempowered by the vocal minority.” Protest must be seen, instead, as a catalyst for change. The proper aim is to “re-establish government as a democratic forum within which differing social needs are weighed, and all is not reducible to the corporation or the individual.”
Hertz concludes that “to avoid permanent marginalisation in the decisions that shape our lives, now is time for action.” To do what? “As citizens we must make it clear to government that unless politics focuses on people as well as business? we will continue to scorn representative democracy, and choose to shop and protest rather than vote. Until the state reclaims us, we will not reclaim the state.”
This, such as it is, is the argument. The question is not what is wrong with it, but what is right. Since space is limited, I will address just four aspects: the argument that corporations dominate the world; the thesis that taxes and regulations are in a race to the bottom; the notion that inward investment impoverishes the people of recipient countries; and, last, the idea that all we need is a revitalisation of democracy. This leaves out other issues: Hertz’s superficial treatment of the impact of globalisation on inequality, her confusion between liberalism and mercantilism, and her misunderstanding of how the WTO works to name a few.
Do corporations dominate the world? To support this claim, Hertz cites an analysis which concludes that “51 of the 100 biggest economies of the world are now corporations. The sales of GM and Ford are greater than the GDP of the whole of sub-Saharan Africa.” This is gross abuse of statistics. The study measures the size of companies by sales. But national economies are measured by GDP. Since GDP is a measure of value added, one must compare it with the value added of companies, which is the difference between the value of their sales and the cost of the inputs they purchase from suppliers. Last year the sales of GM were $185bn, the same as Denmark’s GDP. But the value added of GM was only a fifth of its sales. So, this company’s “economy” is not the world’s 23rd largest but 55th, after Ukraine.
But the comparison between corporate and national economies is intrinsically absurd. They are as different as apples and artichokes. A corporation has to attract the labour and capital it employs from competitive markets. Its ability to survive depends on the returns it offers to those free to go elsewhere. Countries are governed by a coercive territorial power. States tax and regulate, companies buy and sell.
Moreover, the corporate sector has never been an omnipotent force for economic liberalism. It is divided, weak and intellectually lazy. Those desiring environmental or labour regulations have often overcome business resistance. Hertz gives several examples.
Have taxes been collapsing? No. Between 1980 and 1999, the average ratio of tax revenue to GDP in OECD countries rose by five percentage points. Between 1965 (the heyday of the Keynesianism Hertz admires) and 1999, that ratio rose from 26 to 37 per cent. The notion that the state is withering away is ludicrous.
Hertz refers to the difficulty Germany has had in sustaining its corporate taxes. What she does not state is that Germany has long had an exceptionally inefficient corporation tax. As a percentage of total taxation, corporate taxes in OECD countries rose, from 7.6 per cent in 1980 to 8.9 per cent in 1999. But Germany’s fell from 5.5 per cent to 4.4 per cent. Contrast this with Britain, which is far more open to foreign direct investment, and so more vulnerable to the pressure Hertz decries. In 1980, corporate taxes made up 8.4 per cent of British tax revenue rising to 11 per cent in 1998.
There is also huge variation in overall tax ratios. In 1999 it varied from less than 30 per cent of GDP in Australia, Japan and the US to 52 per cent in Sweden. Similarly, the share of corporate taxes in total revenue in 1998 varied from Germany’s 4.4 per cent to Australia’s 15 per cent. There is therefore no economic force preventing most internationally integrated market economies from raising taxes. The constraint is political. It is not beastly capitalism that prevents countries from raising the higher taxes Hertz wants, but the democracy she adores. After a big expansion in state spending in the past 50 years, voters have called a halt.
Much the same applies to regulation. Over the past two decades governments around the world have privatised many public enterprises. This was not done because of pressure from business, but because previous policies had been grossly inefficient. Yet environmental and safety regulations have generally increased. The story on labour regulation is more varied but Britain has just shown that a government wanting to increase labour market regulation finds it easy to do so.
There is no convincing evidence that capitalism is leading to a regulatory race to the bottom. Hertz states baldly that “‘pollution havens’ are created as environmentally unfriendly policies are allowed? and human rights are abused? all to attract foreign investment.” But this statement is contradicted by the evidence cited in her own footnotes. In 1999, three-quarters of all foreign direct investment went to high-income countries, not the countries with cheap labour and poor environmental standards.
What then of the impact of inward investment on poor countries? Foreign investors in developing countries virtually always offer higher wages and better conditions than those offered by local employers. Compared to conditions for many casual workers, employment in a foreign company is close to paradise. A recent study of Indonesia by the National Bureau of Economic Research in the US showed that inward direct investment raised wages not just in the foreign-owned plants, but in locally-owned ones as well.
Pampered westerners shocked by the conditions experienced by workers in poor countries fail to compare these with domestic alternatives, rather than with what they themselves expect. But if people in poor countries are to enjoy the opportunities of those who live in rich ones, they must either be allowed to immigrate freely-precluded by the populist democracy Hertz desires-or be given the capital and know-how to raise their own output to western levels. Given the unwillingness of western voters-democracy again-to support higher transfers of aid to poor countries, the alternatives are private capital and know-how. This, in turn, must mean large-scale inward direct investment, as the majority of developing countries now recognise.
Finally, Hertz seems unaware of the vast literature on why unbridled democracy is dangerous. She talks of “we” the people as if that na?ve collectivist notion was unproblematic. But we know that those who are willing to give their time and money to politics do not always have the aggregate interest at heart. Many voters are rationally ignorant about the issues confronting them, because the return on acquiring the knowledge is so small. The interesting question is not why do people fail to vote, but why do they vote, given the tiny probability that they will affect the outcome. And more important, we have no reason to suppose that those who run the state will necessarily be selfless servants of the public weal.
A book whose chief theme is the importance of subordinating the market to politics and corporations to politicians should have shown at least some awareness of these difficulties. It might then have offered a coherent view of the balance to be struck between the market and politics. Hertz provides, instead, the classic delusion of populism-the proposition that the interests of “the people” are self-evident and bound to be served by the state they are supposed to control.
Today’s world is no utopia. The regulation of an integrating global economy, particularly of the financial sector, is a great challenge. Another is assisting unsuccessful developing countries to improve their performance. Yet another is how to secure protection of the global commons. But resolving such difficulties requires more effective international institutions, which will inevitably raise questions about political legitimacy.
This book adds about as much to these complex debates as do the idiots who throw stones at WTO meetings. It offers instead a simple-minded story of corporations that dominate politics, destroy the state’s capacity to act and impoverish the poor. Against this it sets an equally na?ve answer: to renew democracy. It is, alas, this very vacuity that will account for its appeal. It will permit the intellectually lazy and emotionally self-indulgent to believe they have the answers. That someone attached to one of the world’s great universities should offer such shoddy work is depressing beyond words.