Opinion
Walking down the hallways of the AUC dorms, chances are that you have seen at least one “Capitalism must fall” or “Capitalism ruins everything” sticker on people’s doors. Social science majors and humanities majors may also be familiar with such phrases and ideas from class discussions. Such sentiments were more prevalent in 2019 when several youth climate movements like the Extinction Rebellion movement gained support in AUC and catapulted themselves in the media spotlight.
Other people around the world also seem to be on the same anti-capitalist page. For the past two decades, the Edelman Trust Barometer has polled thousands of people from 28 countries around the world. Their 2020 report reveals that 56% of their respondents agree that capitalism is “doing more harm than good in its current form”, with 22 of the 28 countries in the study reporting majority dissatisfaction with Capitalism.
Several events serve as justification for pessimistic and anti-capitalistic sentiments. In the last two decades, the world economy has been riddled with multiple crises: The Great Recession in 2008, the European debt crisis that followed suit, and the devastating Covid-19 Recession. However, the problems with our economic system is not so simple that we can just blame its entirety for all the problems in the world. A more careful examination is needed.
Clarifying the Definition of Capitalism
While this is not a political science class, we should begin by clarifying what capitalism actually means. Many of us probably associate the ideology to the current economic system, however, capitalism is far more simple than that.
Capitalism is an economic system where private individuals or corporations own the means of production. Consequently, important features of a capitalist system include private property rights and individual liberty.
That is all. In this sense, the idea of capitalism is quite simple and straightforward. However, when we think of capitalism, we tend to associate it to the following ideas and outcomes.
- Income inequality;
- Frequent recessions;
- Globalization
- Environmental destruction;
- Socio-economic aggravation of discrimination
Although these problems are indeed linked to the economy, it is not the capitalist economic system that is problematic but rather the form it has taken.
So what exactly are the problems?
1. Shareholder Value Maximization
This phenomenon largely began in the 1980s, when corporations shifted their focus from “retaining profit to reinvest” to “maximizing wealth creation” for company shareholders. Consequently, three pernicious business practices ensued to realize greater profits to shareholders.
The first pattern of business practice was downsizing and outsourcing, because cutting costs was easier than increasing revenue. As a result, a corporate culture of viewing employees as replaceable capital emerged and the practice contributed to suppressing wages and employment instability in developed economies, particularly in the US. However, this was not enough to squeeze out more profits for shareholders.
Corporate dividends, proportions of annual profit that go to shareholders, increased by almost 50% in the 1980s and 1990s compared to the preceding two decades, according to a study on corporate value appropriation. Since then, corporate dividends have continued to increase in certain periods despite declining profits. In addition to this, stock buybacks became more integral to corporate profits as it increased from 5% in the late 1970s and early 1980s to between 20% and 25% of corporate profits by the mid-1990s. Although these figures concentrate on the US, such business practices have been widely reported from other countries creating a global increase in the income and wealth of executives and shareholders. All the while, the incomes of the rest of the corporate ladder have remained largely stagnant.
In essence, shareholder value maximization is the management approach of maximizing corporate profit at any cost. This precipitous profit-maximizing business practice has not only contributed to the current wealth and income inequality but also to environmental destruction and financial instability, as these potential consequences were neglected in the decision-making process.
2. Political and Corporate Corruption
Since companies have gained increasing power and political influence, political and corporate corruption has been rampant. The collusion between government and businesses currently relies heavily on two things: the revolving door and offshore finance.
The revolving door refers to the process of industry legislators and corporate members of those industries interchanging their roles. The phenomenon is particularly prevalent in the US but also common in many other countries, as well as the European Union. For example, according to Transparency International’s 2017 report, 51 members of parliament who left office at the 2014 European Parliament elections are now employed by organizations listed in the EU transparency register, 26 of whom directly lobby EU institutions.
Although it is not fair to assume that everyone who goes through the revolving door is attempting to influence policy in a way that aids their previous or future employer, it would be naive to believe that there has been no conflicts of interest. Especially when the corporations that are involved have been riddled with ethical scandals and alleged crimes that question the credibility of those who participate in this process. For example, José Manuel Barosso, a former president of the EU Commission who later joined Goldman Sachs as their non-executive chairman, allegedly attempted to lobby Jyrki Katainen, a former vice president at the EU Commission.
The merry-go-round between the private and public sector is problematic enough. But what is perhaps even more troublesome is offshore finance.
Offshore finance exists due to tax havens, which are countries or places with low or no corporate taxes that allow outsiders to easily set up businesses there. In other words, tax havens provide guaranteed non-transparency about companies and their ownership. This lack of regulation allows for the creation of shell companies, legal entities created in tax havens, which usually exist only on paper with no employees and no office. For example, it is estimated that the Netherlands is currently home to over 12,000 shell companies that have over 4 trillion euros in total assets. Most importantly, as legal entities, these companies can hold money, assets, and property, playing a vital role in the flow of illicit money (payments, profits, and investments) around the globe.
Tax havens are problematic not only because they help the wealthy avoid taxes. It also allows them to escape financial regulations, disclosures, criminal liability and more. The financial costs of this offshore financial system is quite devastating. Gabriel Zucman, a French economist, estimates that 10% of the total global output in the world is hidden in offshore financial centers. That is, roughly, $8.7 trillion is hidden around the world. Others like James S.Henry, lawyer and economist, estimate this to be more than $36 trillion but there is no way of accurately pinpointing this value. However, the IMF believes that tax havens collectively cost governments at least $800 billion in tax revenue from corporate and income tax losses.
Beyond hiding vast amounts of wealth, tax havens are also important for large financial institutions and other multinational companies to tilt the playing field against smaller and medium-sized companies. This usually comes in the form of offshore transfers to government officials that are harder to track. Therefore, with such benefits, the offshore financial market has been integral in creating a new global aristocratic class and building an empire of corporate behemoths.
Despite the “non-transparency”, offshore finance is increasingly getting public and government attention. Last year, the International Consortium of Investigative Journalists (ICIJ) released a global investigation dubbed “The FinCEN Files“, conducted by more than 400 journalists in 88 countries, which reveals how banks and consultancy companies have helped move dirty money for drug cartels, corrupt governments, arms traffickers, and other international criminals. The ICIJ was also responsible for publishing the Panama Papers that revealed the offshore holdings of politicians, celebrities, and sports stars.
Their most recent article reveals how Boston Consulting, McKinsey, and PwC received tens of millions of dollars in commision from Isabel Dos Santos, former Angolan billionaire, for helping her embezzle hundreds of millions from Angola’s state oil company using shell companies in tax havens.
3. Neoliberalism
The overarching problem with today’s economic system is not the fact that it’s capitalistic but neoliberal. The primacy of corporations in the neoliberal agenda calls for deregulation and the opening of markets to global competition while also advocating for privatization and weaker governments. The desired result of this approach to development was the creation of wealth by companies, which would “trickle-down” to the rest of the public, making businesses the driver of development and growth. However, the result has been quite the opposite.
What we have seen instead is widening socioeconomic inequalities, the destruction of our environment, and more frequent recessions. By focusing all our attention on businesses and their instrumental ability to create material wealth, we have forgotten that the center of our economic system and capitalism should be the welfare of humanity.
In fact, the International Monetary Fund (IMF) reported in their 2016 Finance and Development Report that the benefits of neoliberal policies have been “somewhat overplayed” and that the costs of this policy approach have been greater than initially thought. They go as far as to say that the neoliberal “approach is jeopardising the future of the world economy”, which actually is quite ironic given that their structural adjustment programs are full of neoliberal policies. Others such as Former Greek Finance Minister, Yanis Varoufakis, go even further to call the current economic system “techno-feudalism”, alluding to the fact that it is an economic system dominated by technology firms who make the rich richer and the poor poorer.
This is to say that the culprit of all the socio-economic problems we associate with capitalism is the neoliberal structure that the economic system has taken rather than the capitalist system itself. In fact, if capitalism were to actually end, our current daily lives would be shattered. Groceries would be hard to buy, many forms of entertainment including streaming anything would end, travelling would become increasingly hard, and you can never buy new technology again. In fact, replacing any of your current material goods you own would become virtually impossible.
What we need to end is not capitalism but the pernicious neoliberal form it has taken. We have to reform our business-oriented economy to create a humanity-oriented economy. Only by putting ourselves and the planet at the center of our economic structure, can we move forward.
The Herring 