William Baumol, Ed Gresser, Bruce Piasecki: Reforming Capitalism?

When I started this newsletter in 1999, some of my first issues dared to take issue with “post-capitalists” like David Korten and the antiglobalist protesters in Seattle. As a result, both of my foundation-connected funders cut me loose, and they weren’t nice about it.

One shouted at me over the phone, the other refused to answer phone calls or written messages (despite the fact I’d worked with her for nearly 10 years).

I am not complaining. Obviously, this newsletter managed to flourish without foundation funding (thanks to modest annual contributions from 193 loyal readers!). I am simply offering testimony as to how charged the whole question of capitalism and globalization had become, and how rigid some funders’ thinking had become.

So it’s been deeply satisfying for me to watch -- over the last few years -- a new consensus develop on reforming capitalism.

Analysts and activists have continued to speak out in their all-knowing, take-no-prisoners styles. But if you read their tracts carefully and look behind the rhetoric, you will find what I was trying to find in 1999: significant common ground on capitalism and globalization.

Broad spectrum

In 2007, at least six key texts revealed -- inadvertently -- a surprising amount of agreement on what’s right about capitalism, what’s wrong, and what urgently needs to be done to make capitalism and globalization work better.

Those texts are not monochromatic. Their authors range from committed activists to distinguished business-school professors, and their perspectives range from radical-left to center-right.

Here are those authors and their texts, listed in (approximate) order from left to right:

Naomi Klein, author of The Shock Doctrine: The Rise of Disaster Capitalism (Metropolitan / Henry Holt, 2007), is a prominent global-justice activist and writer;
Kent Greenfield, author of “Saving the World With Corporate Law?” (Boston College Law School Research Paper #130, April 2007), teaches business and constitutional law at Boston College Law School and is president of the watchdog group Forum for Academic and Institutional Rights;
Robert Reich, author of Supercapitalism: The Transformation of Business, Democracy, and Everyday Life (Knopf, 2007), teaches public policy at UC-Berkeley and was President Clinton’s Secretary of Labor;
Edward Gresser, author of Freedom from Want: American Liberalism and the Global Economy (Soft Skull Press, 2007), runs the Progressive Policy Institute’s Project on Trade and Global Markets, and was policy advisor to President Clinton’s U.S. Trade Representative;
William Baumol, Robert Litan, and Carl Schramm, authors of Good Capitalism, Bad Capitalism, and The Economics of Growth and Prosperity (Yale University Press, 2007), are all distinguished business and policy analysts -- Baumol teaches entrepreneurship at NYU’s Stern School of Business, Litan is a senior fellow at the Brookings Institution, and Schramm is a fellow at University of Virginia’s Darden School of Business;
Bruce Piasecki, author of World, Inc. (Sourcebooks, 2007), is president of the American Hazard Control Group, a management consulting firm.

I. COMPLEMENTARY ANALYSES

The six authors emphasize their unique points of view. It is the North American Way.

But if you read them together, in a spirit of openness and discernment, you will realize that they share much more than they ‘fess up to -- and that WHAT they share amounts to a coherent new approach to capitalism for our time.

Against “pure” capitalism

Let us begin with Naomi Klein, the most radical thinker of the six, whose book was characterized as “totemic, capacious and brilliant” by Christopher Hayes in the totemic movement magazine In These Times (December 2007).

Klein’s thesis is that a conspiracy of “free world” government officials, conservative economists, and corporate moguls has spent the last three decades trolling for disasters around the world (and even fomenting them) -- at which point they move in with their International Monetary Fund “assistance,” World Trade Organization blandishments, and superficially persuasive politico-economic advice, which always seems to end up crippling the recipients and benefiting the donors, principally the U.S. and the big corporations.

Klein’s book is powerfully written and admirably specific, and has enormous scope, ranging from Allende’s and Pinochet’s Chile in the 1970s to the South Africa of the 1990s to the ongoing Katrina disaster in our own back yard.

At the same time, it is full of telling exaggerations and omissions, which several journalists have seized upon in an attempt to discredit the book -- see, e.g., Tyler Cowen’s review in the New York Sun (3 October 2007).

But that is a journalist’s game -- a “gotcha” game -- and I have no desire to engage in it here (or anywhere). The truth is that Klein is largely correct about U.S. and corporate behavior over the last 30 years. Former New York Times foreign correspondent Stephen Kinzer describes the same behavior in less incendiary prose in his book Overthrow, reviewed by us HERE.

Where Klein goes awry is in her apparent attempt to attribute U.S. and corporate misbehavior to capitalism. You can read huge swaths of her text and get the impression that capitalism is her target, just as you can get that same impression from reading her international bestseller No Logo (orig. 2000). It is an impression she appears to enjoy creating.

But a dispassionate reading of Klein’s text -- and a willingness to parse her fevered prose -- reveals that her target is not capital-c Capitalism at all. It is what she occasionally refers to as “pure” or “fundamentalist” capitalism, as distinct from a “mixed, regulated” economy which (as she quietly explains deep in the book) she favors not only over “pure” capitalism but over “authoritarian” economies as well.

In other words, we’re talking about a Keynesian thinker here -- a Paul Samuelson with attitude, and with the smarts to distinguish among types of capitalist economies. Ms. Klein, let me introduce you to Professor Baumol.

Four types of capitalism

By distinguishing among four types of capitalism, William Baumol and his co-authors do not contradict Klein’s analysis -- they extend and deepen it.

What Baumol et al. call “oligarchic” capitalism is approximately what Klein means by “pure” capitalism. Under oligarchic capitalism, say these business school professors and think tank analysts,

government policies are designed predominantly or exclusively to promote the interests of a very narrow (usually very wealthy) portion of the population. . . . This form of capitalism is, unfortunately, all too common in too many parts of the world, encompassing perhaps one billion or more of the world’s population. It is prevalent in much of Latin America, in many states of the former Soviet Union, in most of the Arabic Middle East, and in much of Africa.

Should the U.S. continue to comfortably accept the existence of oligarchic capitalism? Absolutely not, say these authors. In the long run it harms nearly everyone and everything.

In fact, in one startling passage our well-heeled authors “reluctantly . . . conclude” that “revolution may be the most effective (and perhaps the only) way to undo oligarchic capitalism.”

Preferably nonviolent, of course.

A second kind of capitalism identified by the authors -- “state-guided” capitalism -- is approximately what Klein means by “authoritarian” economies. But even state-guided capitalism has its transitional uses in certain places, say the authors (and one senses that Klein would agree).

The other two forms of capitalism they describe -- “entrepreneurial” and “big firm” capitalism -- can be benign, they say . . . SO LONG AS there is effective government regulation, and SO LONG AS there’s an appropriate entrepreneurial / big firm mix.

Both the appropriate degree of regulation and the appropriate corporate mix will vary depending in good part on the history and culture of the societies involved, they explain -- sounding very much like Klein at her decentralist best.

The question of trade

Klein is deeply skeptical of the World Trade Organization, but she’s no isolationist. She speaks passionately of the need for trade that could genuinely benefit all trading partners. (In this she echoes not radical proponents of self-sufficiency but her family background -- she’s related to the leadership of Canada’s New Democratic Party, some of the most principled internationalists on the planet.)

For their part, Baumol et al. concede that some trade is not good, and that even trade that is mutually beneficial in the medium- to long-term can be “destructive” in the short term.

Ed Gresser takes up where Klein and Baumol leave off. He observes that Klein-like arguments about exploited foreign workers are “not wholly wrong” and that the cost of global free trade for some U.S. citizens “has indeed been high.” But he argues that, under proper rules, free trade can be empowering for all concerned.

Better than any author I know, Gresser makes the case for free trade from the point of view of ordinary people. He reminds us that the free trade vision was initially not a product of neoconservative ideologues, but was an integral part of Franklin Delano Roosevelt’s dream for postwar America.

To buttress his case, Gresser emphasizes certain telling facts. For example, he shows that at least 95% of U.S. job loss is due to increasing productivity -- not job flight. (Each year, American businesses lay off 15-19 million workers, and hire an approximately equal number . . . something that’s forgotten by all sides in the trade debate.)

He also shows that U.S. factories account for a greater percentage of world production today than they did before NAFTA. So much for Ross Perot’s “great sucking sound” of factories disappearing.

“The system has gaps,” Gresser concludes. The free trade regime -- like capitalism itself -- is deeply imperfect. But it needs to be improved, not replaced. “International law, special concern for the poor, [and] active and energetic government remain the principles which can build upon and improve [it].”

Change the rules!

Robert Reich meets Klein halfway on a different issue.

He agrees with her that neoconservative ideas have triumphed in powerful circles and are part of the problem. But he disagrees that an intellectual cabal led by Milton Friedman actually caused the triumph of “pure” capitalism. “They offered a convenient justification for the shift [in capitalism] already under way,” Reich says. “They did not cause the shift; at most, they legitimized it.”

Neither are devious, monstrous global corporations the heart of the problem. “In fact, large corporations have less economic power now than they had three decades ago,” Reich says, since technological advances have eliminated most oligopolies and companies are having to compete more intensely than ever.

Our real problem, Reich says -- the real reason pure capitalism is in the driver’s seat at present (and workers and communities are often not doing well) -- is that enormous gains in technology have led to ridiculously low prices.

Of course, most of us don’t mind that at all . . . since all of us are consumers and many of us are investors. Most of us are happy to accept low prices and high earnings!

“But most of us are also citizens who have ideas about fair play,” Reich says [emphasis his]. “And in this respect most of us are appalled.” Or should be appalled.

To introduce what Reich calls “fair play” into capitalism, he would not have us obsess about the unpleasant behavior of large corporations, as Klein does in her book and as the corporate-social-responsibility movement does generally. What most large corporations are doing is playing by the rules, Reich says -- and citizens set those rules.

If we don’t like the way contemporary capitalism works, Reich says, it is up to us to change the rules. Focusing overmuch on the motives of corporate executives and trying to identify the nicest, most “socially responsible” corporations becomes at some point a diversion from our #1 task as citizens in a democracy: writing decent rules.

“Social response capitalism” to the rescue?

Reich was a leading government official, so you might expect that he and a leading business-management consultant like Bruce Piasecki would see the world differently. But if you read Piasecki carefully, he and Reich are not that far apart.

Unlike some articles in the trade journal CRO (stands for “Corporate Responsibility Officer”), Piasecki’s book acknowledges that corporate social responsibility, which he calls “social response capitalism,” cannot do it all.

He acknowledges that most corporations “are still far too concerned with profit to examine their own role in creating a better world.” He distinguishes between “senile” or “primitive” forms of capitalism and social response capitalism (shades of Baumol!).

As a result, he concedes that, “Yes, we need both sides of the scissors. We must call on governments to play a stronger role.”

But the central thrust of Piasecki’s book is that social response capitalism is on the rise, and it’s rising because of forces within capitalism, not because of pressure from government. And he says that’s a good thing:

Law imposes changes from the outside, from the government. It is always less effective and less enthusiastically pursued than change generated by internal forces such as the competitive drive of corporations and the needs of consumers.

What are the most important “internal forces”? Consumers today, says Piasecki, have a new “social expectation” -- namely, that corporate products “meet social needs or at least do not harm people and the environment.”

In addition, the competitive drive of corporations ensures that they’ll increasingly “differentiate” their products by branding them socially responsible.

Finally, the increasing amount of information available to the public via the Internet and via aggressive environmental and social-justice nonprofits ensures that corporations will increasingly be held accountable by consumers and stockholders, quite apart from government.

So social response capitalism is coming along. But Piasecki is no Pollyanna -- he concedes that, at the present rate, it will take “several decades” to bring social response capitalism fully into being.

Just another good reason to continue trying to write appropriate laws and regulations!

Think about ALL the stakeholders

Radical law professor Kent Greenfield shares Piasecki’s admiration for corporate capitalism. “The corporation is immensely successful in creating wealth,” he says.

But like Reich, he is all about changing the rules. Specifically, Greenfield wants to change corporate law so that directors are encouraged and even required to act for the benefit of all the “stakeholders” in a corporation -- not just stockholders but employees, communities, customers, creditors, and even the environment.

As it is now, he says, “non-equity investors are shortchanged in the distribution of the wealth they help create.”

II. COMPLEMENTARY SOLUTIONS

Not only are our six authors’ analyses complementary, so are their solutions. Consider these policy proposals that I drew effortlessly from their texts. . . .

Solutions for developing countries

Encourage better social policies in the developing countries -- land reform, major initiatives in education and literacy, etc. (Klein, 450-55)

Sponsor “reverse Fulbright” scholarships and internships that would enable young people in developing countries to come to the U.S. and learn about entrepreneurship first-hand (Baumol, 174)

Channel foreign aid to countries pursuing policies that promote entrepreneurship (Baumol, 173)

Encourage a variety of international trade practices, including barter of goods & services outside the confines of the World Trade Organization (Klein, 456)

Eliminate most U.S. tariffs on products and services from the least-developed countries (Gresser, 210)

Enter into trade treaties that establish locally-appropriate minimum wage levels for foreign workers (Reich, 127)

Solutions for the U.S.

Construct safety nets that can protect U.S. workers from the global trading system’s often harsh local impacts (Baumol, 91) -- for example, by providing wage insurance and job training for them (Reich, 127)

Eliminate those U.S. tariffs that hurt America’s poor the most -- for example, tariffs on clothes and kitchenware (Gresser, 210-11)

Eliminate tariffs on environmentally beneficial goods (Gresser, 209)

Decouple health care from employment, and use the tax savings (n.b.: employer-provided health care is a tax-free “benefit”) to give everyone access to no-frills health insurance (Reich, 128)

Purge corporate cash from the political system -- for example, by severely limiting corporate campaign contributions, and by severely limiting corporate expenditures on lobbying (Reich, 211; and see Bruce Freed & Jamie Carroll, “Open Windows,” Center for Political Accountability report, March 2007)

Require that corporate directors owe a “fiduciary obligation” to the firm as a whole, rather than to shareholders alone (Greenfield, 24)

Require that corporate boards include directors who represent stakeholders other than shareholders (Greenfield, 27-28)

Penalize short-term stock holdings and / or promote long-term holdings (Greenfield colleague Allen White in “What Is Long-Term Wealth?,” Business for Social Responsibility report, September 2007, p. 6)

Solutions that go beyond government

Attack the bureaucratic, labor-union, and psychological barriers that keep victims of natural and other disasters from participating in the reconstruction of their own communities (Klein, 461-66)

Refocus the labor movement -- for example, by having unions de-emphasize bargaining “on behalf of a pool of career employees” (how many of us intend to work at one job forever today?), and having unions emphasize, instead, such 21st-century necessities as “skill development programs, [keeping] pensions and health care secure during periods of job transition, and alert[ing] members to new and higher-paying job opportunities nearby” (Gresser, 205)

Refocus global activism -- for example, by having activist groups de-emphasize sanctions and punishments for misbehavior abroad, and having activist groups emphasize, instead, incentives and rewards for reform abroad (although Mexico and Brazil are “quietly approaching the elimination of child labor . . . no [activist group] has suggested a campaign to buy Mexican or Brazilian goods, to reward their governments and encourage others to follow them”) (Gresser, 206-08)

Make the concept of socially responsible capitalism a part of the mainstream economic-policy debate -- for example, by stressing the connection between corporate responsibility and long-term financial success (Piasecki, passim), aka the link between corporate responsibility and competitive advantage (see Mark Kramer’s Harvard Business Review post “Why Robert Reich Is Wrong About CSR,” September 13, 2007)

Conclusion: Unity ‘08!

There will always be cause-oriented foundations that insist upon channeling their money into overheated left- or right-wing takes on capitalism and globalization. But now, mercifully, they no longer have a hammerlock on the debate.

In fact, if you look closely at the work of a broad spectrum of policy analysts over the last year, you will find a surprising amount of agreement on what needs to be done to make capitalism and globalization work better.

Activists should focus less on cultivating their differences and more on working toward solutions they can all agree upon.

RE:SOURCES

For a brief and highly readable introduction to capitalist economics that should be palatable to left and right alike, see Charles Wheelan, Naked Economics: Undressing the Dismal Science (Norton, 2002). The author used to write for The Economist and is now policy and communication director for the admirable Chicago Metropolis 2020.

Among groups that have taken as their task the reform of capitalism via the significant improvement of corporations & other organizations, I am impressed by

June Delano’s Organization Development Network
Daniel Goleman’s Consortium for Research on Emotional Intelligence in Organizations
Barry Johnson & Dana Wilcox's Polarity Management Associates
Marc Sarkady's SARKADY alignment transformation renewal
Peter Senge’s Society for Organizational Learning
Allen White & Marjorie Kelly’s Corporation 20/20

The latter two groups were joint sponsors of the Summit on the Future of the Corporation (November 13-14, 2007), where panelists included everyone from “post-capitalist” thinker David Korten, to Harvard Business School’s Rosabeth Moss Kanter, to Nike’s Darcy Winslow. Law professor Kent Greenfield, discussed above, presented a stripped-down version of his April 2007 research paper there -- see “A New Era for Corporate Law” (Summit Paper #2, November 2007).

ABOUT THE RADICAL MIDDLE CONCEPT

WHY "Radical Middle"?

WIKIPEDIA Weighs In

50 Thinkers and Activists DESCRIBE the Radical Middle

50 Best Radical Middle BOOKS of the '00s

GREAT RADICAL MIDDLE GROUPS AND BLOGS:

100 Great Radical Centrist GROUPS and Organizations

25 Great Radical Centrist BLOGS

SOME PRIOR RADICAL MIDDLE INITIATIVES:

Generational Equity and Communitarian platforms 1990s

First U.S. Green Party gatherings, 1987 - 1990

Green Party's "Ten Key Values" statement, 1984