Monday, 29 January 2018

Reflections from snow-topped mountains

One of the main strands of Donald Trump’s appeal to the American public is that he is an outsider. Of course, that is not true – and never has been.  As the president said in a speech in Arizona last year, “I was a good student. I always hear about the elite. You know, the elite. They're elite? I went to better schools than they did. I was a better student than they were. I live in a bigger, more beautiful apartment, and I live in the White House, too, which is really great.” So it probably should not have been a great surprise that he became the first sitting president in almost two decades to attend the World Economic Forum’s jamboree for the great and the good in Davos[1].

Not surprisingly, Trump was the star of the show and the positive message Europe heard was that “America First does not mean America alone.” But he also pointed out that the world "cannot have free and open trade if some countries exploit the system" and that Washington "will no longer turn a blind eye to unfair trade policies." The WEF’s annual report indeed highlighted that the risk of some form of conflict was high on the list of issues which could derail the current friendly economic environment. The WEF notes that “charismatic strongman politics is on the rise” that has hastened the move away from the rules-based multilateralism which has underpinned the peace and prosperity of the post-WWII economic system. The US has blocked appointments to the WTO’s seven-member Appellate Body during Trump’s tenure, and two seats are currently waiting to be filled. A weakening of the WTO’s ability to resolve disputes does nothing to assuage concerns that trade tensions between the US and China could yet become a major problem.

But one of the biggest curiosities of the Davos bash is that it should happen at all. One of the reasons why “strongman politics” is on the rise is that many millions of ordinary voters feel left behind by the advance of the global capitalist economy, which appears to benefit the very few at the expense of the many. Two weeks ago BlackRock CEO Larry Fink distributed a letter addressed to the CEOs of global companies arguing that “society is demanding that companies, both public and private, serve a social purpose.” Economists such as Milton Friedman would not agree. Writing in 1970, Friedman argued that a business executive who exercises social responsibility in the course of their work “must mean that he is to act in some way that is not in the interest of his employers”. Businesses which do anything other than maximise profits were “unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades” and were guilty of “analytical looseness and lack of rigor.”

Arguably Friedman’s view is flawed because it fails to distinguish between short-term and long-term profit maximisation and ignores the non-pecuniary benefits which flow from social activities. Companies which simply attempt to maximise profits each year, whilst failing to treat their customers and employees with respect, will fail. But that is a different proposition to suggesting that companies exist to serve a social purpose. In any case, many large firms have long since taken ideas of social responsibility on-board in drawing up their corporate sustainability programmes. Corporates do have a duty to act responsibly, of course, and those which fail to do so are held up to scrutiny. The problems faced by Volkswagen following the revelation that it falsified diesel engine emissions highlights that there are costs associated with acting in a non-socially responsible manner.

But the more I listened to what Fink had to say, the less I was convinced by his message. Another of his Davos pronouncements was that too many people are excluded from the workings of financial markets as a result of financial illiteracy and more work has to be done to ensure “they don't feel frightened of moving their money into long term instruments.” Given that Fink is the CEO of a primarily passive investment fund, there is a certain irony (to say the least) in his desire to get more people involved in financial markets. His point that a lack of involvement ultimately hampers efforts to generate decent retirement incomes was valid. But at a time when many people are finding their incomes being severely squeezed, they simply do not have the excess resources to devote to financial investing – a problem the likes of Fink do not have.

I have no doubt that Fink’s views – and those of his fellow grandees – are motivated by a genuine concern that the system from which they have benefited is under threat, and that they believe there is a strong case for redistributing some of the wealth. Perhaps they not aware of how their argument in favour of caring capitalism comes across – it does sound like a ‘let them have cake’ view.  Many people simply feel that they are being screwed and want a piece of the pie. That said, when it falls to the rich to talk about solving global inequality problems, it is small wonder that the ordinary voter has little faith in governments.



[1] In the interests of disclosure, I should point out I was not there. I assume my invitation was lost in the post.

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