Neoliberalism, Corporations and Wealth Inequality

 

These thoughts have been inspired by reading James Meadway’s fascinating essay on the future of neoliberalism, and Terry Hathaway’s article entitled “Neoliberalism as Corporate Power”, both of which I strongly recommend. Needless to say both authors may strongly disagree with what I say here, which as ever is ‘untutored’.

Neoliberalism and Corporations

If I had to offer one piece of evidence to those who are sceptical about the concept of neoliberalism, I would look at Investor State Dispute Settlement (ISDS). These entities are set up as part of trade or investment deals, and essentially allow a corporation to sue governments if governments do something to disadvantage the corporation. For some examples of cases brought by companies against governments see here. These actions are often used against smaller states, but companies have also sued Germany (for ending nuclear power) and Canada (for banning a dangerous chemical).

The motives for corporations for having such agreements are straightforward, and amount to de-risking investment. The motives of governments in signing them is presumably to facilitate investment or trade. But the idea that a government can be sued by a corporation because the government has banned a dangerous substance that this corporation is using seems very odd. If nothing else, it sets up completely the wrong incentives for that government and corporation.

I chose the example of ISDS because it illustrates a case where corporations have legal powers over governments. I think enhancing the power of corporations is at the heart of how to understand neoliberalism in practice. That may involve using the law to sue governments, as here, or it may involve using governments to enhance corporate power.

This description and my choice of example may surprise many, because it is often said that neoliberalism is all about the primacy of markets. This is certainly how many of what Mirowski calls the Neoliberal Thought Collective, and many commentators on neoliberalism, see it. I would argue the distinction is between neoliberalism as a theory or ideology, and neoliberalism in practice. Of course each influences the other, but they are distinct. In many if not all cases of neoliberalism in practice, neoliberalism has strengthened the power of corporations and large companies.

The clearest example of that for me is unionism. Everyone would agree that what was central in the arrival of neoliberalism in the US and UK was an attack on the union movement. What has this got to do with markets? The standard response is that unions interfere with the operation of a free market. But for an economist, so does monopoly, or any form of imperfect competition among firms. On this, neoliberalism in practice seems silent.

Colin Crouch talks about market-neoliberals and corporate-neoliberals to deal with this problem, but it hardly resolves it. You can see the contradiction being resolved in favour of corporations in Will Davies’ fascinating paper on how ideas about the virtues of competition, and the need to break up monopolies, changed within the University of Chicago from the 1930s until the 1980s. (I talked about this and other aspects of the problem here.) You could describe this period as a good example of where interests influenced ideas. As I noted here, I don’t think this is the only case where neoliberal governments are prepared to ignore the market in the interest of large companies.

This apart, it is fairly clear why corporations should like the idea of the primacy of markets, as long as its position in markets is unchallenged. Markets, after all, are how a corporation makes money. It is natural that it should want to avoid anything that interferes with this, like market regulations of any kind. Equally some corporations would want to extend the scope of markets into areas that might previously have been undertaken by governments.

On page 22 of this paper, Mirowski lists eleven ideas associated with neoliberal thought. I don’t think any of them go against the interests of corporations. Indeed number 9 is “Corporations can do no wrong—by definition”! This is at least compatible with viewing neoliberalism as an ideology that protects and enhances corporate interests and power. Of course this doesn’t mean that neoliberalism is only about enhancing corporate interests, or that neoliberalism as ideology is not capable of unwittingly acting against corporate interests (see below).

Of course the advent of neoliberalism was not the first time corporations had been politically powerful. The Polanyi-like tussle between corporate power and labour or democratic power began in the 19th century with the advent of corporations. The ‘Gilded Age’ in the US or the military industrial complex may be examples of strong corporate power before the ‘neoliberal era’. Corporations in the post-war period, in contrast, were relatively weak, which no doubt helped inspire neoliberal ideology.

Neoliberalism, Wealth Inequality and Crisis

One of the important acts of the neoliberal pioneer governments of Thatcher and Reagan was to reduce the tax on high incomes. I have talked about elsewhere how that may have encouraged CEOs to bargain harder, leading to ever growing CEO pay. But lower tax rates on high incomes would also have another effect, which is to incentivize corporations to divert money to dividends, which of course go to the shareholders who are the owners of corporations. Here is the share of dividend income in GDP for the US.

Towards the end of the 1980s, after the 1985 cut in the top rate of income tax from 90% to 50%, the share of US dividends in national income began increasing. (The share in GDP is low, but the share of corporate profits is of course greater.) This increasing share has continued through to today. Of course shareholders as a collective do not choose dividend levels, but the tendency that began at the same time to reward CEOs partly through stock options gave those who did choose dividend levels an interest in raising them.

A higher permanent share of dividends will mean the return from stocks will increase, and that in turn will raise stock prices. A recent study by Daniel L. Greenwald, Martin Lettau and Sydney C. Ludvigson is particularly interesting in this respect. They showed that over the period 1952 to 1988 the growth in the stock market could all be explained by the growth in output. In contrast from 1989 to 2017 a massive $34 trillion of real equity wealth (2017:Q4 dollars) was created by the U.S. corporate sector, and 44% of this increase was attributable to a reallocation of rewards to shareholders. In turn, a higher stock market price increases the wealth share of the 1%.

It gets worse. They also estimate that most of this reallocation was at the expense of labour compensation. Not only was the stock market booming because dividends were rising, but workers wages were lower as a result. In contrast to the 1952-88 period, output growth accounted for just 25% of the stock market rise. (Playing a more minor role in stock market growth were a lower risk price (18% contribution), and lower interest rates (14%) due to secular stagnation.

It is perhaps not surprising that an ideology that enhanced the power of corporations would lead to an increase in the income and wealth for the owners of corporations. However I have also argued that it led to a crisis for neoliberalism in at least the two countries where the influence of neoliberalism was strongest.

In the UK, the biggest blow to corporate power came not from unions or left wing governments, but from forces created by neoliberalism itself. High incomes and wealth generate a demand for innovative forms of financial investment, which because of financial deregulation were allowed to multiply. If you look at who helped Brexit by providing finance or, in one case, directly helping to win votes, we know of two very wealthy hedge fund managers (Robert Mercer and Paul Marshall). Critical to persuading people to vote for Brexit were very wealthy newspaper owners. More than 40 per cent of the Leader’s Group of top Conservative donors (who meet the PM and ministers regularly) owe their wealth to investment firms – a combination of finance, hedge funds, private banking and private equity.

In this sense Brexit was where one form of capital, the personal financial wealth of a few, helped set back the interest of another form of capital, a large number of corporations in the UK. The Conservative party that had previously always supported business interests in general became a populist plutocracy. Donald Trump in the US departed from the neoliberalism playbook by messing with free trade and by restricting immigration, neither of which were in the interests of corporations as a whole. [1] Whether this is a hiccup in the forward march of neoliberalism, or is a more fundamental challenge, we will see.

[1] From the early days of the Labour government the Conservative party has talked the talk on reducing immigration. However once in power, the pre-Brexit Conservative coalition and then government was very reluctant to take effective measures to reduce it. That changed with Brexit and the ending of EU free movement.