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Those Darn French
Posted by: Dale Franks on Wednesday, March 29, 2006

Ah, the International Herald Tribune. It can always be counted upon to spew the standard Lefty line about the faults of capitalism. And today's op/ed by William Pfaff, occasioned by the French labor protests, is certainly no exception.
Since the 1970s, two fundamental changes have been made in the leading (American) model of capitalism.

The first is that the "stakeholder," post-New Deal reformed version of capitalism (in America) that prevailed in the West after World War II was replaced by a new model of corporate purpose and responsibility.

The earlier model said that corporations had a duty to ensure the well- being of employees, and an obligation to the community (chiefly but not exclusively fulfilled through corporate tax payments).

That model has been replaced by one in which corporation managers are responsible for creating short-term "value" for owners, as measured by stock valuation and quarterly dividends.

The practical result has been constant pressure to reduce wages and worker benefits (leading in some cases to theft of pensions and other crimes), and political lobbying and public persuasion to lower the corporate tax contribution to government finance and the public interest.

In short, the system in the advanced countries has been rejigged since the 1960s to take wealth from workers, and from the funding of government, and transfer it to stockholders and corporate executives.

While that may seem an incendiary comment, it seems to me a simple factual observation. The criticism currently made of Europeans who resist "reform" is that their policies block managers from downsizing and outsourcing jobs, in order to add "value" to the corporation. (A recent headline in the International Herald Tribune read: "AT&T- BellSouth deal gets Wall St. applause. Merger would lead to 10,000 job cuts.")

I once called this "CEO capitalism," since corporate chiefs today effectively control their boards of directors and are also the biggest benefactors of the system, subject only to critical attention from investment-fund managers, themselves interested in maximizing dividends, not in defending workers or the public interest. (The well-known American fund manager, John Bogle, now retired, has taken up my argument and advances it in his recent book, "The Battle for the Soul of Capitalism.")

The second change that has taken place is globalization. The crucial effect of this for society in the advanced countries is that it puts labor into competition with the poorest countries on earth.

We need go no further with what I realize is a very complex matter, other than to note the classical economist David Ricardo's "iron law of wages," which says that in conditions of wage competition and unlimited labor supply, wages will fall to just above subsistence.

There never before has been unlimited labor. There is now, thanks to globalization - and the process has only begun.

It seems to me that this European unrest signals a serious gap in political and corporate understanding of the human consequences of a capitalist model that considers labor a commodity and extends price competition for that commodity to the entire world.

In the longer term, there may be more serious political implications in this than even France's politicized students suspect. What seems the reactionary or even Luddite position might prove prophetic.
Look, to a certain extent, this criticism is valid. When CEOs can make millions of dollars in bonuses, even if earnings or stock prices fall, there's a fundamental problem of corporate governance that needs to be addressed. If nothing else, this is a sign that corporate boards are abdicating their responsibility to ensure shareholder value is maintained. In addition, American companies in particular have become increasingly focused on short-term stock-price and/or earnings performance.

In both cases, this is failure of corporate governance that is directly attributable to the board members. (By the way, I'm available for service on corporate boards. Admittedly, the demand for moody loner/misanthrope libertarians on corporate boards is limited, but if your company is looking for a complete free-market a-hole to sit on your board, I'm your guy. But, you should probably know what "complete free-market a-hole" entails before making me an offer. Fair warning.)

But, whatever the current problems with American corporate governance, that's not a valid criticism of capitalism as a system. Because, at the end of the day, capitalism, which is nothing more than the end sum of millions of consumers making individual decisions about the products and services they desire on a daily basis, has proven to be the most effective means of ensuring the greatest amount of wealth for the greatest number of people. Just look at the workers' and peasants' paradise of Sweden. African-Americans in Alabama have more wealth than the average Swede. In American terms, the Swedes are losers.

Moreover, while you can decry the fact that American capitalism is rigged in favor of stockholders, the simple fact is that more than half of Americans are, in fact, stockholders. As such, that puts a bit of a different complexion on the problem.

What the French want is a guaranteed income, a lifelong job, and immunity from any deleterious economic changes. What they want, in short, is to live in a fantasy land where people do no respond to incentives, and where they are guaranteed immunity from the real world.

Heh. Good luck with that.
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Previous Comments to this Post 

If only David Ricardo were around to do what Marshall McLuhan did in that scene in Annie Hall, where he stepped out from behind a potted plant to tell a pompous fellow in front of Woodie Allen "You know nothing of my work". I suspect that the formulator of the theory of comparitive advantage, which underpins the whole idea behind globlization, would take issue with this author’s invocation of his analysis of wages.

Written By: Billy Hollis
URL: http://
Billy, I have to say that this critisism of American style corporatism is pretty accurate. The postition of the writer on globalization is a little more tenuous.
I would add to it that corporate power in America has succeeded in changing the rules to give CEO’s unlimited power, to rob pension funds (legaly), to change the accepted accounting standards(done in the 1990’s), to colude and form oligopolies where before you have competition, employ mass illegal immigrants, and to syphon billions of dolars from the government in the form of subsidies.

Libertarians and conservatives should be against this form of corporatism. Instead, many people on the right are Rah-rah supporters of everything the Wall Street journal editorial page wants. Others are just reflexivly against anything the Liberals want, well, unfortunantly the Liberals are not always incorrect with their description of problems (they have the wrong solutions).

Free trade and globalization are a good thing, but they do cause temporary problems which government can help with a little around the edges. However, rampant corporate power is not such a good thing. If the government wants to help commerce they should concentrate on making the enviroment friendly for the growth of small and medium sized business.
Written By: Kyle N
URL: http://
Kyle, I’ll be the first to say that corporate management in the US is flawed, particularly for very large corporations. The reason I don’t get that incensed about it is that, over a medium to long time span, the problem is self-correcting. Corporations that manage themselves stupidly, GM for example, eventually pay the price in contraction or bankruptcy.

Government is just as badly managed, but lacks the external feedback to correct its problems. Unelected bureaucrats have no feedback at all, and politicians have used redistricting, campaign-finance reform, and other incumbency-protection programs to insultate themselves from feedback. Thus there’s no limit to the damages they can do. I worry a lot more about that.

The bankruptcy of a GM will be a blow to the US economy, but not a catastrophic one, and maybe not even that noticable. If social programs become financially untenable, the damage will indeed be of a catastrophic level. So that’s where I am interested in focusing energy on trying to find a solution.

To put it in metaphorical terms, each spring I spend some time eliminating the moles from my yard, because they damage it. But I wouldn’t be paying much attention to the moles if a smouldering fire were threatening to burn my house down.
Written By: Billy Hollis
URL: http://

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