Democracy vs Big Business?

13th January, 2009

The Irish Times published my review of ‘ Supercapitalism’ by Robert Reich yesterday. The author is a former Cabinet Member for President Clinton. The full review is below.

Paschal Donohoe is a member of Seanad Eireann. He was formerly the Commercial Director for Procter & Gamble Ireland. Review of ‘Supercapitalism’ by Robert Reich.

Momentous events such as bank nationalisation, the recklessness of banks and the return of Keynesian economics are winning many new and unlikely converts to a more skeptical view of the market economy. However these swelled ranks should not distract from listening to those who have a longer track record of commenting on the social effects of big business.

Robert Reich is such a commentator. Prior to becoming a high profile academic he served as Bill Clinton’s Secretary for Labour. The Wall Street Journal recently named him as one of the ten top business thought leaders in the world. ‘Supercapitalism’, his new book, is his latest contribution on the role large businesses play in our society and economy.

The title of the book hints at a reverential approach to the market economy. The subtitle of the book:- ‘The Battle for Democracy in an Age of Big Business’ gives a clearer idea of where Reich is coming from. He argues that the creed of corporate social responsibility, and its adoption by multinational companies, is a bad development.

His analysis focuses on the American economy. However the global dominance of this economic model makes this book very relevant to our current predicament and potential long term solutions.

Supercapitalism is the ability of the market economy to create vast wealth for shareholders, consumers and some employees. This capacity has been ‘turbo charged’ by the internet, global supply chains, economic

deregulation and high volume production chains that can easily meet niche consumer needs.

However the corporate environment is relentlessly volatile and restless. The status of corporate giants is continually under siege from an investment community relentlessly critical of share price performance. These companies find their sales performance continually challenged by new aggressive market entries. Such forces create a ruthless focus on meeting short term targets.

Reich argues that these effects are undermining democracy. He states that “capitalism has become more responsive to what we want as individual purchasers of goods, but democracy has grown less responsive to what we want together as citizens”. The book points to the inability of democracies to take decisive action to deal with collective problems such as climate change or improving welfare systems.

Corporate Social Responsibility is an example of how challenges are sidestepped by companies and politicians. Reich argues that there should not be demands for more social responsibility. This is because it allows companies to portray serious issues, such as healthcare provision and environmental protection, as issues specific to them. This portrayal reduces the public demand to change the ‘rules of the game’ for everybody.

The right response would be for politicians to change the conditions for all companies and not allow businesses to sidestep important issues by declarations of individual action. Reich relates the increase in interest in corporate social responsibility to a decrease in faith in politics.

The author also covers more familiar ground. His analysis of the growth in executive compensation is startling. In 1980 the average CEO took home roughly 40 times the average industrial wage. By 2001, CEO pay packages were about 350 times the wage of a typical worker.

This book is relevant to many of the challenges Ireland and Europe faces. There is no doubt that we must make the market economy more sustainable. Sustainability used to be just an environmental concern. It is now clear that the boom and bust cycle has not been abolished, it just went away for a short time. How we adjust the ‘rules of the game’, through regulation and a greater appreciation of the role of government, now occupy central bankers and government across the world.

‘Supercapitalism’ is weak where it fails to offer clearer ideas about how these improvements can be made. This book is oddly silent on the role government can play. Globalisation is the result of political decisions. These same decisions can be reverted or changed.

It is also too critical of the efforts of individual companies when they act in the interests of Corporate Social Responsibility. The working conditions and wages of many employees have been improved by these efforts. Wal-Mart is now one of cheer leaders for American health care reform. The fact that this campaigning is driven by commercial grounds and not altruism does not take away from the fact that their efforts could make a difference to millions of employees.

At a time when large businesses themselves are requiring more of governments Reich misses an opportunity to outline clearly the new role that politicians can play in changing the ‘rules of the game’. We all know the system is broken. What is needed now is visionary leadership on how to fix it.