Liberal market economies are under attack from all sides: the left decries “market fundamentalism,” inequality and corporate greed; the right bemoans corrupt public elites, the burdens of regulation on businesses and the steady erosion of individual freedom and free speech.
As in so many other areas of modern life, Covid-19 has raised the stakes on these debates. We’ve seen corporations come under fire for stock buybacks, which weakened their balance sheets and left them less robust when Covid-19 struck; forces on the left wanting more regulation of business; free market advocates fear that the golden goose will be killed, and that society will suffer too.
In the midst of difficulties and contradiction, leading academics and businesspeople (myself among them) have joined forces to seek a third way—somewhere between the unrestrained free markets of the right and the big government dogmas of the left. Inspired by Adam Smith, our vision of an ethical liberal market economy—expressed in our Panmure House Declaration—coalesces not around excessive regulation, nor the religion of maximizing (short run) shareholder returns. Instead, we encourage policy that favors market-based solutions, alongside corporate governance that recognizes mainly stakeholder (not just shareholder) value. It’s my belief that if you try to maximize shareholder wealth, you most assuredly won’t succeed. It’s only by trying to service customers and build a great company that you will benefit shareholders.
How did we get here?
How did we arrive at a place where some businesses put profit above all else? Where S&P 500 companies spent $5.3 trillion (54% of net income) on stock buybacks between 2010-2019, and another $3.8 trillion (39% of net income) in dividends? Not all of these buybacks are wise.
This is a relatively recent phenomenon. Years ago, as Oxford economist John Kay explained at the Panmure House Society’s 2020 conference, businesses were “deserving of the love” that underscores Adam Smith’s moral philosophy.
Kay used the pharmaceutical industry to illustrate his point. After World War II, companies such as Merck and Johnson & Johnson produced drugs and vaccines that improved health and extended lives, provided their employees with rewarding careers, and delivered substantial profits to their shareholders. As George Merck himself once said, “Business is for the people. It is not for the profits. And the better we have remembered that, the more certainly profits have come.”
The industry, however, began changing in the 1990s, as the ideology of maximizing shareholder profit picked up steam. Instead of using profits to invest in innovation, many corporations, pharmaceutical and otherwise, delivered those profits back to shareholders. By 2018, according to UMass economist and fellow Panmure House Society member William Lazonick, 18 pharmaceutical companies in the S&P 500 had spent the last decade distributing $335 billion in buybacks and $287 billion in dividends—106% of their profits. The sale of opioids in rural American communities has further tarnished the industry’s image.
At the same time, the international institutions that for decades buoyed liberal market economies and globalization have also been challenged. This is in large part due to China’s increasing presence on the global stage; a presence that under Xi Jingping, as Orville Schell put it, seeks “to make the world system safe for Chinese authoritarianism.”
For instance, the Chinese have reaped the benefits of the World Trade Organization while consistently flouting its rules; their government sanctions asymmetric market access, espionage, technology transfers, and cyber-attacks that upset the liberal, merit-based system of wealth creation that Smith championed. This flouting has encouraged others to follow suit.
What can we do?
As our international institutions continue to fray, global corporations can and must play a more significant role in promoting ethical liberal market economies.
This means shifting corporate governance: away from ideologies that exclusively favor shareholders and towards those that recognize other stakeholders necessary for the long run success of the enterprise; away from short-term thinking and towards long-term investment and product innovation; and toward the prioritization (and measurement of) environmental and social impact.
We need to think of the relationship between markets and the state with nuance, the way Adam Smith did – “living institutions embedded in specific cultures” that “shape and are shaped by their participants.”
As global institutions recede, business leaders have a new opportunity to shape our liberal market economies – not solely for individual profit, but for public good.