Episode Transcript
Speaker 0 00:00:00 If you are listening to morals and markets on your favorite podcast app, please be sure to like, and subscribe and rate the podcast so others can find this awesome content. Um, and with that, I'm handing things over to you, Richard.
Speaker 1 00:00:14 Thank you, Abby. And as I normally do, I thought I would just read my own description of this segment. And then, uh, as before I'll make comments for about 20, 25 minutes and then open it up, uh, to discussion and, uh, question and criticism. So my description and title of course is stakeholder capitalism is fascistic. And anytime you call something fascistic, that's a kind of controversial, maybe even an incendiary term, but I will try to justify it. Uh, tonight I've, I've spoken on this before and by the way, there's a chapter on this entirely in my, uh, new book called where have all the capitalists gone. But the description for the tonight is the following the model of so called stakeholder capitalism is a contradiction in terms, but it's fast replacing the model of shareholder capitalism and shareholder capitalism. I actually consider to be a redundancy that is the only kind of legitimate capitalism.
Speaker 1 00:01:11 And I'll elaborate. Now, the stakeholder model entails basically scores of pressure groups. Uh, most importantly, including politicians and regulators basically dictating what corporation managements must do, especially if what they're doing is less rational, less profitable and averse to actual shareholders, goals and interest. A related designation you may know is ESG, which stands for environment, uh, social and go and governance issues. Um, another budding aver, a version of what I think is similar to China's social credit system. And in summary, whereas capitalism entails both private ownership and private control of the needs of production. Fascism entails private ownership entitled, but public control. And the latter is the essence of stakeholder or put another way. The stakeholder model is essentially fascistic. So that's as to my opening, but just to give you a little color and commentary on this, the business round table has been around for many, many decades, and it's a, uh, lobbying group basically, but also an issues group that, uh, is, uh, run by, uh, large corporations and CEOs.
Speaker 1 00:02:32 So when they issue statements, public statements and elsewhere, um, they're typically seen as representative of corporate interest. And so it was very interesting in August of 2019. Now I'm here reading off of the New York times. Shareholder value is no longer everything top CEOs say, and I'm reading from the segment of it, breaking with decades of long held corporate orthodoxy. The business round table today issued a statement on the purpose of a corporation, arguing that companies should no longer advance only the interests of shareholders. Instead, the group said they must also invest in their employees, protect the environment and deal fairly and ethically with their suppliers quote. And this is from the round table. While each of our individual companies serves its own corporate purpose. We share a fundamental commitment to all of our stakeholders. The group said we commit to deliver value to all of them for the future success of our companies, our communities, and our country.
Speaker 1 00:03:38 Now I just wanna quickly note that it is certainly in the self-interest of a corporation, which is trying to earn profits and maximize shareholder value to treat their customer suppliers and employees. Well, that, that is just nonsense to suggest that until this stakeholder model came along, corporations had no interest in any of these important constituents of corporate success. So in many ways, this is being couched in a way that doesn't want to sound too radical. In fact, the fact that they even speak of, um, that the shareholder interests not be the only interest that management serves, uh, is again this idea, but it's clearly a dilutive idea. The idea is it's no longer just the shareholders, but these other enumerable parties. And we'll see, they are quite enumerable and they very much entail anti corporate interests. Now, to just be clear on the terminology before I go further with this, a shareholder literally means you have a share in the company cuz you invested money in it.
Speaker 1 00:04:46 For those of you not familiar with corporate finance, when you invest in a company and acquire ownership through the stock market, you buy shares. That's why they're called shareholders shares, meaning common stock certificates, meaning evidence of ownership of a company. So you give them your money and in turn they give you this, right? Basically this stock ownership and you have a share of the company. Now you might own 100% of the company. Mostly smaller companies can be 100% owned or you can own 75% of it or 50% of it or half a percent of it. The point is the shareholders of the owners. And that's important to keep in mind when we talk about models of ownership and control. So it's really this ownership aspect that is being diluted, uh, with the stakeholder model. Now notice very cleverly, the phrase stakeholder sounds like shareholder, but it involves having a stake in something.
Speaker 1 00:05:41 Now what does it mean to have a stake in something, especially since it's, it's not obviously the same as having a share in something. It means you have an interest in something, even though you don't own it. Well, the key to the stakeholder theory is that those who don't own should be able to control. And I might add that if you just think of your own person and body, this way, the idea would be suppose you think you own yourself and therefore you can control what you do with your mind and body. You have Liberty, you have freedom. But if someone comes along and says, well, you can own your body and maybe even some of your stuff, but I'm gonna tell you what to do with it. I'm gonna tell you what to do with your body. I might even make you chattel slavery.
Speaker 1 00:06:26 I might use your stuff. Yeah, you can still own it in title, but I'm gonna control it. I'm gonna tell you how to use it for my benefit or others. No one would look at that as, uh, ownership, because ownership comes with control. It's part of control. It's meaningless to speak of owning something without being able to control it. Now, now I'll, I'll distinguish further, uh, before we get into it, but I wanna get some other quotes on the, on the, on the docket here, uh, distinguishing the four major systems of political economy based on this de separation. Uh, so this two part aspect of ownership and control, but let me tell you also where this is is coming from. It is not, uh, an or a new theory. If you look at the, if you just look up origins of stakeholder theory, you see that it originates actually in a 1963 paper, the first time the phrase is ever used, but it's really in the 1970s and largely by the way, outta the law schools where this concept comes up and it is, you can, you can tell from the origins literature, a direct assault on the ownership principle and the shareholder principle of capitalism.
Speaker 1 00:07:35 Now the other thing is over the years, it has seeped into business schools. So one of the reasons CEOs now, of course, they're the targets, they're the managers of these large corporations. They're the, the, I wouldn't say the targets and the sense of not, not targeting shareholders as shareholders are clearly being diluted and semi Rob, but the CEOs are being used to carry this out. Uh, short of just taking over these companies. The CEOs are being groomed to have this attitude and have this position. Now, another more recent source of this is, uh, you may know, uh, the world economic forum. So this is a group of major prominent, uh, business leaders, policy makers, academics, uh, think tanks run by a guy named Klaus Schwab. Now he's been running this for many, many decades and he himself has written on stakeholder capitalism. So he, he is kind of the, the central figure today, at least in pushing this view and every year, and they have sub conferences as well, every year, Davos has these conferences in Davos, Switzerland, and they're pushing this.
Speaker 1 00:08:46 So if you wanna read more about this and the particular portrayal of it, I would go to the world economic forum website, w E F and you'll see plenty of material, including a book by Schwab, an update of his prior book called stakeholder capitalism, subtitle, a global economy that works for progress people and the planet. So the implication of course, is that the shareholder model is anti-progress anti people, anti uh, planet. Another phrase that this comes under, or it used to decades ago is, um, CSR, corporate social responsibility, CSR corporate social responsibility. So again, the idea that the corporation should not be responsible to its owners, the managers of the corporation, but rather to a broader constituency. Now the current president, uh, when he was running in 2020, put it fairly succinctly. So this is Biden in July of 2020, quote, it's way past time to put an end to the era of shareholder capitalism. The idea that the only responsibility a corporation has is with shareholders. That's simply not true. It's an absolute farce corporations have a responsibility to their workers, their community, their country. That's not a new or radical notion.
Speaker 1 00:10:12 We'll see soon that it certainly is not new. And, and not just as I say that, it goes back to the seventies. This is exactly the kind of approach that was taken in the 1930s in Molins fascist Italy in Hitler's fascist Germany, but I'll get back to that in a moment. Is this just all talk and air? Well there's legislation already being crafted to impose this. Um, there are, has long been from the SCC and elsewhere regulations of companies. And now they're using the SCC and others to have corporations commit to certain things that have nothing to do with shareholder value. But in terms of particular legislation, if you wanna look at how this would be implemented and how it would be crafted, look at from Senator Warren, Senator Elizabeth Warren, uh, possibly the most prominent, uh, in Congress pushing this view in an, in a piece of legislation called accountable capitalism, notice the phraseology and she'll often say I'm a capitalist.
Speaker 1 00:11:14 So she is certainly not a capitalist, but the, the felt need, she has to use the word capitalism in her legislation is quite revealing. She doesn't want to come across as anti capitalist. Uh, but what is meant by accountable capitalism, if you read the legislation again, it's like the other phrases, you know, without this intervention by government, without this legislation, the idea is that capitalism is unaccountable, irresponsible, reckless, a two individualistic, two focused on who owns the company, uh, just an excerpt from her own website describing this legislation. It was proposed in 2019, quote. This is from Warren for much of their history. American corporations tried to balance the interest of all their stakeholders, including employees, customers, business partners, and shareholders, but in the 1980s, corporations adopted the belief that their only legitimate and legal purpose was maximizing care holder today, please
Speaker 2 00:12:17 Mute,
Speaker 1 00:12:23 Mute, mute. I hear that
Speaker 0 00:12:29 I'm go through and mute. I'll figure out who it is and mute them
Speaker 1 00:12:35 Again. Quoting from, uh, Warren quote. She believes there's been a shift since the 1980s that's nonsense the 1980s, of course, of the Reagan years. So they're trying to portray this as the us becoming more shareholder oriented and more pro capitalist in the 1980s, the Reagan years were a move back toward more capitalism, but it's really in the last 50 years that the move has been against share the shareholder model, uh, not for the shareholder model. So this is not something that we're becoming more capitalists and, and Senator Warren has to stay, uh, stand in the way of it.
Speaker 1 00:13:13 Who are the stakeholders? Uh, I've, we've seen a list already, but a study by Samantha Miles in the journal of business ethics called stakeholder, essentially contested or just confused. She was interested. She's really not, uh, has a view. Doesn't really have a view one way or another. She was more interested in trying to classify who the stakeholders were. So she did a extensive literature review of trying to figure out what a stakeholder meant. I mean, if this is the system and the method we're going to have, you're gonna have to tell corporations who their stakeholders are. And even if you have a list of only 10, you'd still have to say, well, which one takes priority. One, one of the virtues and greatness of the shareholder model is, you know, who the owners are and you're obliged to serve them in a fiduciary capacity period. That's it?
Speaker 1 00:14:02 Well, when she did the study, she found that the concept of stakeholder I'm quoting now has become central to business. Yet there is no common consensus as to what the concept of stakeholder means with hundreds. I, I repeat there hundreds of different published definitions suggested while every concept is allowed to be contested for stakeholder research. This is problematic for both theoretical empirical analysis. This article explores whether this lack of consensus is conceptual confusion, which would benefit from further debate to try to reach a high degree of elucidation. So notice she accepts the premise that it's okay to make managers, uh, duty bound to serve other than the owners. And she's just disputing, uh, who will the list is and how long the list is. Interestingly, she uncovers 435 different distinct definitions of stakeholder in the literature. An interesting number because it's the same number of representatives in the us Congress 435, uh, uh, different quote unquote stakeholders who, uh, should be able to tell corporations what to do.
Speaker 1 00:15:16 Now, something on, I mentioned before to clarify, uh, on the, uh, four types, I think this can be helpful in terms of understanding what's happening here. There are basically four types of political economy systems. And if you think of a two by two matrix where you have quadrants, so there's gonna be four sections. And imagine along the rows, we, uh, designate ownership as either private or public. And then in the columns up top, you designate control and the control is either private or public. Well, now, if you imagine in the upper left corner, the upper left corner would be private ownership and private control in this case say of the means of production. That's the standard way of defining these systems. All sides would agree that private ownership and private control is the capitalist system. Now, what is the diagonal opposite in the call? It the Southeast cran public ownership and public control that is obviously socialism.
Speaker 1 00:16:24 And again, the socialist would agree with this definition. So would a capitalist. Now fascism is a hybrid. If you know the history of fascism and it is largely a 20th century phenomenon sometimes today in the literature called CISM. And I'll elaborate on that. Well, what is fascism? It is not the nationalization of industry. It is not what socialists would do. The socialists would just seize the means of production, take it over and have the government own it and run it. But the distinction with fascism is it permits private ownership, but there's public control. There is the government, or if government allies controlling what the corporation does and that's, what's unique to fascism. And that is obviously what stakeholder is. And that is why people like Obama and K Schwab and Liz, Warren, and Biden. When pressed, if you don't know the terminology, if you press them and say, well, you guys are just socialists, they'll say, and quite rightly, they'll say, we're not socialists.
Speaker 1 00:17:26 We are not advocating that the government own Exxon, for example, we're just gonna tell Exxon what to do. We're gonna mandate telling ex Exxon management what to do, and it may be in the, against the interest of Exxon owners. You get the idea that is the essence of fascism now, because the word has such incendiary history to it, just to be clear for those who don't know, the history, fascism does not necessarily entail racism of the kind scene in Germany. There was no racism, for example, in the fascism of Mo and Mo put in a fascist system in Italy, in the twenties before Hitler did it in the thirties. And so really that is the model. And if you just look up mu or gen teal, who is the theorist of fascism from the twenties and thirties, they're definitely advocating this system they're. And to the extent they pose as anti-socialist or anti-communists, it's only because they oppose the public ownership part of the model, but they're definitely of the view that the corporation and the individual included by the way, owes, uh, allegiance to the state must do everything in, in order to enhance the power and prestige of the state, including the war, making power of the state.
Speaker 1 00:18:44 So these are, this is a model that attempts to use the assets created under free markets. The corporate structure is a free market structure and use it in service to collectivism. And stateism. So, uh, a point about the interpretation of this, this is one of the reasons why sometimes fascism is associated with capitalism. You'll often see socialists interchangeably referring to the capitalist model and the fascist model. In other words, the capitalists or fascistic, what is their view? Their view is the fascist don't go far enough. Their view is the fascist don't me, uh, argue for ownership of the means of production. So these are two anti capitalist groups, the fascists and the socialist quibbling over what degree of control and ownership is appropriate or not. The other thing that's unique about fascism, which comes often obscures its um, position is it does since it does not abolish the corporate model, but simply coops it, it seems to be pro business and particularly big business.
Speaker 1 00:19:53 Now this is an important distinction. The reason the corporate model, the fascistic model, uh, is seen as pro business. It is not only because they don't abolish or nationalized business and create one huge government monopoly it's because they want the businesses to be big. They want that the businesses that they control to be near monopolistic in each industry, why cuz it's easier to control them. If you had a more competitive system, as capitalism would deliver where there were many companies and there are many buyers and sellers, so to speak, the government would be in less positioned to control. So the, so the idea then that's, what's meant by CISM and the literature. The idea, not that it just it's a system of private corporation. No it's big corporations controlled by government. And the bigger corporations you may know are that tend to be possibly because their CEOs are created in the universities, in the business schools, they're the ones who get the elite MBAs and work themselves up the ladder.
Speaker 1 00:20:56 They tend to be trained in the view that the corporation is not a private entity, but rather should work in service to the state. And of course the bigger corporations tend to be more regulated, often more subsidized by government. So the, if you take a career path in small business and entrepreneurial, small business, you, you will tend not to be, uh, as pro-government intervention as some of these major corporations are. So for those who are confused about why would it be that we see CEOs today embracing this model? Because when you think about it, they're basically violating their fiduciary duty. If an Exxon CEO gets up and says, I'm gonna serve interests, other than the people who own what I'm managing, that is a violation of fiduciary duty in, in normal judicial proceedings, that person would be arrested and fined and thrown out of there because they're basically AB responding with the assets of the owners.
Speaker 1 00:21:50 This is what in economics and law is called the principle agent problem. The principle in this case is the owners. The owners have hired the managers to manage their assets. And if the managers don't do that in the interest of the owners, they are violating the contract, they are violating the fiduciary duty. This is done by the way, when it comes to estates and trusts. And sometimes it's even argued. That is the essence of legitimate political governance, where the governed who vote for their agents, their representatives, uh, are really the ones with the sovereign rights. And it's the obligation of government officials to protect the individual rights, the personal, uh, the persons and security of the citizens. Whereas if they become tyrants, if they become not fiduciaries who carry out the will of the people and the rights of the citizens, that rather the other way around, it's the essence of tyranny. So that on the political level is what you see when the whole system is, uh, inverted. We are moving in America and have been for the last 50 years or so from the FA from the capitalist model to the fascistic model, we are not moving towards socialism. We're moving toward fascism and tho, and again, those who know the history from the thirties knows that this leads to tyranny and poverty and usually war type, uh, economy for various other reasons we can get into.
Speaker 1 00:23:22 So it's a, it's one of the reasons I wanna high I've been highlighting and want to highlight it. This is a kind of a warning and, um, and an explanation I, I think what's happening and how it should be resisted. Now I want to, before I finish, I have about five more minutes to my opening. I wanna bring your attention something very interesting in the past in a corporate critique, that's now has a new light on it. When you look at stakeholders in, um, the early 19 hundreds during the, actually in the first third, the 1932, a famous book came out and, and turned out to be very influential in FD R's administration called the modern corporation and private property. So if you look this book up, it's, it's very famous, very influential, the modern corporation and private property. And it was coauthored by a lawyer and economist.
Speaker 1 00:24:15 One from Columbia that was Burl. That was the lawyer. And Gardner means the professor of economics from Harvard. Now the theme of their book was that capitalism was no longer truly capitalism anymore. Now notice this is a very common theme in the thirties when fascism was rampant, not only in Europe, but in America, in the universities, in the FDR administration, it was peopled by fascists and according to bur and means capitalism was no longer in service because corporations have become so large that the managers were no longer the main shareholders, you know, imagine Henry Ford in 1900, he's not only owns the company, but controls the company and it's management decisions. Well, the feeling was that by 1930 and now we're looking for scapegoats for the stock market crash. We're looking for scapegoats of the great depression. The idea is, well, corporations have completely gone off the rails because there is no direct self-interest in the managers anymore managing on behalf of the shareholders.
Speaker 1 00:25:21 So the critique of Berlin means was that there was a separation of ownership and control, and that this was a bad thing. Well, interestingly in the forties and fifties in business school, prior to the stakeholder model, arising many corporate finance professors, uh, developed ideas for uniting, again, as best as possible as corporations got better, the incentive structure for managers and CEOs to manage on behalf of the shareholders. Uh, so if they couldn't own, of course they could not own large shares of the corporation. The corporation was super large by now. You could still have things like incentive packages or stock options, or various other ways to tie the, uh, performance of the company to the performance of the CEO. And that worked very well. And the, the ownership control issue was basically solved in the forties and fifties. And at any rate Berlin means in the 1930s, we're critiquing the corporation from that standpoint.
Speaker 1 00:26:21 Now think of this today, because it almost sounds so quaint that was a critique of corporate America. It sounds quaint because today there was a push to separate ownership and control the same kind of critiques of capitalism that came from the 1930s today, take the form, not of insisting that corporate executives better represent the interest of shareholders, but that the opposite occur, that there be a widening separation of ownership and control that the owners of the corporation have less and less say in who their managers are and what their managers are doing. So I think that turn of events is, is very interesting in Germany. They changed the entire in the 1930s with the corporate law system in Germany, under Hitler and the Nazis. They totally overthrew the corporate legal system and turned it into a fascist regime precisely by diluting and getting rid of these fiduciary elements.
Speaker 1 00:27:19 And of course it's well known. The stories are well known if you know them in Hitler's Germany of huge, large German conglomerates, just falling over themselves to serve the Nazis. There were very few that were willing to step up and, and oppose the Nazis. Now, I just want to end on a, a more positive note if you're looking for literature, you know, besides what I'm writing that pushes back against this, or, or writes in favor of the shareholder model, the most famous, uh, uh, launch of this argument really came from, uh, Nobel Laureate, Milton Friedman in 1970. So a very famous, and you can find this on the internet. I think from the New York times, September, 1970, the social responsibility of business is to increase profits. That was the title of it. That's 1970, that's almost more than 50 years ago. Um, that was the argument made and Friedman in effect was noticing even in 1970, he was beginning to notice corporations violating their fiduciary duty and purporting to spend corporate funds on things that were not for the corporation.
Speaker 1 00:28:28 His view was if you are running a corporation, you're blo in, in a fiduciary sense. And, and in a, in an efficiency sense, he was also arguing it from the standpoint of this is how companies are more prosperous and productive by focusing on the bottom line, by focusing on shareholders. And if that meant various groups you dealt with, uh, you would deal with yes, but the goal would be to treat them well because it improved the bottom line, improved profits and profits here would be interpreted not in the Marxist sense of profits stolen from manual laborers or stolen from consumers by charging them too much, but rather a net value creation. And if there's a talent at the top, as there typically is, there's a kind of a pyramid of ability in corporations. It's precisely the people at the top that are gonna co contribute most to the bottom line.
Speaker 1 00:29:18 Not those at the bottom, it's precisely Friedman's shareholder model. If you look on the internet and elsewhere, it, that is being assault and an attack over the last 20 years via course passed, I think in 2006, but I don't find many, uh, progeny of, of Friedman standing up and defending, uh, the corporation there is, uh, from 1979. So this is about a decade after Friedman wrote, uh, a very good book called in defense of the corporation by Robert Hesson. And, uh, he shows that corporations amount to legal entities that permit, um, missions, people to congregate and have a mission and collect assets and raise money that there's nothing nefarious about the corporation. There's nothing that makes it a vehicle or, or a product of the state. You'll hear some libertarians even say that the libertarians will, some of the libertarians will be anti corporate, cuz they think there could not be corporations, government favors.
Speaker 1 00:30:17 That's not true. The incorporation laws, uh, historically when done well, they're just, uh, a generic law that permits people to, uh, accumulate and come together for, um, legitimate purposes. So the idea of the corporation as a person with legal limited liability, there's nothing wrong with that. People all the time create structures, uh, in order to, uh, prevent having, uh, being sued for just anything by other people. There's nothing wrong with congregating together and pooling your assets and pooling your talents for a particular mission. So in defense of the corporation by Hessan well recommended, not easy to find. I think it's out of print more recently from 2013, uh, by man cell M a N S E L L Samuel Manel, capitalism corporations and the social contract subtitle, a critique of stakeholder theory. So I, I don't agree with everything in that book, but it's, it is a, uh, a decent attempt to critique the stakeholder approach and defend, uh, the shareholder approach.
Speaker 1 00:31:25 I'll, I'll leave it at that. I, I think, uh, I've spoken before on crony capitalism, stakeholder capitalism is another example of what I call these adjective. Capitalisms these quote, varieties of capitalism instead of simply defending capitalism for what it is, the system of private ownership and private control, the means of production, not just the means of production, but the products themselves and of you as a person that is really the only kind of capitalism I think is legitimate. All these other attempts, crony capitalism, CISM, state capitalism, and certainly stakeholder capitalism to me are anti-capitalism. So their contradictions fundamentally contradictions in term, but I think other than crony capitalism, this is one of the worst of them. So crony capitalism and stakeholder capitalism, uh, both must be resisted from a philosoph political and economic standpoint. So I'll draw a line there, Abby, for the, uh, podcast.
