The Athenian Acropolis and the Assembly Grounds

 

  

                    Political Philosophy and Economic Localization in a Time of Crisis

                                                                                                  

Central to the concerns of the ancient Greeks, in specific to the Athenians, was the exploration and explanation of the world. Although the Greek philosophical viewpoint tended to be universal, applicable to all mankind, at least to all Greeks, the fact that their political philosophies developed in the city-state, the polis, made them specifically applicable to the governance of a local group that had to devise the best ways to live together. It is this viewpoint that we emphasize in the following essay. The Constitution of the United States then modified these democratic ideas to the governance of the world’s first large-scale democracy.

In Book IV of The Republic, Plato laid forth his vision of the three elements of the human soul and therefore the structure of a harmonious state. There is first Reason, that calculates and decides. Second there is Spiritedness, the source of ambition, achievement and the thirst for recognition. Finally, there is Desire, that seeks the gratification of basic physical or instinctual drives.

The just man has a balanced personality. He, “…will not allow the three elements which make up his inward self to trespass on each other’s functions or interfere with each other, but, by keeping all three in tune…(he) will in the truest sense set his house to rights, attain self-mastery and order, and live on good terms with himself. When he has bound these elements into a disciplined and harmonious whole, and so become fully one instead of many, he will be ready for action of any kind…” 1

A state will also contain these three elements of the human psyche, but emphasizing one or the other. The Enlightenment state of the 18th century, of which the United States is an outstanding example, was structured according to the large-scale balance of powers, according to the Federalist papers (1787), “…what is government itself but the greatest of all reflections on human nature? If men were angels, no government would be essential. If angels were to govern men neither external nor internal controuls on government would be necessary…You must first enable the government to controul the governed; and in the next place, oblige it to controul itself. A dependence on the people (at election time) is no doubt the primary controul on the government; but experience has taught mankind the necessity of auxiliary precautions. This policy of supplying by opposite and rival interests, the defect of better motives, might be traced through the whole system of human affairs…” 2  “The executive power might be in the hands of a peculiar favorite of the people….But it could never be expected to turn on the true merits of the question. The passions therefore not the reason, of the public (i.e. not public reason), would sit in judgment. But it is the reason of the public alone that ought to controul and regulate the government.” 3 Truth (and therefore balanced reason), former ambassador James Melville says, is the fundamental way the West governs.

Spiritedness, or Keynes’ “animal spirits,” is the motivation for economic growth. Germany in the later part of the 19th century or the Asian countries, at present, are examples of this. 4

Finally, there is Desire. In 2016 the American electorate chose a libertine president who was unable to control himself, and therefore able to achieve nothing, least of all leading the way to keep the American people safe during an epidemic. If Donald Trump were to be elected president, a journalist once wrote, Americans would be, “sicker, dirtier and poorer.” That prophecy has now come to pass in all aspects.

 

The Nobel Prize winning physicist Sir Ernest Rutherford once said, “Gentlemen, we have run out of money. It is time to start thinking.” 5 Since the dollar is the medium of international exchange, the U.S. has drawn down only on its international political capital. It has not yet run out of money (credit); but it will unless it gets a grasp of itself and begins to heal its divisions. The following discusses the present nature of the globalized market system and how it must evolve.

Although there are local variations, the entire world now organizes economic production according to the capitalist system, which has three main characteristics: the private ownership of most capital, production coordinated by the impersonal market system and motivated by profit. In the January, 2020 Foreign Affairs magazine, London School of Economics professor, Branko Milanovic, writes, “Societies around the world have embraced the competitive and acquisitive spirit hardwired into capitalism, without which incomes decline, poverty increases, and technological progress slows.”

As efficient as it is, untrammeled capitalism is ultimately self-destructive because economic competition ends in monopoly and Darwinian markets, demanding “whatever it takes,” ultimately destroying society. John Gray is likewise a professor at the London School of Economics. In False Dawn (1998) he demolishes the myth that (as producers) all benefit from international trade. “Ricardo understood (that the theory of comparative advantage) could be true only so long as capital was not to any significant extent internationally mobile…The contrast between this theoretical requirement of unrestricted global free trade and the realities of the late twentieth-century world needs little comment. When capital is mobile it will seek its absolute (not relative) advantage by migrating to countries where the environmental and social costs of enterprises are lowest and profits are highest. Both in theory and practice the effect of global capital mobility is to nullify the Ricardian doctrine of comparative advantage. Yet it is on that flimsy foundation that the edifice of unregulated global free trade stands. The argument against unrestricted global freedom to trade and capital movements is not primarily an economic one. It is, rather, that the economy should serve the needs of society, not society the imperatives of the market.6

Globalization is now hard-wired into the international institutions and supply chains of individual companies. What needs to change, as the Constitution says, “...to form a more perfect union, establish Justice, insure domestic Tranquility…promote the general Welfare.”?

In 1944, towards the end of W.W. II, forty-four nations met to establish the trading rules of the post-war system. According to Harvard economist, Dani Rodrik, (2011), “A delicate compromise animated the new regime: allow enough international discipline and progress toward trade liberalization to ensure vibrant world commerce, but give plenty of space for governments to respond to social and economic needs at home.” 7 Specifically favored were agriculture, most financial services, and manufacturing.

In 1995, this trading system was replaced by the World Trade Organization which marked the beginning of hyperglobalization. “Domestic economic management was to become subservient to international trade and finance rather than the other way around. Economic globalization (and the minimization of trade frictions and transactions costs), the international integration of markets for goods and capital (but not labor), became an end in itself, overshadowing domestic agendas….Globalization became an imperative, apparently requiring all nations to pursue a common strategy of low corporate taxation, tight fiscal policy, deregulations, and reduction of the power of unions.” 8 These elements were supposed to lead the international trading system and its members to greater heights of prosperity. “The 1980s were the decade of the Reagan-Thatcher revolutions. Free market economics was in the ascendancy, producing what has been variously called the Washington Consensus, market fundamentalism or neoliberalism. “ 9 To correct to faults of the present system, Professor Rodrik calls for increase localization, “…we should accept that countries can uphold national standards in (some) areas, and can do so by raising barriers at the border if necessary, when trade demonstrably threatens domestic practices enjoying broad popular support.” 10

There is, we think, also good reason to call for a more national economic system more responsive to local concerns, because as we quoted above, “economics should serve the needs of society, not society the imperatives of the market.” Harvard Business School’s Rebecca Henderson has written, “Reimagining Capitalism in a World on Fire.” Educated in England and the United States (at MIT), she understands the political and economic systems of both countries well. Her unit of analysis is the business case, a complex analysis of the specific and local situations that decisionmakers find themselves in.

But first, more political philosophy. With the dissolution of the medieval world in the 16th century, English philosophers such Thomas Hobbes (1588-1679) and John Locke (1632-1704) sought to reconstitute the basis of society. Central to English political philosophy was the idea of a social contract, a compact that men formed in order to escape a nature where life could be, “nasty, brutish and short.” According to Hobbes, in search of security, men ceded their freedoms to a monarch whose powers were nearly absolute – save for the fact (and this is crucial) that they could rescind the contract in the event of the monarch’s actions against the public interest. The American Declaration of Independence of 1776 is just that, a bill of particulars against George III justifying recission of the social contract.

Professor Henderson’s book asks what businesses can do to address the social crises brought on by market fundamentalism, “environmental degradation, economic inequality, and institutional collapse….The (social) institutions that have historically held the markets in balance – families, local communities, the great faith traditions, government and even our shared sense of ourselves as a human community - are crumbling and even vilified.” 11 There are clearly problems with contemporary capitalism and the social interest. We recommend this book for its informed suggestions in a time of significant change.

“A central cause of the problems we face,” Professor Henderson writes, “is the deeply held idea that a firm’s only duty is to maximize ‘shareholder value.’ Milton Friedman, perhaps the most influential intellectual force popularizing this idea, once stated that ‘there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits.’ From here it’s not far to the idea that focusing on the long term or the public good is not only immoral and possibly illegal but also (and most critically) decidedly infeasible.” 12

The problem with “shareholder value” is myopia. “Markets have gone off the rails for three reasons: externalities (such as pollution whose social costs are not priced into products), many people no longer have the skills necessarily to give them genuine freedom of opportunity, and firms are increasingly able to fix the rules of the game in their own favor (note the extensive lobbying by the carbon-producing energy industries).” 13

Professor Henderson then discusses specific things business can do for their stakeholders:

·       Creating new values in existing businesses. The book discusses how the CEO of Norway’s largest waste handling business created a global seller of industrial recycled materials. “By 2018 NG was one of the largest and most profitable waste companies in Scandinavia.” 14

·       Creating shared purpose. “There are essentially two ways to run an organization. Low road firms assume that people are cogs in a machine and manage them as things, while high road firms treat people with dignity and respect, as autonomous and empowered cocreators in building a community dedicated to shared purpose.” 15

·       Rewiring finance. “Traditional finance may be the single biggest stumbling block to reimagining capitalism. As long as investors care only about maximizing their own returns, and focus only on the short term on what can be easily measured (making money), firms will be reluctant to take risks inherent in seeking to exploit shared value and to embrace high road labor practices….If solving the big problems of our time is in the interests of investors…then the secret to persuading them to support companies seeking to do the right thing is to develop measures that demonstrate that the right thing is also the profitable thing.” 16 The SASB (Sustainable Accounting Standards Board), modeled after the FASB, has already developed very detailed industry standards that can be incorporated into a company’s 10-K. A stock may not know you own it, but you do.

·       Building cooperation. “When Nike first attempted to get child labor out of its supply chain, it began by attempting to clean up its own operations….This approach succeeded in improving some practices in some factories, but it proved to be impossible to fix the problem completely. Most of the large suppliers turned out to work for nearly everyone in the industry…In response, Nike attempted to persuade every other major firm in the industry to join in cleaning up the entire supply chain.” 17 Potluck works when everyone knows everyone else.

·       Rebuilding our institutions and fixing our governments. We need the private sector to be part of the effort to rebuild our institutions and to fix government. “The only way we will solve the problems that we face is if we can find a way to balance the power of the market with the power of inclusive institutions, and purpose-driven businesses committed to the health of the society could play an important role in making this happen.” 18 The example of Denmark provides a precedent for this cooperation. Today, Danes consider themselves the happiest people in the world. “But Denmark is not a socialist country….Its economy is a strongly pro-business system in which business, labor and government work closely together to sustain economic growth – within a structure that was championed by the private sector. In the second half of the nineteenth century, Denmark was a nation in trauma…” 19

So why don’t companies focus in on the long-term? The problem is their shareholders, or more precisely the agents of their shareholders. “Peter Drucker, perhaps the most famous management guru of the first half of the twentieth century, memorably suggested: ‘Everyone who has worked with American management can  testify that the need to satisfy the pension fund manager’s quest for higher earnings next quarter, together with the panicky fear of the raider, constantly pushes top management toward decisions they know to be costly, if not suicidal mistakes.’ Every CEO I’ve ever met agrees with Drucker. We know that companies routinely delay or eliminate profitable investment opportunities to ensure they hit their numbers.” 20

How can business overcome its short-term focus? Bring in well-run government.

“The key to prosperity for both business and society at large is to understand free markets and free politics as complements rather than as adversaries. Free markets need democratic, transparent government if they are to survive - as well as the other institutions of an open, inclusive society including the rule of law, shared respect for the truth, and a commitment to a vigorous free media. Similarly, free governments need free markets. Without the growth and opportunity that truly free and fair markets provide, many societies have trouble maintain their legitimacy or upholding the minority rights that are at the heart of effective democratic governance.” 21

So how does this all happen?

We return to Thomas Hobbes and the contract theory of society. Professor Henderson notes elsewhere that if you get three parties with different interests around a table, say business, government and society, they won’t agree. Where you start, is what people agree on; and then proceed from there (to a deal that all will try to live up to). This is how things happen in liberal democratic societies. A national effort should to be made to bring as many groups as possible to the table for rational discussion and compromise.

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The 7/14/20 NYT wrote, “Joseph R. Biden Jr. announced on Tuesday a new plan to spend $2 trillion over four years to significantly escalate the use of clean energy in the transportation, electricity and building sectors, part of a suite of sweeping proposals designed to create economic opportunities and build infrastructure while also tackling climate change….the proposal was the product of discussions with scientists, climate and environmental justice leaders, union members and leaders, mayors and governors and representatives from the small-business and manufacturing communities….

“In an interview, Gov. Jay Inslee of Washington, a prominent environmentalist who ran for the Democratic presidential nomination on a platform of combating climate change and later endorsed Mr. Biden, called the proposal a “triple-A-rated clean energy plan…”

This is how the United States does things.

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We also have international obligations which could be better met by a fair and balanced United States, with its house in order.

 

 

Footnotes

 

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