Broken Capitalism: Smells Like Green Spirit

Capitalism needs a fix. Green regulations and higher taxation are trendy. But the real problem is that capitalism was never allowed to operate freely. «Free» markets simply never existed.

Myret Zaki

Deutsche Version

Innovation and markets were never free, that is the shocking truth I am going to analyze in the following lines. State intervention lies even at the core of Silicon Valley’s success. Capitalism has always been rigged by statism, and not allowed to redistribute wealth correctly.

Myret Zaki

Myret Zaki started in 1997 as a junior analyst in a Geneva private bank where she learnt the basics of equity research, before joining the daily newspaper «Le Temps» in 2001, where she was in charge of the finance section for 9 years. When the financial crisis broke in 2008, she wrote the investigative book «UBS, am Rande des Abgrunds» (originally published in French as «UBS, les dessous d'un scandale»), for which she received the Schweizer Journalist prize. She joined «Bilan» magazine in 2010 where she became Chief Editor from 2014 to 2019. Between 2010 and 2016, she wrote three other bestselling books, about Swiss banking secrecy, the end of the Dollar reserve status, and the rise of the shadow banking system. She has a Political Science Bachelor from the American University in Cairo and an MBA from the Business School of Lausanne. She is now a freelance columnist and a consultant in influencer and opinion leader strategies.
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Instead, the debate is only centered on how capitalism has been excessively free, and on the necessity of regulating, taxing, or scrapping the «free» market system.

Let us disentangle this confusion.

For starters, there is no denying that what we call «capitalism» right now is no longer sustainable. And indeed, these days you don’t have to be a Marxist to criticize the capitalist system in its very Western, neoliberal version. This has even become cocktail talk. This time around, liberal capitalism is attacked on both social and environmental grounds.

Aligning with public opinion, CEOs of big companies are stating that they no longer want to participate in this inequality game and in climate irresponsibility. They talk of sustainability, impact, inclusion, zero carbon, philanthropy. It sounds like «Davos» everyday, without the snow and the super-expensive hotel rooms. The United Nations’ goals on environmental, social and governance issues (ESG) are on everyone’s lips.

Taxation is the solution of the desperate

Of course, part of this late corporate moralism is largely marketing. And part of it is making a virtue out of necessity: new laws are forcing change in companies. Switzerland’s federal elections on October 20 gave green parties a record number of seats. The Paris agreement is translating into new EU climate laws. Swiss banks will have to change their governance, risk management, sales training and IT systems to adapt their products to the revised MiFID 2, UCITS and AIFM directives, amended to enforce sustainable finance.

The new political colors of the day are green and pink. Thomas Piketty is vindicated. In 2013, the French economist had explained in his book «Capital in the 21st Century» that today's income inequality has never been so high in the Western world since the Belle Epoque (1889-1914). Salaries for workers have been stagnating since 1975, while capital returns went through the roof.

The solutions laid out in Piketty’s latest book, «Capital and Ideology» (2019), hold in two words: socialism and high taxation. Not the USSR version of socialism, but an improved, participative version. A tool to decentralize power and property.

He advocates a model of company governance where employees own 50% of voting rights and «co-manage» the business. This participative model breaks with the old capitalist «one share, one vote» rule, even while drawing the lessons from the failed hypercentralized communist regimes.

But it is the taxation aspect that gave shudders to some commentators. Piketty advocates a highly progressive taxation of income and estate, of up to 70%-90% for the richest, to be completed by a yearly property tax.

I wouldn’t radically reject taxation. But it is the solution of the desperate. We wouldn’t be there if we had actually implemented free markets. Liberalism was never allowed to follow its natural course. Inequalities have widened so much because we didn’t let companies fail, when they deserved to fail. And we didn’t let companies take their own risks. It is a myth that we live in a free market system.

Billions of subsidies for U.S. tech giants

Governments have been funding and supporting markets, even Silicon Valley giants. Innovation in the U.S. is almost 100% state funded at inception. In Europe, we ignorantly believe that we don’t have Googles and Facebooks because we don’t have Silicon Valley’s free market approach. In fact, there was a massive amount of public investment behind the computer and internet revolutions, as was exposed by the Italian-American economist Mariana Mazzucato.

Google’s search algorithm was initially funded by a grant from the National Science Foundation, a U.S. public agency. Tesla initially struggled to secure investment until it received a $465 million loan from the U.S. Department of Energy. Elon Musk’s three companies, Tesla, SolarCity and SpaceX, jointly received a whopping $5 billion in public support. Each one of Apple’s iPhone technologies was helped by CERN, the U.S. Department of Defense, National Science Foundation, CIA, Stanford University or by the Defense Advanced Research Projects Agency (DARPA).

The latter agency invested billions into the prototypes that preceded commercial technology such as Microsoft Windows, video conferencing, Google Maps, Linux and the cloud, as Mariana Mazzucato shows in her 2013 book, «The Entrepreneurial State».

Crediting all this innovation to their sole genius allowed the American tech giants to lobby for further deregulation and low taxation, which was an additional gift from the state.

One effect of state intervention in private business is great: the funding of basic research and innovation. The other, more problematic, is to considerably enrich shareholders of those companies. Most S&P 500 companies used their profits to buy back their own shares during the last decade to increase shareholders’ returns, rather than reinvesting the money into research and development.

Similarly, U.S. pharma companies receive $32 billion per year in innovation financing from the U.S. Government, with no conditions, and yet taxpayers still have to pay very high prices for vital drugs. Here again, the public is acting as an early investor in the research that produces highly profitable drugs, while not receiving any direct return on that investment.

Public investments, private profits; this is what’s creating high inequalities – and state interventionism is to blame. In free markets, you fund your own company with the help of private investors, you take your own risks, and then you reap your own rewards. In a state-backed system, government is giving public resources to private businesses, with no return for the public.

This is, at best, socialism for businesses and for the rich. At worst, it is crony capitalism with hidden fringe benefits to politicians.

Failure is rewarded

Ever since 2008, with the bank bailouts, I have been writing about the true nature of «free market capitalism», which is anything but free. The «too big to fail» doctrine for large banks in particular has been the epitome of statism.

In a truly liberal system, an enterprise is free to earn limitless gains, and also free to make limitless losses. In real life, losses are stopped by governments, and soaked up with taxpayer money. It is no surprise that we’re seeing such shockingly wide inequalities. Financial sector failure is rewarded by public bailouts.

«Free trade» is also a utopia. Protectionism has been the rule all along with all kinds of disguised barriers and mercantilist practices. The floating exchange rate regime has never been truly floating. Currency prices have been manipulated from day one by central banks, through devaluation and currency wars. The pre-1967 fixed exchange rate regime almost looks liberal in comparison.

Today we are reaching peaks of public interventionism with negative interest rates, which place a central control on interest rates and currencies and are a de facto central administration of markets.

All these interventions – free public fundings of private business, bank bailouts, negative rates, have the same effet – redistributing wealth upwards.

Stop rigging the game

In order to redistribute better to the economy at large, we need free markets. That means losses, unsubsidised booms and real, complete busts. Free markets are actually a more efficient redistribution mechanism than high taxes: because you can’t escape real market losses, contrary to taxes.

Since markets are driven by greed, they always produce exuberance and bubbles. If left to fail freely, they self-correct through market crashes. Wealth is reset, debt is repaid or written off, greed is reduced; the risk is sanctioned, as much as it was rewarded during the boom.

This self-correction wouldn’t allow for excessive and abusive enrichment. But a modern financial market player can almost never lose. Even in a casino, the rules are fairer to society.

Free market capitalism was never given a chance to operate freely and self-regulate, and we never accepted the very simple liberal idea that losing goes with winning. So why don’t we stop rigging the game and see what happens?

Becoming more «moral», taxing more, regulating more, all the while we rescue failed banks and subsidize speculation, is inefficient, politically unpractical, and outright stupid. It will just keep redistributing wealth upwards to the rich, until the final disaster. So let’s get really liberal and stop the infernal interventionist machine.