Could coronavirus cure capitalism? We've been handed a chance to 'flatten the curve’ of market concentration

There’s no shortage of suggested remedies. Jamie Dimon, the Business Roundtable, Marc Benioff, Ray Dalio and others have all recognised that something is seriously wrong with capitalism. At Davos earlier this year, Dimon, who is the CEO of JPMorgan Chase, released a piece entitled ‘Unless We Change Capitalism, We Might Lose It Forever’ arguing that capitalism needs to make “meaningful changes, like rebuilding our education system and providing skills training, affordable health care policies, substantial infrastructure investment, and sensible immigration reform and climate policies”.

But for all the talk of reform, these Davos-friendly pronouncements tend to undergird existing power structures and serve a tired narrative: perpetual growth, primacy of free-market mechanisms, and ‘win-winism’ (i.e. having impact without sacrificing profit).

They skirt any real regulatory challenge to corporate dominance. They ignore industry’s often deliberate role in charting the wrong path. So, nebulous initiatives and one-off CSR exercises are not enough. We need more than a short dose of ‘thought leadership’ or PR-driven gestures to a supposedly wider set of stakeholders.

With 40 years of neoliberal economic experimentation, and the shock of Covid-19, we know that simply betting on an improved version of our status quo will not work. Structural change is required to rebuild an economy that works for all, not simply benevolent CEOs acting on generous impulses.

Before the novel coronavirus began to threaten our lives and livelihoods, we were living in an economy that had overshot many traditional metrics of health. Corporate profits and the stock market were at all-time highs and companies spent the majority of the 2017 Trump tax cuts — a record-breaking, eye-popping total of over $806 billion in 2018 — on stock buybacks to inflate their stock prices even higher. An outsized portion of those corporate profits went to management — the US leads the world in CEO to worker compensation ratios (in 2008, the average CEO raked in 278 times what the average worker got).

Furthermore, despite being flush with profits, US corporations have simultaneously amassed more debt than ever. In March last year, The Economist argued that America’s corporate debt mountain could worsen a recession. As of mid 2019, large nonfinancial companies had accumulated $10 trillion dollars in corporate debt, a staggering 48% of GDP (for the 2008 recession, the equivalent figure was $6.6 trillion).

This borrowing binge has been encouraged by central bankers who kept interest rates artificially low and by certain economists who touted debt as a way to spur growth. But even some central bankers are worried. Janet Yellen, the previous Federal Reserve chair, recently expressed her concern that high corporate debt levels would burden an economic recovery.

Record high corporate profits, buybacks, and debt are symptomatic of a system that prioritises ever greater returns for shareholders and executives over the need for resilience.

Albert Bartlett, the late emeritus professor of physics at the University of Colorado at Boulder put it this way: “The greatest shortcoming of the human race is our inability to understand the exponential function.” Bartlett viewed the term “sustainable growth” as an oxymoron, recognising that compounding factors like interest and population growth inevitably led to uncontrollable risk.

Loading up on debt is not the only problem with this growth-at-all-costs mentality. There’s also the high levels of market concentration that have left bloated companies in dominant positions across a wide range of industries. Monopolies and oligopolies have used their market power to extract wealth from everyone else. Competition is crushed, workers underpaid, and consumers gouged (see: The Myth of Capitalism: Monopolies and the Death of Competition) — thus generating even more profit and control.

The traditional checks on corporate power include unionisation, strong local supply chains, the opportunity for startups to compete and produce disruptive innovation, and effective enforcement of competition laws. But all of these countervailing forces have been weakened over the last 40 years. Neoliberal economic dogma has put shareholder returns and short-term market efficiency above all other considerations.

Covid-19 has exposed the fragility of this economic model, but it also gives as a chance to  ‘flatten the curve’ of market concentration.

Rather than governments opting for the bailouts and regulatory decisions that give large corporations yet more power, now is the time to envision new models for how markets can work in a de-concentrated, cooperative way. I am not arguing for socialism, nor am I arguing for capitalism, as these binaries make little sense when nearly every world economy is a mixture of the two systems.

What we really need to do is to turn away from extractive, winner-take-all growth to a fair and resilient economy based on distributed power, shared prosperity and democratic decision-making. In particular, we need to see reforms to corporate ownership and governance.

We take the shareholder model ownership for granted, whether it’s in the form of publicly traded shares or private equity. Indeed, right now, private equity firm are circling over the crisis-hit economy, looking to buy up distressed companies. The answer, though, is not concentrating ownership even further, but distributing it more widely to workers (and also users, in the case of technology companies).

Employee stock ownership programs (ESOPs) are one model, as are employee ownership trusts (EOT), which give employees equity stakes in their company and include them in profit-sharing schemes. This list highlights the top 100 companies in the US that are majority employee owned through an ESOP. More companies would do well to adopt these models.

Purpose Evergreen Capital champions what’s known as ‘steward ownership’. They define it this way: “The concept of steward-ownership harnesses the power of entrepreneurial for-profit enterprise while preserving a company’s essential purpose to create products and services that deliver societal value and protecting it from extractive capital.” They also have an investment buyout fund for mid-sized companies wanting to transition to steward-ownership, and they have converted over 50 companies to this ownership structure in Germany.

We have already seen a number of industry bailouts for large corporations, and taxpayers should stand to gain from these socialised losses. One way is for government to take an equity stake in companies, giving taxpayers preferred shares and paying dividends to social security recipients. Alternatively, corporates could issue convertible bonds to the government.

Citizens and workers should stand to gain from the returns of these companies in the good times, not simply pay their bills in the bad.

As for corporate governance, Germany has practiced what’s known as codetermination (giving workers representation on company boards) since the early 1900s. In the 1970s the country instituted these rights into law, requiring worker representation on advisory boards (elected by worker vote) for any company with more than 2000 employees. Today, a majority of EU countries have followed suit with similar legislation. Worker representation in company decision-making should be standard in the US as well, as some studies have shown, it actually increases worker productivity.

The mechanism of a Perpetual Purpose Trust is also being explored as a way to uphold a company’s mission and shield it from investor demand. This structure allows businesses to define their purpose — for example to reinvest all profits back into the business or to primarily serve the interests of its employees. Being solely owned by the trust, the company is protected from profit extraction by predatory investors.

The perpetual purpose trust company structure was setup for the first time in the US two years go by RSF Social Finance and Purpose in the case of the Organically Grown Company. Companies built up or bailed out in the national interest (healthcare companies, drug manufacturing companies, essential parts manufacturing, etc.) could be protected in the same way.

Covid-19 is the first of many future shocks that epidemiologists, climate scientists, and social cohesion theorists are predicting. If we do not use this moment as a time to rebuild and reform our economic system we will be left even more vulnerable to the next catastrophe.

While some will advocate for a return to pre-Covid-19 economic status-quo, others will see this as an opportunity for change. But beware those who advocate change while leaving existing power structure essentially untouched. The language of win-win— ‘doing well by doing good’ — may sound plausible, but we must listen carefully to who defines what it means to win, and who shares in the gains of those wins. Mutual benefit can only occur through exchange, not extraction.

Markets are important mechanisms of exchange that we love and rely on, but we need to reclaim our ability to control them on our terms. We must seize this opportunity to democratise ownership and and create a mission-led system of governance.

There’s no better time than now to reshape the system — and how we respond is up to us.

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