The Naked Emperor

The Midas Curse

excerpted from the book

The Post-Corporate World

Life After Capitalism

by David Korten

Kumarian Press, 1999, paper




... Market theory explicitly states that for the market to allocate resources efficiently, the costs of a product must be borne fully by its producer and passed forward in the price charged to the consumer. Similarly, investors must bear the risks of their investments. Any subsidy, direct or indirect, distorts the incentives of the market's self-regulating pricing mechanisms and reduces the social efficiency of resource allocation.

By contrast, the institutions of capitalism are unabashed proponents of corporate subsidies. Using mechanisms that range from threatening to move jobs elsewhere to political contributions and fabricated grassroots lobbying campaigns, they convince those who control public expenditures to provide them subsidies for research, extraction of resources, advertising products in foreign markets, insuring overseas investments against political risks, and an endless range of other activities. Banks and investment houses regularly run to government to save them from the costs of bad investment, as in the savings and loan bailout and the repeated IMF and U.S. bailouts of bad loans to countries such as Mexico, Thailand, Indonesia, Malaysia, and Korea.

Corporations are constantly upping the ante on what they demand from state and local governments to bring jobs to their jurisdictions. For example, the incentive package given by the state of Virginia to Motorola to entice it to locate a research and manufacturing facility there included a $55.9 million grant, a $ 1.6 billion tax credit, and a reimbursement package worth $5 million for employee training. In New York City, investment banks threatened to leave the city for the suburbs, to which the cash-strapped city responded with ever greater tax breaks and other public subsidies. By 1998, $439 million in tax abatements had been granted to eighteen financial institutions-including the New York Mercantile Exchange, New York's largest commodity market-by the administration of Mayor Giuliani. Big corporations now increasingly expect states to pick up a portion of their wage bill, commonly by returning to the company a portion of the state taxes withheld from qualified employees. In Tulsa, Oklahoma, the county sales tax for one year was diverted from public purposes to pay for construction of a new Whirlpool factory. In addition, the state would reimburse Whirlpool 4.5 cents for every dollar paid in wages to eleven hundred workers for ten years.

Corporations have been especially aggressive over the past twenty years in seeking to avoid paying a fair share of taxes to cover the public services and infrastructure they demand, including roads and port facilities, the protection of their assets by the U.S. military, and the public education of their workers. In the 1950s, corporate income taxes accounted for 39 percent of all federal income tax revenue. From 1990 to 1995, that was only 19 percent. During that same period the share of federal income tax revenues coming from individuals rose from 61 percent to 81 percent. If in 1996 corporations had paid taxes at the same effective rate as during the 1950s, it would have produced an additional $250 billion in federal revenues and wiped out the federal deficit for that year.

It has been much the same story at local levels. In 1957, corporations provided 45 percent of local property tax revenues in the United States. By 1987, their share had dropped to about 16 percent.

The Cato Institute, a conservative Washington, D.C.-based think tank, estimates that the U.S. government each year provides corporations $75 billion in direct cash subsidies plus another $60 billion in industry-specific tax breaks. Worldwide, government subsidies for energy use- the majority for fossil fuel and nuclear sources-are estimated to be from $235 billion to $350 billion, a clear case of using public funds to encourage environmentally destructive practices. Business analyst Paul Hawken has compiled data suggesting that corporations in the United States may now receive more in direct government financial subsidies than they pay in taxes.

Then there are the costs of straightforward corporate crime such a~ overbilling by defense contractors of some $25.9 billion, and by Medicaid contractors, primarily insurance companies, of an amount estimated by federal auditors at $23 billion in 1996.

Still another type of subsidy takes the form of unreimbursed costs imposed on society by the products that corporations sell. These include health costs of $53.9 billion a year from smoking cigarettes, $135.8 billion for the consequences of unsafe vehicles, $141.6 billion for injuries and accidents from unsafe workplaces, and $274.7 billion for deaths from cancers caused by toxic exposures in the workplace.

In Tyranny of the Bottom Line, CPA Ralph Estes compiles an inventory of those public costs of private corporations that have been documented by authoritative studies-not including direct subsidies and tax breaks-and comes up with a conservative total for the United States alone of $2.6 trillion a year in 1994 dollars. This is roughly five times the corporate profits reported in the United States for 1994 ($530 billion) and the equivalent of 37 percent of 1994 U.S. GDP of $6.9 trillion. If we were to extrapolate this ratio to a global economy that had an estimated total output of $29 trillion in 1997, it suggests that the annual cost to humanity of maintaining the corporate infrastructure of capitalism may be upward of $10.73 trillion.

In short, although capitalism claims to be an engine of wealth creation, in fact its primary vehicle, the corporation, is more accurately described as a powerful engine of wealth extraction-its profits dependent on imposing enormous costs on the rest of society so that a few top executives and large shareholders may enjoy unconscionably large financial rewards. If market rules were applied, most of the dominant corporations would have long ago found themselves unable to cover their own costs and gone bankrupt or been restructured into smaller, more efficient firms.



... One of the most basic axioms of market economics is the simple equation: personal savings equals investment. In other words, market theory assumes that when people save, they defer current consumption in favor of investing in future productive output. As in the previous example, the winemaker might invest some of his earnings in a new wine press to increase future production.

The most advanced stage of capitalism's pathology is known as finance capital or finance capitalism. At this stage, the ownership of capital becomes increasingly separated from its application to production as power shifts from the entrepreneurs, inventors, and industrialists who are engaged in actual productive activity to financiers and rentiers who live solely from the income generated from the ownership of financial or other assets. The financial markets and the owners of capital become "increasingly purified in purpose-detached from social concerns and abstracted from the practical realities of commerce" and develop expectations regarding the returns invested saving ought to earn that increasingly "diverge from the underlying economic reality."

The focus at this point is on using money to make money by expanding bank lending, creating financial and real estate bubbles, and speculating on fluctuations in the prices of currencies and other financial instruments. Consumed by their own illusions, capitalism's foremost proponents and practitioners come to pride themselves on having accomplished the equivalent of the ancient alchemists' dream of turning baser metals into gold. The financial excesses we are now witnessing on a global scale are much like those that preceded the Great Depression of the 1930s.

They are all a part of the new global capitalism, and virtually every country and person on the globe is to some extent subject to the resulting economic dysfunction and instability.

The mechanisms employed by finance capitalism to make money from money, without the intervening necessity of engaging in productive activity, allow those with money to increase their claims against society's stock of real wealth without contributing to its production. Although the activities involved make a few people very wealthy, from a societal perspective they are extractive rather than productive. Finance capitalism's inability to tell the difference between productive and extractive investment seems almost to be one of its defining attributes.

The process of making money without creating wealth starts with banks' creating money out of nothing each time they issue a loan. When I studied economics some years ago I was taught that banks are financial intermediaries. They take in money from those who have savings and make it available in the form of loans to those who invest it in productive activities. It is rather like one individual making a loan to another, except that as intermediary the bank translates the short-term savings of one group into long-term loans for another, does the paperwork, and takes the risk-or so I was led to believe.

In truth, there is another and more basic difference. If I loan $1,000 to another person-call her Alice-I no longer have the use of that money until Alice repays me. If, however, I deposit my $1,000 in a bank and the bank loans the $1,000 to Alice, Alice has her money and I still have mine. Between Alice and me we now have access to $2,000 in ready cash rather than $1,000. The bank did not in fact loan Alice "my" money. Rather it created the second $1,000 out of nothing, simply by opening an account in Alice's name and typing in $1,000.

Clearly the bank has something more going on here than simply playing the role of intermediary between savers and borrowers. It is in the literal sense making money - creating it, putting it into circulation, and collecting interest on it-simply by posting a number to an account. Furthermore, the only thing of value that stands behind that money is the willingness of the rest of us to exchange our labor and other property for it. In a very real sense, the bank makes or creates the money and we guarantee its value with our labor and whatever other forms of real wealth we agree to exchange for it.

Another way to make money out of nothing without contributing to the creation of any real wealth is to create a financial bubble, which is a sophisticated version of the classic pyramid or Ponzi scheme. The fraudulent investment scheme that created a national crisis in Albania in the mid- 1 990s is an example. People were invited to participate in investment funds that promised returns as high as 25 percent a month. Impressed by the good fortune brought to them by the triumph of capitalism, some people handed over their savings. Though the investment scheme was not backed by any productive activity, with so much money pouring in it was easy for the promoters to use a portion of the money from new investors to pay the promised interest to the earlier investors. These payments established the credibility of the scheme and convinced still more people to invest. Soon the country was caught up in a speculative frenzy. Farmers sold their flocks and urban dwellers their apartments to share in the promised bonanza of effortless wealth. The inevitable collapse sparked widespread riots, arson, and looting when the Albanian government failed to make up the losses.

The speculative financial bubble, which involves bidding up the price of an asset far beyond its underlying value, is little more than a sophisticated and less obviously fraudulent variant of such pyramid scams. One of history's more famous financial bubbles occurred in seventeenth-century Holland when it was found that certain tulip bulbs, when attacked by a particular virus, produced flowers of brilliantly variegated colors. These bulbs came to be highly valued by collectors. Then speculators began acquiring them, pushing prices higher. Others came in to profit from the bonanza of prices that seemed to rise without limit. Soon everyone, from nobles to chimney sweeps, was in on the action, bidding up the price of a single bulb of a particularly prized variety to the equivalent of $60,000 in current dollars. The inevitable bursting of the bubble came in 1637.

Those of us inclined to laugh at the innocence of the Albanians or the seventeenth-century Dutch speculators should first consider our own participation in the world's stock markets. We operate on the mistaken belief that the money we use to buy stock or mutual fund shares goes into financing future productive output. However, in all but the rare instance in which we are buying shares sold in an initial public offering, not a penny of our money goes to the company whose shares we are buying.

According to 1993 Federal Reserve figures, equity financing raised through the sale of new shares contributed only 4 percent of the total financial capital of U.S. public corporations. The rest came from borrowing (14 percent) and retained earnings (82 percent). Furthermore, from 1987 to 1994, corporations paid out more to buy back their own shares than they received from new stock issues. In early 1998, what is loosely called investment capital was flowing from corporations to the stock market at an annual rate of $110 billion.

We live in an era in which, even as billions of dollars in new "investment', flow into the stock market and pump up prices at record rates, the net flow of funds from the stock market to the corporations in which we are in theory investing is actually negative. In truth, the stock market is a sophisticated gambling casino with the unique feature that through their interactions the players inflate the prices of the stocks in play to increase their collective financial assets and thereby their claims on the real wealth of the rest of the society.

So when I buy stock shares through my broker, not a penny goes to the company I'm presumably buying. After the broker takes a commission, what is left goes to the person who sold the shares. When I make my purchase, I'm simply betting that in the future someone else will be willing to pay me more for that piece of paper than I've just paid for it. If I were a really sophisticated investor, I would be betting on future price declines as well as future price increases, and I would be borrowing money to leverage my bets. No matter how I go about it, however, it has no more to do with real investing than betting on a number on a Las Vegas roulette wheel.


The Midas Curse

The Corporation as Agent

As we look for the driving forces behind the destruction of life for money \ to enrich the few, our attention is inexorably drawn to the institution of the corporation. As the systems of finance have globalized and institutionalized, the corporation's ties of accountability to people and the interests of the living world have steadily weakened. Because the corporation is populated by the people who work in its employ, there is a tendency to think of the institution almost as a living person-an illusion cultivated by corporate public relations and given legal standing by court rulings. Yet the corporation is not a person and it does not live. It is a lifeless bundle of legally protected financial rights and relationships brilliantly designed to serve money and its imperatives. It is money that flows in its veins, not blood. The corporation has neither soul nor conscience.

We who serve in the corporation's employ, even the powerful and well-paid CEOs and money managers, are hirelings paid to embrace the corporation's values and do its bidding. In preparation for our corporate roles we are trained in the language of finance and the methods by which a price can be assigned to everything and every choice can be evaluated in financial terms. Eventually we come to accept it as right and natural that we ourselves be evaluated on financial performance and motivated by financial incentives.

It is instructive to recall that the modern corporation is a descendant of the chartered corporations, such as the British East India Company and the Hudson's Bay Company, that were formed by the British crown as monopolies to exploit colonial territories by extracting their labor and resources and monopolizing their markets. Some claim the American Revolution was as much a revolution against the crown corporations as against the crown itself. As a consequence, corporations were treated with great caution by both citizens and politicians in the early days of the new American republic. The few corporate charters issued were generally for a limited duration to serve a carefully delineated public purpose, such as constructing a canal system. The crown has since been replaced by the modern shareholder and access to corporate charters has been democratized, but our current experience with the global megacorporation suggests its role has not changed.

... the only way most corporations can produce the profits the financial system currently demands is by passing off ever greater costs to the society. This includes expropriating and selling off the living capital of human societies and the planet at such a rate that, in the words of ecological economist Herman Daly, "It looks as though we are holding a going-out-of-business sale." We need scarcely look beyond the daily reports of The Wall Street Journal to find examples of the world's largest corporations profiting from the

* Depletion of natural capital by strip-mining forests, fisheries, and mineral deposits, aggressively marketing toxic chemicals, and dumping hazardous wastes that turn once-productive lands and waters into zones of death;

* Depletion of human capital by maintaining substandard working conditions in places like the Mexican maquiladoras, where they employ once-vital and productive young women for three to four years until failed eyesight, allergies, kidney problems, and repetitive stress injuries leave them permanently handicapped;

* Depletion of social capital by breaking up unions, bidding down wages, treating workers as expendable commodities, and uprooting key plants on which community economies are dependent to move them to lower-cost locations-leaving it to society to absorb the family and community breakdown and violence that are inevitable consequences of the resulting stress; and

* Depletion of institutional capital by undermining the necessary function and credibility of governments and democratic governance as they pay out millions in campaign contributions to win public subsidies, bailouts, and tax exemptions and fight to weaken environmental, health, and labor standards essential to the long-term health of society.

The Post-Corporate World

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