The power and the glory

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A democratic society must deny companies both the right and the obligation to pursue widely drawn concepts of social responsibility. The business of business is business; no more, no less.

Joseph Conrad’s masterpiece Heart of Darkness describes the corruption and desolation brought about by competition for natural resources in the Congo. This curse continues to blight the country. A century ago, King Leopold II of Belgium and his associates destroyed the structure of Congolese tribal society and inflicted hideous suffering on its population as they looted the country. Joseph Mobutu, president from 1965 of what he renamed the Republic of Zaire, repeated the act. “Mobutu has not only killed the golden goose, he’s eaten the carcass and made fat from the feathers,” said one ambassador to his court. The mineral-rich country now called Democratic Republic of Congo is one of the poorest in the world, and millions of its people have been killed or forced to flee as refugees in the course of its incessant internal conflicts.

Throughout human history, the nexus between politics and economics has been close. However, the stronger that nexus becomes, the worse the politics and the worse the economics. From the Court of the Sun King to the entourage of George W. Bush, among the fiefdoms of the East India Company and the oilfields of Nigeria, in Mao’s great leap forward and Hitler’s search for lebensraum (German expansion), the links between wealth and power have damaged honest government and national prosperity. The rich have generally been powerful, and the powerful have generally been rich, but the vicious circle of personal economic success and political influence is the enemy of international peace, social cohesion and the wealth of nations.

The relationship between power and wealth changed profoundly with the rise of democracy. The aristocracy of traditional authority was displaced by a meritocracy of wealth. Louis XIV and the Medicis owed their riches to position, power and patronage. But as democratic societies developed modern market economies, the parvenus raced ahead. In the 19th century, the Rothschilds, Rockefellers and Vanderbilts accumulated commercial fortunes that dwarfed the resources of the landed classes.

Throughout Europe, the aristocracy watched the mutually sustaining forces of political authority and economic strength drain away. The decline was slowest in Britain, least affected by war or revolution. After the second world war, dukes and earls were forced to open their stately homes to day trippers, and at the turn of the millennium they were ejected from the House of Lords. The changes were no more than a symbolic recognition of a process that had occurred generations earlier. And so the richest people today are men (few women) such as Microsoft founder Bill Gates; the legendary investor, Warren Buffett; Larry Ellison of software giant Oracle; and the Walton family, descendants of Sam, founder of Wal-Mart, the world’s largest retailing business.

It is now mostly in countries without a developed market economy that we find great wealth derived from political influence rather than business. Many such fortunes – the house of Saud and other Middle East sheikhdoms, the royal family of Brunei – are derived from oil. Others come from systematic theft by political authorities and their cronies, with Mobutu an extreme but far-from- exceptional case. In Russia in the 1990s, those who helped secure the crown for Boris Yeltsin were richly rewarded through the sale of state assets, in much the same way as assistance to Yorkist or Lancastrian leaders generated huge rewards for those who picked the right side in the Wars of the Roses five centuries before. And, as in medieval times, a change in regime could very quickly transform opulent living and political influence into imprisonment and banishment. Thus there is a sharp, and not at all accidental, difference between the origins of the wealth of the rich few and the general levels of wealth and income of the poorer many. In all prosperous economies the principal source of great wealth today is no longer the service the individual or his or her ancestors rendered at court, but the success the individual or his or her ancestors enjoyed in building new businesses.

This change in the nature of wealth distribution came with the rise of disinterested government. The officers of the state are enjoined to promote the public good, rather than to aggrandise the power and fill the pockets of those who control that government. There is a direct correlation between the corruption indices computed by organisations such as Transparency International and measures of national prosperity such as GDP per head. The correlation exists because effective commercial life requires the honest mediation of politicians and officials, judges and regulators. Without such disinterested government, the trust on which a complex modern economy depends rapidly unravels. There is no expectation of enforcement of contracts, no security of property, no stability in business relationships.

These are the direct consequences of disinterested government, but the indirect effects are equally important. Disinterested government is crucial to overall prosperity because economic life requires the talents of the entrepreneurial and acquisitive people who are more usefully employed if the road to riches involves establishing new businesses rather than acquiring political power. Gates’s fortune is largely the result of new wealth created from developing new products and markets. The riches of Genghis Khan came entirely from appropriating assets that had already been created by someone else.

Disinterested government is a fragile plant. Its roots are firmest in the soil of Northern Europe and North America. In these countries, the government offices are austere, their kitchens full of jars labelled with the initials of their owners, lest any indulge in a cup of tea at public expense. While much petty frugality is simply silly, the costs of corruption are far greater than the direct losses from corruption itself. The rigour of such regimes seems to diminish as the climate becomes warmer. Jacques Attali, first president of the European Bank for Reconstruction and Develop-ment, fell victim to this north-south divide in a stream of leaks about his comfortable travel arrangements and his private chef, and his penchant for marble in his London headquarters finally led to his removal by the British and North American directors.

That is why we insist that politicians and civil servants work for salaries that would be scoffed at by those in comparably senior roles in business and finance. Federal Reserve Board chairman Alan Greenspan is the most powerful man on Wall Street, but his $172,000 salary would be regarded as a derisory bonus for an inexperienced bond trader. Still Greenspan, with a successful business career before he became chairman of the Fed, is not a poor man. It is unlikely that his interest rate decisions are influenced by worries about the mortgage.

But while Greenspan’s background was once the norm – people would enter public life as a second career or have financial security through private means – today’s leaders are generally professional politicians who live on their salaries. Peter Mandelson’s resignation as trade and industry secretary after failing to disclose a loan from his friend – paymaster-general Geoffrey Robinson – to buy a pleasant but not exceptional house in London’s Notting Hill is a poignant demonstration of the gap between the reasonable social aspirations of one of the more powerful men in Britain and the limited financial resources that go with such a position. Tony Blair’s new house in London’s Connaught Square costs almost 20 times his prime ministerial salary, a multiple that would set alarm bells ringing in the offices of any mortgage lender. We are reassuringly told, however, that the purchase reflects not his current income but the much larger one he can expect when he retires from active politics. Politicians once ended their days as elder statesmen, pronouncing on public affairs with detachment from everyday partisanship, travelling the world for the public good. Today they can no longer afford to, or choose not to. Disinterested government suffers no damage when figures such as Margaret Thatcher and Bill Clinton supplement their pensions with large advances for their memoirs and generous fees on the lecture circuit. But while such activities are very rewarding for former prime ministers and presidents, the second and third ranks of office holders find fewer readers and less appreciative audiences.

When US bank robber Willie Sutton was asked why he held up banks, he replied: “That is where the money is.” The money today is in the corporate sector. Successful diplomats always find sinecures in the boardrooms of multinational companies, retired generals a more peaceful life in the offices of defence contractors. Former US secretary of state Henry Kissinger established a new model when he founded a secretive consulting business to assist large corporate clients. Since then, the trickle of former politicians into government relations for companies and consultancies has become a flood. Politicians from all levels have been swept along. Someone like Kissinger commands top dollar. At the bottom of the market, but still not inexpensive, we find the hapless former political adviser in Downing Street, Derek Draper, whose private sector career faltered after he offered an undercover journalist exclusive access to “the 17 people who count in Britain”.

The rise of the large corporation brought a fundamental change in the relationship between politics and economists. When ICI became Britain’s largest industrial company in the 1920s it established its corporate headquarters at Millbank, a stone’s throw from the Palace of Westminster. But this was then unusual. If American corporations moved their offices from the industrial centres where they had their roots, it was most often to New York, where they would be close to Wall Street.

Even in the 1920s, when President Calvin Coolidge proclaimed that “the business of America is business”, there was a distinct separation of business and state. Alfred Sloan built the first great professionally managed corporation at General Motors, and was active in public affairs and a formidable philanthropist. But he regarded it as a matter of principle that these private activities were rigorously distinguished from those of the company. Sloan’s successor as chairman, Charles Wilson, is reviled by history for his claim that “what’s good for General Motors is good for the rest of America”. This is not exactly what Wilson said: in 1952, President Eisenhower asked him to be secretary of defence and during the confirmation hearings Wilson was quizzed about whether he could make a decision as defence secretary that was contrary to GM’s interests. He responded that while he could, he did not expect the situation to arise because “what was good for the country was good for General Motors, and vice versa”.

In retrospect, it seems quite absurd to suppose that Wilson’s motive in accepting nomination as defence secretary was to advance either the interests of General Motors or his personal finances. Wilson emerged as a genuinely public spirited individual seeking to serve his country in difficult times. In any democracy, there is conflict between the expectation that citizens vote in accordance with their own private interests and the hope that they will vote in accordance with their private perception of the public interest. They frequently resolve the conflict, as Wilson did, by reassuring themselves that there is little difference between the two. But such a stance both recognises the differences and acknowledges the priority of the public’s interest. Wilson’s confirmation hearing, far from being an assertion of the power of corporate interests, was an affirmation of the ideal of disinterested government.

The relationship between business and government has declined since then. Within a few decades the pursuit of corporate interests – what’s good for General Motors – would become legitimate in its own right. The claim that the corporate interest was aligned with the public interest – what’s good for General Motors is good for the country – would be made perfunctorily, if at all.

Stanford Law professor Laurence Lessig, in The Future of Ideas (2001), offers the following view: “Companies have a duty to their shareholders. Their job is to make money. If the opportunities present themselves, they will, and should, change their views. They are not institutions of public policy… we should treat [what corporations say] as statements by individuals who are required by law to be self-serving. This is not just ‘bias’ – this is legally mandated bias.”

In this view, the modern corporation is amoral and should be. The pursuit of selfish financial interests through political means, rightly seen as discreditable when practised by individuals, need not therefore incur the same opprobrium if undertaken by corporations. Those who seek to promote the corporation acquire legitimacy and escape moral censure because they act, not on their own behalf, but in pursuit of their fiduciary duty to shareholders. By happy coincidence, they have usually arranged incentives through which their zeal in performing that duty will be of direct personal financial benefit.

The limited political activities undertaken by the General Motors of Sloan and Wilson would be led, and largely undertaken, by these senior executives themselves. And although Sloan was committed to pursuing the interests of his shareholders, he would have been troubled by the idea that this limited the nature of his personal responsibility for his actions. The professionalisation of corporate and public affairs was bound to change this, and did. The government relations department of a company has as its primary objective the interests of the company. How could it be otherwise?

The notion of corporate affairs to promote the interests of the company through means other than the competitive market gained further impetus from the growth of professional lobbyists. Washington’s K Street has become the world centre for paid advocates of the interests of corporations – the number of lobbyists for the pharmaceutical industry alone is said to outnumber the number of legislators on Capitol Hill.

Brussels is second only to Washington as a focus for lobbying. The European Union generated a mass of regulations and directives relevant to corporations, and the European Commission was an under- resourced bureaucracy, subject neither to strong political control nor effective legislative scrutiny. The development of new European institutions gave an opportunity to specialist guides who understood the mechanisms by which they worked and the people through whom they worked.

And so corporate “rent-seeking” – the pursuit of competitive advantage through political influence – became an industry like any other. And, like other industries it is competitive, profitable, and has customers who demand visible and deliverable output. The focus of rent-seeking was once tariffs and trade restrictions – it was this activity which aroused the ire of 18th century economist Adam Smith, and fuelled several of his denunciations of the ill effects of political influence on the wealth of nations. As free trade has become more widespread, this area, though still important, has declined in relative significance, and new fruitful fields for lobbyists, such as environmental regulation, have opened up. As has the subtle and barely noticed growth in the political influence of investment banks. Staffed by articulate and highly intelligent individuals, and central to both political and business life, these institutions gained direct and indirect influence over economic policy, promoted capital market liberalisation and undermined state pension provision around the world. Perhaps the most sinister development of all was the growth of companies such as Carlyle and Halliburton, both involved in rebuilding Iraq, whose underlying rationale seemed to be the skills and contacts they brought to managing the grey areas between public service and private profit.

In North America and western Europe, the institutions of disinterested government are sufficiently robust to prevent granting personal favours in return for corporate favours. Put more simply, there is not much direct bribery and the attempt is usually counter-productive. The rewards have to be indirect, perhaps through post-retirement largesse; frequently through campaign finance. In the US, where limits on campaign expenditure and donations have been weak and largely ineffective, spending has reached levels that make almost every candidate dependent on such fundraising. But perhaps the most remarkable feature of corporate influence is the extent to which it has grown without any evident quid pro quo. As English poet Humbert Wolfe wrote in 1930: You cannot hope to bribe or twist, thank God! the British journalist.

But, seeing what the man will do unbribed, there’s no occasion to.

And so it has been with corporate influence on political affairs. The position that Lessig describes is the outcome of a much wider change in intellectual climate. Part of this is the development of a public-choice theory of politics, which pours scorn on the notion of disinterested government and sees politics as an arena for the clash of conflicting self interest. James Buchanan, who won the 1986 Economics Nobel Prize for his contribution to this doctrine, used the occasion to denounce “the classical prejudice that persons participate in politics through some common search for the good, the true and the beautiful”.

While it is starry-eyed to suppose that western politicians are motivated solely by concern for the public interest, it is the common search for the good, the true and the beautiful that is at the root of the cultural, social and economic progress of western society. The disparagement of a notion of public service, such as insider trader Ivan Boesky’s assertion that “you can be greedy and still feel good about yourself”, creates the sense that selfish behaviour, in politics as in business, does not even require dissimulation or apology.

These shifts in perception change our views of the nature of wealth. There have always been competing economic and political theories of inequality in the distribution of income and wealth. From the economic perspective, such inequality is the result of differences in productivity; from the political perspective, it mirrors inequality in the distribution of power in society. The battle between these two polarised positions has dominated political economy for the last two centuries.

Today the economic school is in the ascendant, partly because market economies conspicuously outperform planned ones, and partly because it is mainly economics, not politics, that accounts for wealth inequalities in developed societies.

But once the claim that wealth is the product of effort, talent and public service is accepted, the democratic objection to the use of wealth to secure political influence is undermined. Indeed in the most extreme manifestations of this doctrine, the market is a truer reflection of democracy than the ballot box.

The collective wisdom of securities traders represents a sounder measure of informed public opinion than elections, because voters must put their money where their mouth is. “Microsoft has a monopoly,” a Wall Street Journal editorial proclaimed, “because we want it to have one.” And chief executives need enormous remuneration packages, less for the money – which they cannot conceivably find time to spend – than for its reinforcement of their own sense of self-importance and value to society.

This is a major change. The first generations of successful businessmen felt a need to justify their good fortune, to make some repayment to the communities that had made them rich and to demonstrate the disinterested nature of their generosity.

Anti-trust policies originated not to promote economic efficiency but to limit the influence of President Theodore Roosevelt’s “malefactors of great wealth”. Men such as Andrew Carnegie, John D. Rockefeller and Henry Ford established large philanthropic foundations which were administered pro bono by trustees with substantial independence. The results were remarkable: the Rockefeller Foundation’s record of supporting scientific achievement – developing antibiotics, green revolution crops, and unravelling DNA – is so extensive that the foundation’s activities are of greater economic significance than the creation of the family’s Standard Oil company.

Today’s donors demand more influence over the specific destination of their philanthropy, and, because of the triumph of the market, they receive it. Bill Gates and international speculator George Soros deserve to be listened to, not for the originality of their ideas or the size of their cheques alone, but because the size of the cheques demonstrates the originality of their ideas. Enron’s views on regulation command attention, not just because its growth and profits enable it to be a generous supporter, but because its growth and profits demonstrate its leaders’ insight into regulatory policies.

It is desirable that those in politics should know more about business, and vice versa. Beyond that, almost all the links between politics and business work to the ultimate disadvantage of both, undermining the disinterested government on which both a democratic society and a prosperous economy depend. As taxpayers we need to pay more for both our politicians and our political parties. Neither are cheap if they are of good quality.

But disinterested government can be sustained in the long run only if we assert that political action is not a proper function of the public corporation. This is a radical change, and a more radical change from where we are today than from where we were 50 years ago. The separation of economics and politics made the triumph of the market economy possible, but the very success of the market economy and its institutions threatens that separation. A successful economy must make the pursuit of competitive advantage through political influence by corporations extremely difficult. A democratic society must deny companies both the right and the obligation to pursue widely drawn concepts of social responsibility. The business of business is business; no more, no less.

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