The Future of Capitalism

by Paul Collier

  THE REGULATORY MEA CULPA

  Corporations have globalized, morphing into legally complex networks of subsidiary companies that trade with each other but are controlled by a parent. For such companies, tax has become voluntary. In Britain, this was exemplified by Starbucks: despite selling billions of cups of coffee, during an entire decade the British subsidiary made virtually no taxable profits. It transpired that another subsidiary, based in the Dutch Antilles, was making remarkably large profits despite not selling any coffee at all; instead, it was selling the rights to use the name ‘Starbucks’ to the British subsidiary. As the company indignantly announced, it had paid all taxes due in the Dutch Antilles, although it omitted to mention that the tax rate there was zero. In poor countries, the equivalent is natural resource extraction: in Tanzania, a gold-mining company contrived to report losses to the Tanzanian tax authorities, while distributing huge dividends to shareholders.

  An even less salubrious aspect of corporate globalization is the growth of shell companies and havens of banking secrecy. A shell company, established by highly skilled lawyers in a metropolis – typically London or New York – is one whose true ownership is concealed. If such a company opens a bank account in a secrecy haven jurisdiction, the money deposited is shielded from scrutiny by a double wall of obfuscation. This structure has become a major means of protecting corrupt and criminal money from detection. Bitcoin has recently added a further option.

  As with trade itself, for the potential gains from corporate globalization to be realized, public policy must react. In practice, it hasn’t: the globalization of companies has not been matched by the globalization of regulation. The capacity to tax and regulate remains firmly lodged at the national level. As I discussed in Chapter 6, our supranational co-ordination mechanisms – the OECD, the IMF, the EU, the G7 and the G20 – have lost the capacity to forge binding reciprocal obligations underpinned by enlightened self-interest. Each nation prefers to compete in a race to the bottom. This defeat of governance has been the ugliest reality of modern globalization. Having been the epicentre of the problem, in its presidency of the G8 in 2013, Britain began to lead the way in trying to address it.* For example, the UK pioneered a crackdown on ‘shell companies’ through which lawyers conceal asset ownership; the country now has a compulsory public register of the true ownership of all British companies, closing a major conduit for corrupt money.

  THE MIGRATION MEA CULPA

  Corporate interests have become highly influential in economic policy-setting, one of its focal points being the benefits of immigration. It is evident why business should favour immigration: it enlarges the pool of workers from which to recruit. However, the interests of business and citizens are not coincident. While some immigration benefits both firms and citizens, it benefits firms even when it reduces the welfare of citizens.

  Globalization has conflated trade and the movement of workers, but there is a fundamental analytical distinction: trade is driven by comparative advantage, whereas the movement of labour is driven by absolute advantage. In consequence, although on the standard textbook assumptions migration is globally efficient, there is no reason to expect it to be mutually beneficial for host societies and countries of origin. Migration introduces a third category of beneficiary, migrants themselves, who are the only unambiguous beneficiaries (if they did not gain, they would not migrate). They receive the absolute productivity differential that drives labour movement. Migration is globally efficient, so that, in principle, transfers from migrants to hosts and those left behind could leave all better off. But in the absence of such transfers migration can be mutually damaging. It is privately rational for migrants, but this does not necessarily aggregate into collective benefits for societies. For example, despite the evident misuse of a scarce skill, global GDP rises if a Sudanese doctor moves to Britain and works as a taxi driver.

  Once immigration is set in the context of the rents of the metropolis, introduced in Chapter 7, its potential for costs to citizens becomes apparent. The metropolis generates ‘rents of agglomeration’ which get captured partly by landowners, but mainly by those workers with high skills and low housing demand. If the nation opens its borders to immigrants, the pool of potential workers will expand. For the typical country, the global workforce is around a hundred times larger than the national workforce, so the effect of fully open borders would be dramatic. Many foreigners will have higher skills and lower housing demand than nationals. Since they have an incentive to compete for these high productivity job slots, these immigrants will displace nationals.

  The process is globally efficient: the metropolitan economy will grow, and with it the rents of agglomeration. But who now gets the rents? With a workforce that has less demand for housing, and more skill, the rents will shift from landowners to skilled workers, making them harder to tax. Among the skilled, those current citizens who retain their high-skill jobs in the metropolis will gain; they will have become yet more productive by working with people who are more highly skilled. But those citizens who are crowded out of the skilled metropolitan job slots will lose the rents that they would otherwise have had: instead they will work less productively in provincial cities. This transfers rents from citizens to immigrants. If citizens expressed political attitudes reflecting their self-interest, we might expect these two effects to manifest themselves as pro-immigration sentiments among highly skilled metropolitan citizens, and anti-immigration sentiments among citizens in the provinces.

  Something a little like this may have happened in Britain. The population of London is the same today as in 1950, but its composition has changed considerably. As of 2011, 37 per cent of its population is first-generation immigrant, whereas in 1950 it would have been negligible. Without immigration, it is unlikely that London would have shrunk by 37 per cent: no metropolis has done so. More likely, immigration brought people with lower housing demand and higher skills than many citizens and so outbid them for the London job slots. Nationally, the Brexit vote revealed the divergence of identities captured in the discussion of rational social woman in Chapter 3. But the differences between London and the rest of the country may reflect the diverging economic effects of immigration on the two new classes within the city. Indeed, by analysing the Brexit vote, two somewhat counter-intuitive predictions can be tested.* The theory predicts that those members of the educated class who were not crowded out of London jobs would have become more productive due to the influx of skilled immigrants to the city, and so should have been less likely to vote Leave than the provincial educated. We find this to be correct: they were 25 per cent less likely. In contrast, Londoners from the less-educated class, who faced competition from low-skilled immigrants but had not left the city, would actually have lost from the influx and so should be less likely to vote Remain than people from the same class living elsewhere. Correct again: they were 30 per cent less likely. So, perhaps within London, rational economic man was still alive and well. Differences in class composition, and these different economic consequences of immigration, may be a better explanation of the vote than the prevailing metropolitan narrative of provincial xenophobia.

  A very different cost of immigration to citizens is its tendency to undermine the reciprocal obligations that had built up within the society. Recall that the genius of the period 1945–70 was to harness shared identity for many new reciprocal obligations. Those whose lives turned out to be fortunate accepted an obligation to help those whose lives turned out less well. This narrative of obligation was reinforced by a narrative that made compliance purposive: who could tell, perhaps in the next generation, whether the offspring of the fortunate would be among those less fortunate, so it was in everyone’s enlightened self-interest. Immigrants miss out on these narratives of shared identity, reciprocal obligations and enlightened self-interest, and so citizens may doubt whether they have accepted them. Those citizens whose lives have been fortunate may, consequently, be less willing to pay taxes that benefit immigrants as well a
s citizens. Such an effect would be particularly bad news for anxious provincials with few skills; just as they need to call on obligations, their fellow-citizens walk away from them because of immigration. Unfortunately, the evidence for such an effect is now compelling.

  New survey evidence from across Europe records attitudes on the part of those with above-average income towards redistributive taxation designed to help those who are badly off.2 Unsurprisingly, across Europe those who have incomes above the average tend to be less enthusiastic about redistribution than those whose incomes are below average. But when these responses are matched against the proportion of immigrants in the population a clear pattern emerges: the higher the proportion of immigrants, the lower the willingness of those with above-average income to support redistributive taxation. People on above-average incomes evidently still retain some sense of obligation to their poorer fellow-nationals, but that erodes as the identity gap is widened to non-nationals. Surveys of opinion are old social science technology. A more recent methodology is to simulate medical experiments by randomly dividing people into two groups and subjecting one group to a ‘treatment’ not given to the other group. In new work that investigates the same issue using this entirely different approach, two Spanish researchers asked the same question, but make immigration more salient for one group by ‘priming’ them with discussion of it, while priming the other group with some anodyne topic.3 They found the same tendency as the other study: the group that has been reminded about immigration is significantly less willing to pay redistributive taxes.

  Hence, while some migration is likely to benefit host societies and countries of origin, as well as migrants themselves, there is no reason to think that the amount of migration generated by market-driven self-interested private decisions is socially ideal. As usual, ideologies mislead. The left is instinctively sceptical of market-driven processes except for migration, while the right makes the corresponding exception to its blanket enthusiasm for the market. Pragmatism and practical reasoning are more nuanced, asking how much migration benefits a society, and by whom?

  CONCLUSION: A PROFESSIONAL MEA CULPA

  Economists such as myself have been too keen to defend globalization against its critics. The net effects are positive, but globalization is not a unified phenomenon that has to be adopted wholesale or rejected in its entirety. It is a ragbag of economic and social changes each of which is potentially separable. The task of public policy is to encourage those components that are unambiguously beneficial; to arrange compensation for those that are predominantly beneficial but which inflict significant losses on identifiable groups; and to limit those that cause redistributions that cannot readily be compensated.

  Part Four

  Restoring Inclusive Politics

  10

  Breaking the Extremes

  Capitalism is generating divided societies in which many people lead anxious lives. Yet it is the only economic system that has proved to be capable of generating mass prosperity. What has happened recently is not intrinsic to capitalism; it is a damaging malfunction that must be put right. This is not a simple matter, but, guided by prudent pragmatism, evidence and analysis that fit our current context can shape policies that would gradually be effective. During the era following the Great Depression, pragmatic policies put capitalism back on track; they can do so again. Yet our political system is not generating such policies. It has become as dysfunctional as our economies. Why is it no longer capable of thinking pragmatically about solutions to problems?

  Capitalism last worked well between 1945 and 1970. During that period, policy was guided by a communitarian form of social democracy that had suffused through the mainstream political parties. But the ethical foundations of social democracy corroded. Its origins had been in the co-operative movements of the nineteenth century, created to address the urgent anxieties of the time. Its narratives of solidarity became the foundation for a deepening web of reciprocal obligations that addressed these anxieties. But leadership of the social democratic parties passed from the co-operative movement to Utilitarian technocrats and Rawlsian lawyers. Their ethics lack resonance with most people and voters have gradually withdrawn their support.

  Why did political parties not turn to pragmatism? Most probably, this was the fault of voters. Pragmatism calls on people to attend to the evidence of context and to use practical reasoning to assess whether proposed solutions would actually work. That requires effort. An informed electorate is the ultimate public good, and as with all public goods each individual has little incentive to provide it. Most public goods can be provided by the state, but this one can only be provided by people themselves.

  Instead, the vacuum created by the implosion of social democracy was filled by political movements that offered voters a bypass to effort. Pragmatism has two enemies: ideologies and populism, and each seized its opportunity. The ideologies of both left and right claim that context, prudence and practical reasoning can be bypassed by an all-purpose analysis spewing out truths valid for all contexts and all time. Populism offers an alternative bypass: charismatic leaders with remedies so obvious that they can be grasped instantly. Often, the two fused, becoming yet more potent: once-discredited ideologies refurbished with impassioned leaders peddling enticing new remedies. Hail to the herald: from the radical left, Bernie Sanders, Jeremy Corbyn and Jean-Luc Mélenchon; from the nativists, Marine Le Pen and Norbert Hofer; from the secessionists, Nigel Farage, Alex Salmond and Carles Puigdemont; and from the world of celebrity entertainers, Beppe Grillo and Donald Trump.

  Currently, the political battlefield is seemingly characterized by alarmed and indignant Utilitarian and Rawlsian vanguards under assault from populist ideologues. This is the political menu from hell. In escaping it, the fundamental change will come through infusing our politics with a different ethical discourse. But there are also some changes to the mechanics of our political systems that have led to the current polarization, as we will see in this chapter.

  HOW POLITICS POLARIZED

  Our political systems are democratic, but the details of their architecture have increasingly inclined them to polarization. Most of our voting systems favour the two largest parties. So, the menu of choice facing voters depends upon what these two parties offer. The key dangerous step has been that, in the name of greater democracy, in many countries the major political parties have empowered their members to elect their leaders. This has replaced a system in which the leader of a party was drawn from among its most experienced people, and often chosen by its elected representatives.

  The people most inclined to join a political party are those who have become adherents of some political ideology. Hence, this change has tended to tilt the selection of leaders towards ideologues. Of the three major ideologies, social democracy has proved to be the most vulnerable, for reasons I set out in Chapter 1. Its combination of Utilitarian and Rawlsian philosophy is not securely grounded in our common values. This has left the polarizing ideologies of Marxism and Nativism to dominate the field. Marxism had appeared to be mortally discredited by the collapse of the Soviet Union and the Chinese switch to capitalism, but a new generation has grown up for which these are merely historical events, at best skimmed over in history lessons. Nativism was utterly discredited by the Holocaust and this memory has been kept alive. But where the mainstream party of the centre-right has adopted the hybrid of Utilitarian and Rawlsian ethics for its immigration policy, Nativist parties have found an opening.1

  The rise of the ideologues has left the many voters who are pragmatists facing a menu which has been selected by the extremes. Further, as many people disengage from politics because they find this menu unappealing, the winning strategy for leaders has changed from adopting policies that attract the wavering voter in the middle of the spectrum, to ensuring that the ideologically motivated voters all turn out to vote. To promote ‘inclusion’, the minimum age for voting and party membership may be lowered, but, lacking responsibilities and experie
nce, teenagers are the most prone to ideological extremism. Those non-ideological voters who feel themselves to have been disenfranchised have been left to the pickings of the populists.

  Several recent major elections have exemplified this process in action. The American election process of 2016 enabled ideological populists of left and right to dominate the campaigns with simplistic critiques of how they would address the failings of capitalism. On the left, Bernie Sanders was narrowly held at bay but in the process severely weakened the attachment of the Democratic base vote to the archetypal Rawlsian lawyer Hillary Clinton, who systematically pursued the ‘victim’ vote blocks.2 On the right, Donald Trump, using the superior media skills of a celebrity, displaced all the more centrist candidates. In the election itself, Trump maintained his simplistic critique while Clinton failed to articulate a more sophisticated one, appearing almost as the apologist for the current system.

  The French election of 2017 eviscerated all the potential leaders of the two main parties. On the left, the incumbent President Hollande, an archetypal social democrat, recognized that he was too unpopular even to run, and his prime minister, Manuel Valls, another social democrat, was eliminated in the primaries in favour of Benoît Hamon, an ideologue of the party’s left. On the right, the past president, Nicolas Sarkozy, was eliminated, as was the centrist Alain Juppé, in favour of an ideologue of the Republican Party’s right, François Fillon, whose campaign subsequently imploded for personal reasons. This left the first round of the French election, through which the contest was to be reduced to two candidates, a tight race between five maverick leaders – four ideologues and a pragmatist. Neither of the two mainstream party candidates went through to the second round, and the final contest was between the pragmatist, Emmanuel Macron, and a Nativist populist of the right, Marine Le Pen. However, had a mere 3 per cent of French voters chosen differently, the contest would have been between two ideologue populists – Le Pen on the right, and Jean-Luc Mélenchon on the left. France survived its voting system, but narrowly. In contrast to Hillary Clinton, Emmanuel Macron was able to articulate a clear, non-ideological yet sophisticated critique of the current system, aimed not at ‘victim’ groups but at the average French citizen, while exposing the emptiness of the populist remedies. His programme was a prime example of pragmatism, in which good communication skills enabled a complex argument to triumph over the snake oil of populism.