Read the full transcript of Sir Paul Marshall ‘s talk titled “Fighting the 3 Mutant Capitalisms” at The Alliance for Responsible Citizenship (ARC) conference on Oct 31, 2023.
Listen to the audio version here:
TRANSCRIPT:
SIR PAUL MARSHALL: Good afternoon. My subject is free markets and good governance.
Now I am a hedge fund manager and some might say that hedge fund managers are to good governance what highwaymen are to road safety.
But hedge fund managers are also specialists at speaking uncomfortable truths and that is part of what we are here to do at ARK, so bear with me. We want to do three things in the business stream over the next three days.
First, rejoice in the abundance that true free enterprise and free markets create.
Second, acknowledge how free markets can be captured and how they tend towards corporatism and cronyism unless they are firmly checked. And third, to explore what good governance might really look like and how free markets and human innovation can be combined with good governance to ensure human flourishing.
The Rise of Abundance
The theme of abundance will run all the way through this conference. Human development resembles a hockey stick.
For two millennia before the year 1800, standards of living more or less flatlined. More than 90% of the planet lived in what is today classified as extreme poverty. Then something happened. That something was the way scientific innovation and free markets came together to create the industrial revolution. GDP per capita started rising, first in Holland and Great Britain, then in the rest of Western Europe.
It rose as much in 50 years as it had risen in the previous 1800 years. That magic formula was then shared across the world. In the last 75 years, extreme poverty across the world has fallen from 90% to 10%. It has halved in the past 20 years alone. Free market capitalism is the greatest instrument of poverty relief that the world has ever seen. Free markets and scientific innovation can and will also solve the major problems facing humanity today.
Not least, dealing with the challenges associated with climate change. The primary role that free markets play in generating prosperity is a given, axiomatic for almost everyone here today.
The Crisis of Legitimacy
But it is not recognised by those who are at the wrong end of disruptive innovation. It is not recognised by many of the younger generation who do not see the benefits trickled down to them in the way they did to us boomers.
And it is not recognised by the people left behind in flyover country who have seen their factories shuttered and their communities uprooted. For these people, free market capitalism faces a crisis of legitimacy.
So we need to stand up for free market capitalism, but we also need to be careful what exactly it is that we are defending. Ultimately, free markets only truly prosper in societies where there is a proper shared understanding of virtue and mutual honour. That is why the City of London prospered for so many years on little more than the ethic of my word is my bond. Corrupt societies, on the other hand, practise tribalism and cronyism.
Think Somalia, or Sicily, or Davos. The biggest danger to free markets today is that we are losing that shared understanding of virtue. When virtue breaks down, you begin to see the emergence of mutant strains of capitalism.
Mutant Siblings of Capitalism
So let’s talk about free market capitalism’s mutant siblings. There are three big ones.
1. Monopoly Capitalism
First, monopoly capitalism. If you play the game of monopoly long enough, somebody always ends up controlling the board, just like real life. Some, in Silicon Valley, argue that these winners have earned the right to enjoy the fruits of their success, and the right to price gouge to their heart’s content. If Apple wants to charge a 30% tax on their app, some might say, let them.
They have earned the privilege. The problem with this argument is that the genius behind Apple was Steve Jobs, not the corporate executives who are now clipping the coupons. Predatory behaviour is rife in the US, whether it is the Apple App Store, or the way Uber treats their drivers, or airlines treat their passengers. In most US airports, one airline controls over half the landing rights.
Many states have health insurance markets, where the top two insurers have an 80 or 90% market share. Perhaps most serious of all, two companies, Google and Meta, control not only half the US digital advertising market, but half the global market. Given the concerns that many of us have about the curtailment of free speech, this is an issue which goes well beyond monopoly capitalism.
So I say gently to my US friends, that maybe your monopoly laws need to be looked at with a fresh pair of eyes. Maybe the new Speaker of the House will be able to help.
2. Crony Capitalism
The second mutant sibling is crony capitalism. Joseph Schumpeter, the great economist of entrepreneurship, predicted that free market capitalism would end in a form of corporatism, not so different from socialism itself. Corporatism is not free enterprise.
It is a sort of nightmare endgame for free enterprise, where the managerial and administrative classes take control and manage the system in their own best interests. Let me tell you a story. We are just a few minutes away from Deptford Docks, where the East India Company was launched in 1599. It was one of the first ever joint stock companies, enabling entrepreneurs to connect with providers of capital in an enterprise of pooled risk.
The joint stock company was the original cornerstone of free market capitalism.
But within a generation, that original spirit was corrupted. Loot became one of the first Indian words to enter the English language. It was an accurate description of what the East India Company were up to in Bengal. By 1756, they had an army of 20,000 soldiers and had embarked on what had been called the supreme act of corporate violence in world history.
Eventually, their power was challenged by Parliament through the impeachment of Warren Hastings.
But the impeachment failed, because at that stage, nearly a quarter of MPs held stock in the company. What ought to worry us today in the 21st century is that too many successful companies followed the trajectory of the East India Company. Today, neither Google nor Goldman Sachs nor Pfizer employs a standing army of 20,000 soldiers, at least as far as I know. On the other hand, some two-thirds of Congress receives funding from the pharmaceutical industry.
Half of them receive funding from the gun lobby. We live in an age of cronyism. We even have an exclusive venue, an annual conference in the Swiss mountains, where the cronies gather once a year to collude in the most efficient way possible on a global scale. U.S. corporations spend over $2 billion per annum lobbying in Washington, D.C. European corporations spend over €1 billion per annum lobbying in Brussels.
This spending has a high return on investment, a high RLI, as you might call it, return on lobbying investment. Take Big Pharma. Big Pharma spends $356 million per annum lobbying in the U.S. Pfizer alone spends $11 million.
In 2021, Pfizer made $35 billion of incremental sales and at least $10 billion of incremental profits from the COVID vaccine. They were granted fast-track authorization and immunity from all liabilities just in case there were side effects. That is what I call lobbying money well spent. Or take banking. 2008 still leaves a long shadow on Western politics as everyone saw how the bankers played the politicians for patsies.
They privatized their gains and socialized their losses. This gross injustice has never been rectified. Rather, the contrary. Ten years of QE enabled bank CEOs and executives to enrich themselves through the merry-go-round of rising asset prices and lavish buybacks. What we have seen from the 2008 crisis to its aftermath may be the largest transfer of wealth from the poor to the rich since the Norman Conquest.
As someone who has worked in financial markets for the past 35 years, I have been a big beneficiary of this, and I worry deeply that financial cronyism, including the role of central banks, is in danger of discrediting true free market capitalism, which has been the engine of so much of our prosperity.
3. Woke Capitalism
The third mutant sibling is woke capitalism. Woke capitalism is the imposition of a top-down ideology onto the free market system by politically motivated bureaucrats, either from the public or the private sector.
Their ideology is framed through ESG. In some cases, there is also a garnish of diversity, equity and inclusion. To be fair, corporate governance in the public equity markets has not worked well for a long time. This is because of a genuine market failure known as the agency problem. Fund managers acting as agents have mostly failed to ensure proper governance on behalf of the beneficial owners of the shares, mainly because it was too burdensome or too expensive.
Into this governance vacuum stepped BlackRock, the indexation industry, the United Nations and, of course, the European Union. The intent behind all three elements of ESG, environment, social and governance, may actually be a good one.
But the effect has been to create a set of standardised, ideologically based taxonomies which have very little to do with good governance.
But the correct response to woke capitalism should not be to revert to the status quo ante. Instead, we should all install the kind of governance that Adam Smith would have been proud of. That means every fund manager and beneficial owner taking it seriously, using technology to vote their shares in their unique, case-specific way and engaging directly with investing companies to drive sound governance practices.
By this invisible hand, we would end up with responsible, sensible outcomes.
The Challenge of Creative Destruction
There is one final feature of free markets that we need to talk about and that is the problem of creative destruction. Successful new businesses disrupt legacy businesses and destroy jobs at rivals. Free trade does this at scale.
We have just been through two decades of massive global disruption following the opening up of the WTO to China. Advocates of free markets, like myself, need to explain how we deal with the disruption they can cause to our towns and communities. Today, this challenge is starker than ever because we have entered the age of the knowledge economy. Business leaders no longer live next to the factory they are closing.
They don’t even live in the same town. The decisions they take about business strategy are digital rather than analogue. They don’t have to live with the human consequences. The failure to deal with this is cross-party.
Democrats, Republicans, Tories, Labour, Republic En Marche, CDU, SPD. No one has covered themselves in glory.
A Call for Better Governance
So the business stream of this conference is about a call to better governance of free markets so that they operate in the interests of the whole of society and not just a small elite. The descent of free markets into corporatism and cronyism is well advanced. One of Donald Trump’s rallying cries was drain the swamp and it struck a resounding chord.
But once in office, he became part of the same swamp, just another crocodile, albeit a very big one. On this issue, let’s call it swampy-nomics, there is continuity from Obama through Trump through Biden, from Juncker through to von der Leyen. Politics needs a new Teddy Roosevelt, someone who is prepared to take on the vested interests, to rid the world, the business world, of cronyism, regulatory capture and false virtue and to make free enterprise once again a pillar of human flourishing.
It will need people from outside politics to lead a movement of change and renewal and it will need people of integrity inside politics to carry it through. This must be one of the core purposes of ARC.
