In the past two decades, especially after two financial crises, concerns and criticisms about capitalism, neoliberalism, globalization and the responsibilities of corporations have received wider attention across the world. The coronavirus pandemic since 2020 has made more people think about its impact on global capitalism and has exposed many symptoms of the Western financial system and modern corporate governance practice.
Before 2020, the economic performance of many countries was already weakening. Many governments and corporations could not pay their debts. The appearance of prosperity masked the vulnerability of hidden economic bubbles. The systematic risks have existed for years, and the pandemic has prompted us to examine urgently capitalism and the problems it creates. Therefore, we cannot attribute the emerging economic crisis solely to the pandemic.
Indeed, capitalism in practice does not always imply free and fair market competition, as the market is always imperfect or failing. Many Western scholars, such as Fernand Braudel, Immanuel Wallerstein and Friedrich von Hermann, have pointed out that capitalism mainly promotes continuous capital flow, accumulation and concentration, tilting in favor of giant business groups and thus creating monopolies. It is an unfair game of “winner takes it all”. Excessive accumulated capital is largely turned into speculative investments, rather than used in manufacturing and real production, easily causing a bursting of asset bubbles and a slowing of the economy and income growth of the middle and lower classes.
After World War II, many countries in Europe and North and South America adopted Keynesian economic policies to rebuild their economies. Keynesians focus on maintaining full employment and providing a more comprehensive welfare system. Hence, such economies often run into deficits. By the 1970s, deficit budgets and economic stagnation had become common. Later, Keynesianism faded, and free, lax market regulation and privatization became the norm, especially under the leadership of Margaret Thatcher in the United Kingdom and Ronald Reagan in the United States.
In the US, the total wealth of billionaires has increased significantly during the pandemic; the same is true of Hong Kong. This imbalance has threatened American-style capitalism and its social structure and has brought about social polarization
Neoliberalism, by upholding the small government principle, minimalizing government intervention in a free market and advocating open competition, has become the dominant governance philosophy in developing economies since the 1980s. During this period, global institutions, such as the International Monetary Fund and the World Bank, as well as some renowned economists including Milton Friedman, saw market liberalization as a way to boost economic development. The problems caused by neoliberalism not only resulted in economic contraction and worsening social inequalities in many developing countries, developed countries also found themselves in dire situations after the financial crisis in 2008. The crisis proved that both financialization of the economy and the pursuit of unlimited growth were equally unrealistic.
In addition, many countries substantially increased money supply after the crisis, causing huge new capital flows into the market. This stimulated a rise in asset prices, and the increase in liquidity allowed asset owners to gain a large share of the new finances which also stimulated the stock market to rise. Big capital reaped huge profits in the next economic cycle. Therefore, many people think that the so-called non-intervention policy serves to benefit capital owners. The pandemic has widened the wealth gap between the 1 percent wealthy population and the other 99 percent. After the pandemic, many countries will gradually reach the end of the long-term debt cycle. With the implementation of a zero interest rate policy, traditional economic stimulus plans will fail, making it more difficult for the problem-ridden capitalist economy to recover.
At the business and corporate level, since the two financial crises and several corporate scandals, Friedman’s 50 years of advocacy that “The one and only social responsibility of business is to increase its profits” has been challenged by many, including the “Occupy Wall Street” movement in 2011. In the past, many corporate executives’ “maximizing profits” behavior, which pursued maximized shareholders’ value at the expense of non-shareholder stakeholders (such as employees, customers, suppliers, community and the environment), led to many problems in American-style capitalism. Such behavior also caused concern that the trust between businesses, government and society would be eroded.
In his new book When More Is Not Better, the North American management scholar Roger Martin pointed out that the fundamental problem of American-style capitalism is that people view the economy as a complex machine and continuously pursue greater efficiency and growth. However, he says, the excessive pursuit of profit efficiency has inadvertently lost balance. In addition to weakened resilience in times of crises, the original huge middle class has been greatly reduced. Median incomes of laborers’ households have grown very slowly, making the disparity between the rich and the poor even bigger. In the US, the total wealth of billionaires has increased significantly during the pandemic; the same is true of Hong Kong. This imbalance has threatened American-style capitalism and its social structure and has brought about social polarization.
In recent years, some pioneers in the business sector and academia have reflected on the specious concept of “maximizing shareholders’ values” and suggested redefining the relationship between corporations and society under a new social contract, i.e.,“stakeholder-based”. This means that corporate executives should not concentrate solely on shareholders’ interests but should balance the interests of other major stakeholders to make a reasonable profit.
During the peak of the pandemic, some corporations in Hong Kong and elsewhere took advantage of the crisis to seek exorbitant profits. Some even paid big dividends while conducting large-scale layoffs. However, there were also many which consciously took better care of their employees, valued their customers, supported the community, treated suppliers fairly, and cared for the environment. The pandemic has undoubtedly struck a heavy blow to most corporations, while presenting an opportunity to reflect and chart a win-win path for the sustainable development of corporations and society.
Since the 1980s, capitalism in the UK has infiltrated many social democratic elements and policies to reduce vicious competition, monopolies, exploitation of labor, long working hours, etc., and has introduced mechanisms to protect labor’s rights and social welfare. The new era needs a new type of capitalist system that can demonstrate more social equality and justice (e.g., similar to the models of Scandinavia or Singapore).
The pandemic seems to be a warning to remind us to speed up reforms and effectively get out of this predicament. Many of the temporary relief measures implemented by the Hong Kong Special Administrative Region government are insufficient. We need to transform the socioeconomic system into an adaptable one to better balance economic efficiency, resilience and social inclusiveness. Only in this way will Hong Kong society no longer be afraid of the impact of further crises on the economy and people’s livelihoods.
For instance, apart from allowing the free market to function fully, the HKSAR government should also resolve social and economic inequality, reformulate industry structures to create new job opportunities, prevent monopolies, strengthen a green and sustainable ecosystem, reform wealth redistribution policies, and significantly enhance labor rights and social security to help the underprivileged.
It is difficult to rely on individual sectors to change the entire system. To cope with future possible crises, the government, corporations, academia, non-government organizations and other stakeholders should change and play their part to build a stronger and more risk-resistant socioeconomic system. In other words, we need to make a “New Deal” for capitalism or a “Great Reset” as mentioned by Klaus Schwab, executive chairman of the World Economic Forum.
While pursuing income and wealth, today’s young generation pay more attention to social fairness, justice, inclusiveness and sustainability. The “Great Reset” plan should guide the free market toward this future to build a “stakeholder-based capitalism”.
The author is president of The Hang Seng University of Hong Kong.
The contents represent the author’s personal opinions.
The views do not necessarily reflect those of China Daily.