MHCi Monthly Feature: October 2011

 

Occupy with Responsibility not only Wall Street:

Keynes would have known what to do!

 

Dr. Michael Hopkins, CEO, MHC International Ltd

 

Introduction

 

It is a sad fact of our times that strident action with a hint of violence gains more attention than peaceful words.  Today’s protests of Wall Street and big business certainly have a rationale as the distribution of income worsens in our major economies and the drivers of this mess, banks and financial institutions, emerge unscathed.  We have been here before.  Remember, it was Keynes who was the inspiration that helped resolve the recession of the 1930s through his recommendation to increase effective demand.

 

CSR has been the tool that dreamers such as myself have suggested to curb the excesses of exploitation, worsening income distribution, and the excesses of capitalism.  Clearly, the worldwide Occupy Wall Street movement shows that CSR has not worked too well so far.  By the way, by CSR I mean corporate AND institutional responsibility toward all stakeholders with the aim of achieving sustainable development as I have argued elsewhere.

 

For many years the twin ideas of free markets and CSR to curb the excesses of the former have been in vogue.  Believe it or not, the CSR model has actually worked somewhat for many large corporations.  As ever, those who pretended to act responsibly and some of those through published social or sustainability reports, have not helped to convince an increasingly skeptical public – Enron, WorldCom, Madoff, Lehman Brothers, TepCo etc. – to see that a radical change is actually taking place among many corporations – Unilever,  Wal-Mart, Nestle, IBM, Ford being some of these.

 

Need for Government Responsibility

 

Nevertheless, the corporate sector still has a long way to go regarding responsibility.  What is more surprising, if not depressing, is that Government responsibility has not worked so well even in democratic societies.  Don’t forget that it was Government that gave financial markets the opportunity to dice and slice mortgages through de-regulation.  Followed soon after by the collapse of asset prices and a recession that we have all experienced.

 

Lehman Brothers produced social responsibility reports extolling the virtue of their philanthropy but little else.  With a proper concern for CSR I am convinced that Lehman Brothers would have had a great chance of survival.  I had approached them, without success, and suggested they take a hard look at their rating agencies but my advice was ignored.  Even today, the incredibly powerful rating agency, S&P (Standard and Poors), ignores the topic completely.

 

It is interesting to see the Republican Party Presidential debates in the USA.  Each candidate, in pursuit of their dream of being Head of Government, preaches for smaller, or even NO, Government.  Rare is it to see applicants for posts in other fields denigrate the institution they want to work for!

 

The result of this confused thinking led to the rise of the Tea Party who want to vastly lower taxes and dismantle Government (except defense of course).  Similarly, the reaction of Occupy Wall Street protestors believe that their efforts will lead to improvements in the distribution of income, reduce poverty and create employment.  Both appealing platforms but both have misguided solutions.  When interest rates are very low, Government borrowing can be used to promote economic demand to lead to increased economic growth, incomes and employment.  This CAN all be done with a more responsible and even a smaller Government.  None of us want a ‘BIG BROTHER’ Government that taps our internet and phones, tortures prisoners, fights ridiculous wars and provides us with an incomprehensible tax code while reducing legislation for financial institutions.  On the other hand, we all want a Government that creates and repairs infrastructure that prevents our environment from being harmed and insists on reasonably priced health care and pensions.

 

Moreover, we need a more responsible Government that regulates Wall Street, but also one that increases spending to stimulate growth when times are hard.  So not only do we need responsible Government to adopt the tenets of CSR for its own internal actions, Government also needs to start thinking about what it can do to promote CSR within companies as well as their normal lifeblood of urging responsibility on their citizens.

 

More or less taxes to stimulate growth and employment?

 

To answer this question we must not ignore the great British economist John Maynard Keynes.  Allow me to introduce his basic equation since the soothsayers in our societies today just seem to misunderstand one of the basic and most essential stories ever written.  The story is based around this simple equation:

 

Y = C + I + E - M

 

What the equation means, at its most basic, is that output is equal to consumption plus investment plus exports minus imports.  Thus to grow output (Y), or supply, we need to increase one or more of C or I or E (or demand) and reduce M.  Now C is private plus government consumption.  If private consumption is stagnant, as is happening across the industrialized world, one or more of public consumption, I (public or private investment), or E (exports) must rise. 

 

In the USA rich people and corporations are hanging onto their money and so investment is stagnant.  Exports can’t rise in a declining world economy unless your currency declines sharply – being tried by both the USA and UK but not poor old Greece!  So we are left with the public part of investment and consumption, and to increase them is better known as ‘stimulus’ and, also, despite huge debts low interest rates give some wiggle room.  

 

But, in the USA and the UK, the conservative forces want to reduce the public part of both investment and consumption in the hope that the private part picks up.  They also want to reduce taxes so that private consumption picks up, and corporations have more resources to invest.  Sorry folks this is just not happening. 

 

So are corporations irresponsible for not investing or are governments irresponsible for not introducing more stimuli?  Well something has to move somewhere or we get stagnation or, as now, a deepening recession. 

 

Keynes’ solution was counter cyclical policy whereby the public sector stimulates the economy and all the other components of the equation above move up.  I won’t discuss imports here nor technology but note that employment rises when Y or output rises under the assumption that imports don’t take up the slack and/or technological gains don’t depress employment as productivity rises.

 

Still with me?  Tack onto the above interest rates (now historically low) and inflation (also low), you can see that raising interest rates to curb inflation (as the European bank has done) will simply reduce I and hence Y unless C or E are rising fast.  This is happening in Europe and output is declining while unemployment rises.

 

Now how would CSR work in that equation?  Keynes was certainly in favour of Government responsibility[1].  Indeed, if we link CSR to his equation we can see, using today’s terminology, that ‘Y’ needs to be ‘sustainable’ and fairly distributed, ‘C’ needs to be conducted responsibly and energy saving, ‘I’ must be socially responsible investment, ‘E’ and ‘I’ must be non-exploitative, and harm free.  All these ‘new’ concerns do, in fact, give rise to new forms of economic growth (of the sustainable kind) and different forms of employment.

 

But if even one of the aforementioned conditions is voided we are in for trouble.  For instance, what happens when the rich get richer, as in many industrialized economies, their taxes reduce and taxes on the poor and middle classes increase?  This has happened in Greece and the UK and is also suggested by some of the lunatics in the Presidential race in the USA…albeit slightly disguised with the need to simplify the tax code?  Answer: You get ‘Occupy Wall Street’!  See our suggestions (Occupy Wall Street Manifesto) for possible outcomes of the Occupy protest.

 

Conclusion

 

There is no black and white.  We do need an understanding of Keynes’ equation.  But we also need both Corporate and Public Responsibility to create the sorts of Sustainable development we would all like to see across the whole planet.

 

 

 



[1] John Maynard Keynes was extremely active in his campaign to encourage the government to take more responsibility for running the economy.  In 1936 Keynes published his most important book A General Theory of Employment, Interest and Money where he argued that the lack of demand for goods and rising unemployment could be countered by increased government expenditure to stimulate the economy. His views on the planned economy influenced President Franklin D. Roosevelt and was a factor in the introduction of the New Deal and the economic policies of Britain's post-war Labour Government.