Newt Gingrich’s latest attack on fellow Republican presidential candidate Mitt Romney’s leadership of a private-equity firm goes to the heart of today’s biggest debate in politics and economics. “If we identify capitalism with rich guys looting companies, we’re going to have a very hard time protecting it,” he said. Protecting—or, more particularly, fixing—capitalism will be a big topic at the World Economic Forum in Davos this month. With the global economy still sputtering and governments unable to successfully address big issues like income inequality, unemployment and growing debt, it’s a subject that’s front and center not only in the U.S. but also throughout Europe, Asia and the rest of the world.
A key part of fixing capitalism will be reconciling the large and growing imbalances between the public and private sector. National governments have, over the past several decades, seen the most basic pillars of their power erode. Globalization has undermined their efforts to manage their borders. The ability to control their own currency has been lost for all but a handful of major powers. Fewer than two dozen have the ability to sustainably project force beyond their borders. Meanwhile, corporations play nation-states against one another as they venue-shop for more attractive tax or regulatory regimes. This arbitrage undermines nations’ ability to enforce their own laws. Indeed, the rise of big stateless corporations, which now rival many countries in terms of economic and political clout, poses special new challenges to governments.
When early corporations were established by royal charters almost a millennium ago, there was no mistaking their purpose. They had been created by the state to serve its interests. But over the centuries, they took advantage of their special status, which allowed them to achieve enormous scale and buy political favor. The result: They helped shape the development of laws that further tipped the balance of power in their favor.
Corporations have morphed from legal entities designed to ensure an enterprise could survive the death of its owners to institutions possessing more rights than people. The 14th Amendment, established in the late 19th century, granted citizens equal protection under the law. Yet most of the times it has been invoked since its adoption were on behalf of corporate rights. Corporations have used the 14th Amendment to do things like block taxes levied “without due process” and define advertising copy as protected free speech. More recently, the U.S. Supreme Court’s landmark 2010 decision in favor of the conservative organization Citizens United—which relaxed campaign-finance limits on corporations and labor unions and spawned so-called super PACs (political action committees)—equated money spent on political campaigns with constitutionally protected speech. The practical effect has been that those with money can crowd the airwaves with their message.
The biggest companies—the Walmarts and Exxons of the world—have financial resources and political reach that rival all but a few dozen states. Even the 2,000th largest company on the planet is at the center of more economic activity than scores of small countries like Mongolia or Haiti. As borderless supercitizens, global corporations have changed the international order, yet our rules and approaches to governance remain the same.
We have also lost sight of the philosophical ideas that historically gave national governments their authority. The current argument that larger government impinges on rather than protects or advances individual liberties is a far cry from the ideas that fueled England’s Glorious Revolution and the American Revolution. It ignores the fact that the void created by smaller government is often not filled by “liberty.” When matters like the global environment or regulation of derivatives trading are left entirely to market forces, for instance, outcomes tend to serve the most powerful because markets neither have a conscience nor do they ensure opportunity. Rather, they seek efficiency, and efficiency loves scale, and enterprises that grow to scale become elephants stamping out opportunities around them. This was well understood by the father of capitalism, Adam Smith. He condemned the abuses of the megacompanies of his day, like the British East India Co., calling them “nuisances in every respect,” since the monopolies they fostered inevitably led to profit-destroying corruption.
- David Rothkopf
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