Saturday, May 10, 2008
Two days ago Joseph Stiglitz gave a lecture here at the University of Siena for the Workshop Benessere e Imprenditorialità. It wasn't intended solely for economists and as such was often quite superficial and cursorily dealt with some of the issues that he was trying to promote. This was quite sad for me as I have often enjoyed and appreciated what he has written in Economics and I was hoping that he might have make some more rigorous arguments for the promotion of Corporate Social Responsibility (CSR) (one of the themes of the talk) and its link to generalized welfare.
His talk covered CSR mainly in reference to three themes:
Conduct in the recent credit crisis in the US and its movements worldwide
The role of business in climate change and sustainability
The misuse of GDP as an index for measuring welfare.
Each of these has several different implications in respect of world trade, international relations, the functioning of credit markets and so forth. I will try to comment on each of these (now and in later posts).
First, in terms of the credit crisis, there is now a fantastic amount of commentary on how this has permeated from the US into the world economy. I don't think it's particularly worthwhile for me to comment on that (check the Economist's View blog for good coverage of this and other topics). A point that he has made, which I think is particularly relevant, is that corporate social responsibility is not simply the fact that government needs to regulate companies so that they do the 'responsible' thing. It requires buy-in (yes, hand-wavey I apologize) from the companies themselves. Stiglitz gave the example of a Chinese company (which he couldn't name) asking the government to regulate the industry and suggesting specific regulations. The CEO of the company's argument was that if their company wanted to be both profitable and responsible it needed to inform government as to the types of regulation that are required. Why? Because if they are a profit-maximising company and they are competing with privately owned (unlisted firms) that don't have similar systems of reporting, etc then govt needs to insure the economy against malfeasance by these privately owned firms by regulating both privately owned and publicly owned firms. Why again? The publicly owned firms would lose competitiveness against the privately owned firms if the privately owned firms pollute, mismanage labour, etc. Hence, it is in the publicly owned firm's interests for it to promote regulations to ensure corporate social responsibility of all firms. However, this will obviously be 'tainted' by the extent to which this is in the interests of the publicly owned firms. In my mind there is a further asymmetry of information, that which exists between the publicly owned firm 'acting in govt's interests' and govt itself. Obviously the public firm wants to be competitive, in fact it would probably suggest regulation that it, as a larger and public firm could probably easily internalize, whereas the smaller private firm may not be able to. He didn't mention this and I think it warrants comment. Especially because so many private SMMEs are necessary for us to increase growth and employment generally. So yes, it is good for corporates to cooperate with govt, but govt needs to be equally sceptical of their 'input' and must, absolutely must find a way to regulate all firms in such a way that is sensitive both to the firms and to the needs of govt.
Stiglitz contrasted the above Chinese example with financial corporations and their interaction with govt subsequent to the credit crisis. Thes companies are arguing, still, that they DO NOT REQUIRE MORE REGULATION! What? Are these people insane? Have they not noticed the credit-crunch? Have they not seen that (literally) millions of Americans are losing and will lose their homes on account of the speculation of these companies and yet they say they are over-regulated? Come on!Moreover, that these companies have CEOs who walk away with incredible packages at the end of the year, while the average customer is walking away without their life savings and having lost a home is incredible (more on CEO remuneration later). He comments further that companies such as Citibank, with advertising campaigns saying 'Qualified at birth', or companies sending credit card forms to fourteen year-olds, is a form of indentured labour. The companies get the individuals into debt quickly and then keep them paying back the loans for the rest of their lives. Oh yes, on the above topic, don't even let me comment on George Bush's plan to veto the house's proposition to alleviate the pain caused by the credit crisis. Once more he is funny in the head.
Stiglitz also accurately commented on two different Business School and Corporate type supposed 'movements away' from evil profit maximising. Firstly, 'shareholder value'. Well, I'm not going to go into this one again with too much detail, but maximising shareholder value does almost nothing for ensuring the long-term value of the firm because the CEO and the firm generally become far too sensitive to short term movements in the market which may have absolutely nothing to do with the activities of the individual firms. Consider the market at the moment and food shortages, a decent analogy can be found in the various reserve banks being unable to control inflation internally because of the fluctuations in food prices internationally. It would be foolish to expect the individual reserve banks to be able to curb inflation in their own countries when core inflation is up so much. Ditto shareholder value and random fluctuations in the market. Stiglitz argued that shareholder value was actually doublespeak for maximising managerial wealth. Why does he argue this? Well, the US has actually had decent economic growth in the past 9-10 years. Has the 'ordinary American' gained anything from this? No! Real wages have not increased for the average worker, the benefits of from growth in the US economy have gone almost entirely to the top 5% of income earners (or even top 1%). CEOs take away massive remuneration packages at the end of each fiscal year. Stiglitz argues (again accurately in my opinion) that this is another area that CSR needs to tackle and in which govt needs to intervene. CEOs cannot continue to be the only group to benefit from growth in the economy, assuming that there is any growth after the recession created by overly risky loans.
Ok. that's enough for now. More later on Stiglitz and some of his suggestions.