Elizabeth Warren’s Socialist Dogwhistle
The Accountable Capitalism Act would deliver neither accountability nor capitalism
Just a few weeks ago, the media was fawning over Alexandra Ocasio-Cortez and her youthful makeover of tired socialist ideas. Not to be outdone, Elizabeth Warren penned an essay in the Wall Street Journal introducing a modest proposal to completely remake capitalism as we know it. Her Accountable Capitalism Act would create an “Office of United States Corporations inside the Department of Commerce,” requiring any corporation with revenue over $1 billion to obtain a federal charter. These charters would force businesses to vest decision-making authority in a variety of “stakeholders” that would include the company’s workers and other vaguely-defined groups in the communities affected by the company. In other words, it would remake the composition of boards of directors for large U.S. corporations to favor interests that the federal government deems worthy of support.
While not quite Soviet-style communism, the essence of the bill is expropriation of private enterprise a la European socialism. If Matt Yglesias’ fawning coverage at Vox is any indicator of this kind of plan’s popularity with left-leaning Americans, it would seem like this brand of socialism is still in vogue
Yglesias writes:
“As much as Warren’s proposal is about ending inequality, it’s also about saving capitalism.”
Putting aside the fact that Warren is likely using this to position herself as the hard-left favorite for the 2020 presidential election, it’s worth examining what such a policy would actually mean for businesses and working people in the United States. A full analysis would require both a legal scholar and an economist. Professor Richard A. Epstein of the Hoover Institution and NYU’s School of Law joined The Bob Zadek Show on 8/26/18 to explain how Elizabeth Warren’s Surreptitious Socialism threatens the foundations of our (mostly) free economy.
The most sinister aspect of Warren’s proposal is its surface appeal. Giving workers and community members a greater share alongside shareholders and the board of directors seems like a nice way to orient a corporation around goals nobler than a mere profit motive. But as Epstein points out, the way the bill is defined, anyone could claim to be a stakeholder — even a firm’s competitors. Take away the forces of free competition and you kill the engine of prosperity.
That’s far from the only problem. In a global economy, where corporations have a choice of where to do business, such a law would send capital fleeing to other countries to avoid the burdensome compliance costs, which would predominantly be driven by political rather than social or economic concerns.
As Milton Friedman explained decades ago, the profit-motive harnessed within a functioning legal system is all that’s required for both the individual and collective good to be maximized. Warren’s plan to “save” capitalism would conveniently align corporate interests with her own political interests. While she may not wish to turn the U.S. into North Korea overnight, it’s a slippery slope from her Accountable Capitalism Act to full-blown socialism.
For a full discussion of the long list of errors and economic fallacies Warren makes in her piece, tune into the show of ideas — not attitude — or read the transcript.
Transcript
Surreptitious Socialism
Bob Zadek: In the past week, Senator Elizabeth Warren from Massachusetts, formerly a Harvard Law professor, published an opinion piece in the Wall Street Journal entitled the Accountable Capitalism Act — right out of Atlas Shrugged. In that opinion piece, she offered a proposal to basically “redo” — some might say eliminate — capitalism in America. She wants to juggle everything from how we do business to how we organize business affairs in America.
Her plan received a lot of attention from thinkers both on the left and on the right, including this morning’s guest. I am happy to welcome back to the show Professor Richard Epstein. Professor Epstein teaches law at NYU and is also at the University of Chicago School of Economics. Richard has written a bunch of books, all of which I proud to say I have read, some more than once. Richard published a response to Senator Warren’s piece on his weekly blog, Defining Ideas. We are here to discuss the Accountable Capitalism Act.
Why have I selected this as the topic for this morning’s show? Because it is so gosh darn scary. The fact that a law professor — a United States Senator — could actually write this with a straight face (I don’t know how you write with a straight face) is terrifying. She might even believe what she wrote makes sense, and because it comes from a United States Senator — somebody who is being discussed as a presidential candidate in 2020 — it is worthy of at least an hour of time to study both the piece itself, as well as what it tells us about how the political left looks at business life in America.
Richard, welcome to the show this morning.
Richard Epstein: Glad to be here.
Bob Zadek: Tell us the bullet points of what Senator Warren is proposing regarding the management of American business.
Richard Epstein: Essentially, she wishes to convert the American corporation from a shareholder-run operation to a stakeholder-run operation. These two terms are a little bit elusive, at least the second one, so let me explain the way in which this works. The traditional American corporation — the public corporation — is an organization owned by shareholders, which creates a board of directors, which in turn appoints a CEO. The way in which corporations are organized, the three groups each have a distinct set of responsibilities and opportunities.
Shareholders at some level can sell their entire share out to somebody else in the takeover market. Each of them individually is entitled to sell their shares into the training market, and all of them have the right to vote with respect to the selection of the board of trustees or the board of directors. The directors are charged with the general oversight of the corporation. They appoint the CEO to run the thing on a day-to-day basis, subject to the general direction that they give.
So, you have these three layers of corporate situation, and the focus of each one of them is to make sure that the corporation will maximize the rate of return that it gets on its investment consistent with its legal obligations to the states and for the party with whom they entered the contract.
Fiduciary Duties and the “Business Judgment Rule”
The key feature and the key word to describe what happens to the board of trustees and the CEO is each of them have “fiduciary duties.” Fiduciary duties are essentially the idea that when the CEO starts to make decisions, they don’t make them in their own interest — their own interest is taken care of by the pay that they receive for the job — but rather, they are supposed to look at the class of shareholders and essentially try to do what in their good judgment is the best long-term operation for the company at large.
The entire law rests on the following kinds of propositions. First, there is something called the “business judgment rule,” which says that if you are running a corporation and you are trying to maximize the value of your shareholders, you will not be held responsible if it turns out that the guesses that you make do not turn out particularly well. People make good choices and bad choices. If in the long run you’ve got a decent board of directors, the good choices will outweigh the bad choices. The last thing you want is to allow individual shareholders to snipe at the bad outcomes while keeping all the gains from the good outcomes. “Heads, I win. Tails, you lose,” is a recipe for closing down the corporation, because the board gets all the downside and the shareholders get all the upside.
The exception to this rule is in cases of “self-dealing,” whether by members of the board or the CEO. So, if you enter into a transaction with a buddy or a friend, the rule now switches. We no longer think of you as acting as a fiduciary agent for the shareholders, we think of you as trying to deal for your own benefit. If you look at these transactions, it’s not that you invalidate them per se (although many corporations have very stringent restrictions on what officers and directors can do by way of transactions), but you subject them to something known as the “fair value test,” which means that if the value which is received by the corporation is as great or greater than the value of the assets that they surrendered. If you put this all together, then everybody is focused on the same thing — maximizing shareholder value.
In order to make this work in a public corporation, you tend to have only single class of shareholders. The moment you start introducing preferred and common shareholders, there are going to be lots of choices. If they’re safe, they will benefit the preferred shareholders and if they’re risky, they will benefit the common shareholders. You don’t want these people to start figuring out, “Well, which class of shareholders do we wish to prefer, and why?” A single class of shareholders means that everybody is in an identical position to the extent that the law can create it. If you maximize the welfare of one shareholder, at least at a first approximation, you’ve done it for all.
Now, how do you then deal with the rest of the world? Well, the rest of the world is not owed a fiduciary duty because if it were owed a fiduciary duty, you would get much more intense conflicts than those that you have with respect to the difference between a preferred and a common shareholder.
All of these arrangements are handled in one of two ways. If you’re talking about externalities and harms to individuals who don’t trade with the corporation, you have such things as environmental protection laws, which limit emissions and things of that sort. The fiduciary duty requires you to comply as best you can with the external obligation.
If you’re dealing with trading partners — starting with bond holders, employees, suppliers, customers, and so forth, in those particular circumstances — each of them know that you owe as fiduciary duty to your own shareholders, so you bargain at arm’s length for transactions that would be mutually beneficial. In some cases there’s going to be a contest as to how this ought to work. Do we have unionized corporations? Do we have contracts at-will with lenders? What kinds of covenants can they put into foreclosure and so forth. But the whole model is that they will take care of themselves. We will take care of ourselves. The fiduciary duties create win-win arrangements inside the corporation, and if you’re doing voluntary transactions, you then get a win-win on the other side.
It is not that there aren’t stakeholders — people who are interested in the affairs of the corporation — but we have a very clear way in which they defend themselves.
The Scheme
Richard Epstein: What Elizabeth Warren wants to do — and it’s mindless as far as I’m concerned — is to say that the fiduciary duty model, which applies to shareholders, also requires you to have fiduciary duties with respect to all of these outside stakeholders, such as employees and everybody else. Now, if you’re going to do that, the question is, “how do you discharge that?”
She comes to the right conclusion. I use the word “right” in quotation marks. If you only have a board represented chosen by the shareholders, how is it going to act as a fiduciary to people who are non-shareholders? So she wants to have a federal agency call in every charter that has been issued to every corporation by every state — which means virtually all corporations, a massive move — and tell them that they will get their federal charter only if they agree to put on their board individuals who represent these other stakeholder groups.
Now you have this mess of trying to figure out how this particular corporations board is supposed to work. And remember, you have to raise new capital. How are you going to raise equity capital if the guys who are getting it are sworn to make sure that other people can divert it to their own interests?If you are a lender, how are you going to lend to a corporation If you know, in effect, what they can do is divert the proceeds from the operations of the business to some collateral venture, so there is nothing left after you to take it back?
Her plan is essentially an effort to nationalize all corporations by changing the control mechanism. If, in fact, the federal government is there and you’ve got no exit, you are going to have to respect whatever conditions they impose upon you. This means that foreign capital will never come here and American corporations will never stay here. Any small business which gets over a billion dollars with respect to net asset value is going to find that as it gets larger it is going to be taken from it, because the board of directors is going to be passed into alien hands.
This does not even go into all the crazy difficulties as to who these people are, how they’re going to be compensated, how long their terms of office are going to be, or who is going to select them. This is a scheme which is designed to nationalize every piece of American business in the name of “saving capitalism.”
Motivated by Ignorance
Richard Epstein: Warren thinks there is some inequality in the way in which various markets work. Let’s suppose she is right about that. There are other mechanisms like welfare benefits or progressive taxation that you could use to handle these kinds of situations, and for the most part she’s wrong about that, because if you run an economy in which you heavily regulate corporations, the boards that respond to these regulations, knowing that labor contracts are going to be regulated in ways that are often unacceptable, will shift to overseas operations. They will shift the greater capital intensity in terms of their situation.
What is so crazy about all of this is the difficulties that she perceives is essentially a direct product of the kind of legislation that she typically favors — ignorant, I think, of the way this thing works. I mean, I know she was a Harvard professor. The truth about the matter is her work there was never any good, and this stuff is simply off the wall. I think most people who know anything about American business quake in their boots at the thought that somebody this positive, this confident, and this uninformed could push forward a proposal like this, which would shake American businesses to their roots, and leave everybody subject to massive dislocations in pensions, wages, dividends, and everything else.
Bob Zadek: The principal that jumped off the page in Richard’s presentation, when he described how corporate governance and the notion of fiduciary duties works, is accountability. Where shareholders elect directors who hire officers who know their job, everybody knows to whom they owe a duty — a fiduciary duty. Under our system of law, fiduciary duty is a very high duty. When you show up to work, you’re an officer and you know your job — the board requires you to maximize the wealth and the well-being of the corporation. Maximizing the financial wellbeing of the shareholders is your responsibility. The board knows the officers are accountable to the shareholders. Everybody knows their job.
Now imagine sitting at dinner with a dysfunctional family. You’re sitting in the boardroom and you have all of these competing interests — all of whom you now owe an equal duty, as well as to your neighbors. You owe them a duty regarding these environmental issues, but you also owe a duty to people who are in the state in which you operate — to employees, shareholders, and creditors. How in the world could anybody go home from a day at the board meeting and say, “I did a good job today.”
It is absolutely impossible, which means everybody has a target on their back. You have no idea if you’ve done anything right unless there are regulations. It makes it impossible to govern a corporation. It’s a lottery.
Richard Epstein: Bob, you are so optimistic. It’s even worse than that. Let me mention some of the things I didn’t mention in the paper that I wrote, which was short.
One of the things, of course, that boards of directors have is a fiduciary duty.
They also have very powerful duties of confidentiality as well. If you are running a major corporation, you have trade secrets, of course. These concern secret processes, marketing plans, research and development and so forth. Every member of this particular operation knows full well that when that information comes to you, it stops with you. How these things are operated is very complicated, but there are some trade secrets that are so sensitive that you’re not even allowed to take the document. You have to go into a room, go through an inspection without any pencils or paper — it is for your eyes only, and you get the one or two things that you need in order to do this.
Take a formula for Coca Cola: nobody who knows the whole formula. There are only people who know bits and pieces. Now what you are going to do is you’re going to put on the board people who by definition are stakeholders and therefore have obligations to other individuals. Are they duty bound now to release the secrets that they get from the corporation to the people that they represent? Can you really expect that they are going to keep their duties of confidentiality even if they swear to it?
Once a trade secret gets out it doesn’t bear a pedigree of who managed to leak this thing, so what you can do is get somebody who sits on a board meeting who works for a union and who turns out to be antagonistic to the company he happens to be on the board of, and who releases information about trade secrets. A billion dollars in potential income starts to disappear.
When you start looking at these duties, you cannot have multiple masters and hope to discharge any and all of them. You send directors to school for a long time to figure out exactly what they can and cannot do, how they interact, which corporations they could work on, what you do with respect to conflicts of interest — all of which is designed to give you structural protections, so that when the fiduciary duties come everybody knows where they stand.
The Myth of Corporate Greed
Richard Epstein: Does this mean that corporations are selfish? Of course, the reliable bogey man for somebody like Elizabeth Warren is Milton Friedman, who wrote an article in the New York Times in 1970 about how the duty of corporations is to maximize profits for their shareholders. Now Milton is no fool. A fourth rate mind like Elizabeth Warren, trying to pull her credentials on somebody like a Milton Friedman who knows more dead than she does when she’s alive.
What did Milton say? First he said, “I’m not against charity.” In fact, virtually every free marketeer is in favor of charity. The University of Chicago is founded by John D. Rockefeller. Harvard was founded by John Harvard. Yale by Eli Yale. You take the names of great American universities — Carnegie Mellon, Johns Hopkins, Stanford, and so forth — these are all people who essentially amassed fortunes and then realized that consumption is not their dominant goal after a certain point. They created these massive institutions of huge wealth for the benefit of the rest of the world. Laissez fairists always believed in “imperfect obligations” of charity, which go to help the poor, to advanced medical and scientific research, and to creating and to advancing the institutions of culture and higher learning.
Milton wanted to pose the question that if you are a corporation, to which of these particular charities do you give to and why? His attitude was that this is a classic opportunity, if you’re not very careful, for self dealing, in which the head of the board of directors will give to his favorite charity. That is not what a corporation is supposed to do.
Milton’s answer was two-fold.
One part was that when you you have your own shares, you can deed some of them over to the charity that you want. Or, if you want to hold the shares, you could make a pledge of money from the dividends or from the value of the shares that you sell. If you do that at the shareholder level you manage to eliminate all the conflicts of interest which would arise at the shareholder level. If a CEO owns a parcel of shares and wanted to give to the symphony orchestra, he can use those shares as a source of value without having to implicate the entire corporation. Essentially, that means that you get much more powerful giving because it is focused, and donors actually watch over what’s going on.
The other part was that corporations have to maximize goodwill. This a very tricky situation, but imagine the corporation decided that it has a bunch of excess equipment that it doesn’t need, so it puts a funeral pyre out on Sunday and burns the whole thing. People are going to look around and said, “Why did you do that?”
Corporations have typically advanced their goodwill by making a gift of that obsolete equipment to a private or a public school, or a neighborhood center — something which virtually all shareholders agree with. They then encourage members of their staff to work in these organizations as volunteers, and they take that into account in the way in which they think about salaries and promotions and so forth.
There is a certain very sensible limited function of “benevolence” to a corporation, but it is always understood that you give to those organizations such that the image of the corporation will be improved, and that by virtue of your superior reputation you will be able to sell more goods, which will allow you to expand your charitable activities, create more positive reputations, and so forth.
Now, it’s very tricky because corporations must ask whether they really want to get involved with certain kinds of issues. If you’re the head of a corporation, do you want to start giving to gay rights groups or do you want to give to traditional marriage groups? Essentially what happens with corporations, notwithstanding Citizens United, is they have quickly learned that when you start making public political pronouncements unrelated to work, or give gifts to organizations that have strong ideological stances
Bob Zadek: I have always been of the belief that corporations should think long and hard before giving even one penny to charity because, after all, once a cooperation sees its role as to benefit society as a whole, then we lose that accountability that I spoke about earlier. That is, the directors now are no longer simply accountable to shareholders to maximize the value of the shares and the officers and no longer accountable to the board to do a good job at maximizing the value of the shares. Now, they see themselves as having a duty to society as a whole, a duty which is impossible to define and impossible to quantify.
Therefore as an investor, I’d be quite circumspect about investing in a corporation which was somewhat generous in its charitable giving. I would not want the cooperation to be giving away my money (in part, it is my money. since I own a pro rata share). I wouldn’t want a corporation giving away my money to a charity that perhaps I wouldn’t support if I was going to support a charity. Please corporation, give me back some of my money by dividend or stock repurchase, and I will give it to the charity that I wish, thank you very much.
Elizabeth Warren, in her proposal, seeks to invite charities and the public at large as the “stakeholder” — a key defined term in her piece — to the table, so they will be sitting around the boardroom yelling and screaming and lobbying for their fair share. Oh, how we hate those words, “fair share.” They will be lobbying for their fair share, leaving an impossible decision for directors and officers to have gotten it right. So, the area of charitable giving is a tricky one, if that.
Federalizing the Corporation: The Race to the Bottom
Bob Zadek: Another concept in Elizabeth Warren’s piece, as Richard explained, is to require corporations with over a billion dollars in assets to have a federal charter. That, of course, is reverse federalism. That is devolving power, once again, from the states — states now issue corporate charters — and we’re now going to move those charters to the federal government.
Richard Epstein: This is an extremely important issue. One of my good friends, Jim Copeland at the Manhattan Institute, wrote a blog which looks at this federalism issue, and it turns out there is something very important here. The traditional argument with respect to corporations had the following issue: when you have competition amongst states that issue corporate charters, is this a race to the bottom, or a race to the top?
The theory of the critics, of which Elizabeth Warren is one, is that it is always a race to the bottom — that people will start to go to those jurisdictions in which they can get the best rate — to hell with the shareholders and anybody else inside the business.
But the answer on the other side is much more powerful. It says that if you go to one of these places — sure you can pick the place to incorporate, which is going to give to the insiders all the advantages that they could possibly hope for. But there is one little hitch in that argument — you still have to make sure that you’re going to be able to sell those shares to somebody else.
So, what happens when there is competition in this market — so long as there is a buyer — is that the company is going to pick the jurisdiction where the charter terms are optimal regarding the total value that is generated. Then the shareholders figure out what the respective portions of that value will be — for the founders of the corporation on the one hand, and for the public people working in these kinds of arrangements on the other.
Ask yourself, “ Why do we have so many Delaware Corporations?” The answer goes back to another progressive, Woodrow Wilson, who was Governor of the State of New Jersey around the turn of the century. Before he became President he made New Jersey a pioneer in corporate law, and he decided to essentially change the way in which corporations were going to be regulated and taxed and so forth. All of these corporations went en masse to Delaware, which is quite literally across the river, because the terms they got there were going to be much better.
Delaware has been able to maintain a dominance in corporate law, and the reason it has done so is that it has a system of rules on the one hand, and courts on the other, which are exquisitely attuned to the basic problem of how it is that you maintain the proper balance between shareholder management that is inside and the corporate governance issues, so that people are confident that when they go there, A) the legislative rules are going to be pretty good, B) the regulations under them are going to be pretty good, and C) the judges that interpret the law are going to be pretty good.
Once you put all of these people into the federal government, then everything starts to become insane, because now you’ve got only one set of guys, and if it turns out that they are politically chosen with a span of responsibilities so broad that they can’t possibly discharge it, then you’ve got no place to go. The reason we like federalism is because of competition.
Are there reasons why we don’t like federalism? The answer to that question is yes, but they are very different situations, starting in the late 19th century when railroads became very powerful. These are network industries. The only way in which you can effectively operate is to make sure that you can ship your goods from San Francisco to New York by going through 15 states. What you are worried about under those circumstances is that each state will try to be opportunistic and block the free movement of goods back and forth across state lines, at which point federalism — instead of creating competition — now creates walking. It was for exactly those reasons that a form of federal regulation, embodied originally in the Interstate Commerce Act of 1886–87, was in fact the way in which this thing started.
Like everything else in the world, federalism is a mixed bag, but if you get the distribution of powers wrong, as Mrs. Warren always seems to do, it could be a catastrophe to nationalize. On the other hand, if you have the blockade issue, then absolute devolution of power to the state is going to be a big mistake.
In fact, if you go back and look at the original Constitution, one of its chief aims was to make sure that states could not barricade trade across state lines in order to create a national market for goods and services. And they did a pretty darn good job of that. The Supreme Court, although it gives much too much power to the federal government to nationalize charters, for example, it has done a very good job under the Dormant Commerce Clause to make sure that no state can impose burdens upon other individuals in ways that would make it impossible to have the free shipment of goods and services.
Bob Zadek: One observation, Richard. Elizabeth Warren and others worry about the phrase you used, “a race to the bottom.” That phrase, in my opinion, doesn’t really apply. It’s not the bottom, it’s the top. Because, if states don’t have good corporate governance statutes, they will lose the business. A “race to the bottom” is a politically-motivated phrase designed to prove your point when it really doesn’t do that at all.
Richard Epstein: Amen. The thing about Mrs. Warren and virtually everybody like her, is the kind of intellectual impatience they have. They are so sure they are right that they don’t try to understand anything before they figure out whether something ought to be condemned in the most categorical terms. Ms. Warren has never been on a corporation and doesn’t know anything about how to put together a business plan. She is a politician down to her fingertips. She is going to tell every single corporation in the United States which is filled with experts who have been in business their whole lifetime, “you do not know what you are talking about ladies and gentleman. I’m going to tell you how every corporation in America should run, because it turns out that I was once a professor.”
Especially when they have created the greatest profit-making in the history of the world. It is just mind-boggling that you would ignore these successes in every relevant dimension of life, from life expectancy, product safety, medical practices, to pretty much anything that you wish to look at over the last 40 years. The downside in terms of safety and environmental risks that she talks about are down 75, 80, 90 percent. As you get these improvements, why would you attack the system that managed to generate them. I simply do not understand how that makes sense.
Collectivism and Confusion
Bob Zadek: One of the many fatal flaws is society operates today where you have lots of organizations, each of which are specialists in what they do. The police are specialists in controlling crime. The SEC is a specialist on what its does. Businesses are specialists in another thing. Therefore, if I want to make money, I will give money to a corporation because I like the history and how well they’ve done it. If I want to build a house, I’ll hire an architect. If I want police protection, I will hope the police will do it. When you start to blur the lines, like giving the corporation the job of looking after the environment, enforcing the laws, protecting labor laws, looking after workers, and managing some kind of artificial minimum wage laws, everybody has every job.
Look at what has happened in the educational system. When we expanded the task of the schools to become nannies, so that they would also have to teach mortality in addition to all the other assignments we give to schools because other elements of society have failed at the task, the schools suddenly do not have enough resources and end up doing a poor job at all of them, so Elizabeth Warren takes corporations, because they have a lot of money, and she appoints them to be the guardians of the rules of society — the rules that government has selected. It blurs everybody’s assignment so nobody knows which way is up and that to me is the is the scariest part of her present proposal.
Richard Epstein: One of the things that you have done is you restated the issue about the diffusion of knowledge throughout society. If you have centers that pick their own areas of expertise and are allowed to change, you solve the knowledge problem by assigning a high risk to the people that have the greatest knowledge of what is going on. So, if you want to buy a good from a corporation, you don’t have to know anything about how it manufacturers that good or procures it. All you have to do is look at the final product and you see that it has got a warranty with it, you can inspect it, you pay a price, and you’re done. You can make your decisions without going internal. The moment you start having this collective situation where you have these great corporations, it is going to be much more difficult for you to do those things if in fact there is always going to be an administrative process which is going to challenge the way in which the corporation has decided to put these things together.
The “Amazon Effect:” Maximizing the Size of the Pond
Richard Epstein: I do disagree with you on one thing. American corporations have been able to survive amazingly well notwithstanding the fact that they’re burdened by various kinds of labor laws. I am against all of them. The incredible thing is that notwithstanding that we have very bad labor regulations, such as minimum wage rules, overtime rules, family-leave rules and anti-discrimination laws, and so forth, these corporations are so adroit that they actually can, given their fiduciary duties and their expertise, minimize the risk associated with external regulations. This is an incredible achievement.
I think one can say that if you were to remove all of these things, corporations would instantly adjust. We would see higher levels of productivity, which in turn would lead to higher wages. Donald Trump is attacked for many things, and of course Elizabeth Warren is one of the people who hates him the most. I certainly disagree with him on any issue in which he takes a stance against free trade and voluntary exchange. On a domestic front, his willingness to lower taxes and to back off on the the existence of new regulations and on the enforcement of old regulations has created a huge upward draft in the stock market. Those stocks are owned by lots of people, including many pension funds and so forth. And if it turns out that the rich get money in the short run, they give more money away, they hire more people, and do all sorts of things.
So essentially, when you’re doing general public policy, you should always spend your time initially worrying about maximizing the size of the pond rather than trying to figure out what the size should be for each particular slice. And the Warren approach is the exact opposite. Without any basis whatsoever, she knows what ought to be done and what not to be done.
An example of this pond analogy is called the “Amazon effect.” Amazon hires large numbers of relatively low-wage workers to work in filling orders, shipping goods, and all the rest of that stuff. The company is quite different from Apple, whose U.S. employees tend to be high tech times. Well, if you in fact hire another 100,000 people who had no jobs whatsoever and pay them, say, $35,000 a year, as opposed to what bezos gets, which is several billion, then the ratio between his salary and that of his average employee is going to go up and people are going to say, “Oh my God, this guy is an exploiter!”
But that is exactly what you want. Somebody who is willing and is able to create thousands of jobs to thousands of people who had no jobs whatsoever. He is the hero. The ratio is utterly unimportant between how much he earns and how much they earn. What you are trying to do in American capitalism is have people with marginal skills put back into the workforce. Interestingly enough, with the decline in corporate taxes and the softening of regulations, all of a sudden youth employment is up, people with criminal records and now able to get jobs, whereas before they would never able to do.
In order to make yourself rich you have to try to make somebody else richer than they were. Suppose you have two people. One has say $10 in income and the other has $100. Now what we do is we give them a little change and one guy goes from $100 to $200 and the guy with $10 goes to $20. Well, you can say, as Ms. Warren has, that a terrible thing has occurred by this expansion of the difference, but it is a parade of one group. What remember is that in the corporate world there is not just one guy getting going from $10 to $20 as the rich guy goes from $100 to $200. You have 200,000 people in that group who are going from $10 to $20. So, it it turns out that most of the gain goes to people at the bottom end of the income distribution even though the percentage gain for the one guy at the top is larger than everybody else’s.
You don’t want to kill that kind of motion by saying to the guy at the top, you have a billion dollars. Now we are going to basically a knee-cap your business by giving you a series of board members, all of whom are antagonistic to everything that you want to do.
Bob Zadek: There is a wonderful youtube series of interviews with Milton Friedman on the subject of corporate greed. Richard, when you mentioned corporations being greedy as part of the rap of those on the left, I did a show about 10 years ago on corporate greed. Since greed is an emotion, I wondered how a corporation can experience an emotion. I then speculated that a wonderful job opportunity for a psychiatrist, since corporations can now have emotions, is to be a psychiatrist for corporations. They might be depressed and fearful and insecure also.
Corporations cannot be greedy, plus the fact that everybody in America is greedy in the sense that everybody wants to, unless they are self-destructive, because they want to do the best they can for themselves financially and otherwise. So greed is something which drives the engine of American business and it should be encouraged and praised. People who talk about greed are really talking about the manner of acquiring wealth, not the fact of it. Everybody wants stuff. It’s how you get it that makes it praise-worthy or not.
Richard Epstein: Corporations are not greedy in the sense that we say ordinary individuals are greedy.
Imagine you have a bunch of people sitting around the table. The greedy person is the person who goes and takes more than his proportionate share, leaving less for everybody else. The source of greediness is indefinite property rights, which you get with a common. The reason that corporations have successfully eliminated greed is that these roles are so heavily specified that you are not allowed to say that these property rights are indefinite and just simply take your largest share. I don’t think that it’s wrong to say that people are greedy. I think it’s wrong to say that the institutional arrangements that corporations put into effect are not very powerful counterweights to the kind of greediness that ordinary people engage in their daily lives.
Links:
- @RichardAEpstein | Twitter
- “Defining Ideas” — Column by Richard A. Epstein | Hoover Institution
- Elizabeth Warren’s Surreptitious Socialism | Hoover Institution, August 20, 2018
- Warren’s screed in the WSJ.
Related Shows (Subscribe to the Podcast):
- Trump vs. Free Trade with Richard Epstein, June 7, 2017
- Richard Epstein on Climate Change, Aug. 13, 2017
- Consumers Beware: The Consumer Financial Protection Bureau is Here to Help, with Todd Zywicki, Oct. 19, 2014
