Supercapitalism, by Robert Reich

by on November 6, 2007 at 4:31 am in Books | Permalink

Finally, I will come to some conclusions you may find surprising — among them, why the move toward improved corporate governance makes companies less likely to be socially responsible.  Why the promise of corporate democracy is illusory.  Why the corporate income tax should be abolished.  Why companies should not be held criminally liable.  And why shareholders should be protected from having their money used by corporations for political purposes without their consent.

That’s from Robert Reich’s Supercapitalism.  I’m coming late to this party, but mostly I liked the book.  It’s full of fresh thinking and most of all it is excellent on just how much invisible hand mechanisms shape an economy.  It has the best explanation (and partial defense) of high CEO pay I’ve seen, namely supply and demand.  If you think it is exploitation of shareholders, take a look at how much private equity pays its CEOs.  And as the above quotation indicates, Reich is willing to rethink just about all the old left-wing shibboleths (what a biased word) about corporations.  He separates the analysis from the moral narrative, so when you disagree with him, that point is an isolated one and it does not infect everything he says.

Reich recommends that we strengthen atrophied democratic constraints on capitalist outcomes; in his view special interest politics are just another form of capitalism and special interests are crushing voter influence.  "Bryan Caplan, telephone!"

By the way, make sure you read this piece on the futility of campaign finance reform, which counts as one of the most overrated ideas.

Here is Greg Mankiw on the book.  Here is another take on the book

sa November 6, 2007 at 6:58 am

Interesting.

Thomas November 6, 2007 at 10:56 am

I thought the same, because he was. Perhaps he has seen now how corporations
add more value to the poor and developing societies than any other entity
on this planet. Kudos to him for his awakening.

happyjuggler0 November 6, 2007 at 11:19 am

sorry about the italics

Tom November 6, 2007 at 12:31 pm

From the Economist:

“The problem with supercapitalism, apparently, is that when the government has massive power to interfere in markets, firms will compete to use the government to get a leg up on the competition.”

Seems dead on to me.

“but ‘limiting the scope’ of government … assumes a fallacy: that there can be a null government interference in the market.”

‘limiting the scope’ could be lowering it from >20% gdp to only 10%. No fallacy there. Actually, it sound quite nice.

Kudos to Reich on eliminating the corporate tax, the most distorting and wasteful tax we have out there.

Rich Berger November 6, 2007 at 1:53 pm

Ballard5969-

“There is no defense, or argument for that matter, for the extremely high rate of pay wages for CEOs. CEOs are paid 411 times more that their average working employees.”

Don’t get out much, or even read this blog frequently, do you?

This woman is an ignoramus.

What is so magical about any ratio of “average worker” to CEO pay? This is not the law of gravity.

Paul November 6, 2007 at 6:19 pm

Tyler,

The Cato campaign finance piece is deeply unpersuasive, and I can only hope it represents a poorly-chosen extract rather than a good overview of the “argument” provided by the book as a whole.

I mean, really, “They call it ‘reform’ but that presupposes it makes things better” – surely there are better versions of the “money is speech” case you could have pointed to – because were I a donor to the Cato institute I’d ask for my speech back after reading that.

Anon E. Mouse November 6, 2007 at 11:18 pm

M1EK,

What if you tax the shareholders’ incomes from the corporation?

For example: you and I have a closely held corporation (100 shares, 50 each), You and Me, Inc. You and Me sold $5,678 worth of ice cream last year. The ice cream cost the corporation $4,678 to sell (ice cream, rent for the ice cream truck, etc.). Profit = $1,000. The corporation takes that $1,000, distributes $400 to each of us, and $200 stays in You and Me, Inc.’s bank account–just enough for the deposit and first week’s rent for the ice cream truck next year.

We each get taxed 25% on our earnings, so we each pocket $300, uncle sam takes $200.

Where’s the moral dilemma?

Further, what changes if we scale up from You and Me, Inc. to XOM?

Serious question.

Cyrus November 7, 2007 at 7:55 am

Limited liability has to be worth something to the shareholders. In that context, it seems quite reasonable to effectively tax income derived from corporate earnings at a higher rate than income derived from the earnings of a proprietorship.

Cyrus November 7, 2007 at 7:56 am

Limited liability has to be worth something to the shareholders. In that context, it seems quite reasonable to effectively tax income derived from corporate earnings at a higher rate than income derived from the earnings of a proprietorship.

Paul November 7, 2007 at 5:32 pm

On the contrary Rich, the extract Tyler linked to contained only a dog whistle version of the “campaign finance reforms is incumbent protection reform” argument. You could see it was there in the background, but he certainly didn’t go to the effort to actually make it.

Representative sample:

“We have reason to doubt that senators truly believed that the law addressed corruption: “Both Democratic and Republican members rejected any suggestion that the bill was required to address actually corrupt conduct, because they agreed that they were not responsible for any”

If you’re nodding along vigorously to arguments of that quality then it’s because you already agree with the case you think he’s going to make. That’s fine, but it doesn’t warrant a link to a lengthy piece hinting that, were you to read his book, your prejudices would likely be reaffirmed.

You have to go a lot further than “campaign finance reform must be in the interests of a majority of sitting politicians” before on-balance rejecting it – it may solve a collective action problem for instance, or the alleged loss to democratic pluralism (certainly a key feature of modern US politics)may be outweighed by resource savings or reductions in inefficient subsidies.

The appropriately named Mr Samples doesn’t get around to make that, or any, case, which is why I felt he (and, unusually, Tyler) wasted my time.

Bernard Yomtov November 9, 2007 at 8:08 am

If you think it is exploitation of shareholders, take a look at how much private equity pays its CEOs.

Where is this data available?

I am curious not only as to aggregate compensation but also as to the nature of incentives, the tenure and severance arrangements for unsuccessful PE CEO’s, and the degree of monitoring their performance gets from those who set their pay. Would a PE CEO who performed like Nardelli or O’Neal walk away with the kind of money those guys got?

Once all that is known, and a real comparison made, we can consider Christopher Murphy’s point, and related ones.

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