Get your daily dose!

There was an interesting conversation about profit on LinkedIn about a week ago.  In many of my posts and articles on LinkedIn I have stated that in a just economic system investors will have to get used to lower rates of profit than they have been accustomed to, and that excessively high profits are an important part of the explanation for increasing global inequality.

This has resulted in the reasonable perception that I am opposed to profit. I am not, but the conversation forced me to confront the question of what I mean by “excess profits” and how would a “fair” or “reasonable” return on investment be defined.  There is of course no answer to those questions, and it would be frankly absurd to try to regulate, or even create a voluntary code (all the rage these days) placing an upper limit on profits.

I got to thinking that the issue is not the rate of profit/ return on investment but the conditions under which such profits are earned.  What has happened in the last (say) forty years, is that the conditions for generating profits have just got better and better in the global economy.  I could write a long foot noted article, but I don’t think there is much argument about the following:

• Corporate tax rates have fallen, and many corporations and their vastly wealthy shareholders in fact pay little or no tax
• Executive remuneration has sky rocketed, while workers and middle class citizens are no better off, or worse off, than they were forty years ago. Minimum wages haven’t moved for a decade in the USA
• The casualization of labour through the gig economy enables companies to avoid even the most minimal of social security for their “contractors” who are just employees stripped of benefits
• Racial and gender pay discrimination means that a sizable percentage of the workforce is paid less than their white male counterparts, reducing the cost of doing business.
• Hundreds of billions of dollars leave the global South through transfer pricing and other tax avoidance schemes
• Small holder farmers producing tea, coffee, cocoa and other primary commodities continue to earn an absolute pittance, and this feeds the profits of the multi-nationals who buy their product
• The mobility of capital has allowed companies to escape even the low minimum wages in the USA by exporting jobs to the near slave labour conditions that exist in parts of Asia and Africa
• Pump priming, shorting, millisecond computer trading and derivatives so complex not even their inventors understand them, have turned finance into a source of unproductive profit completely unrelated to its intended purpose in the economy
• Extractive and other industries have flourished, without having to pay the full cost of the damage they do to the environment.  The whole idea that these are “externalities” to be fixed by government with tax payers’ money tells you pretty much all you need to know about the privileged place of companies in the social fabric of our society.

I’m sure there’s more, but I will stop there.  The point is that if we attended to these things through regulation and enforcement, then the kinds of profits that I have complained about would largely disappear, without any attempt to legislate what reasonable profits should be.

“You are trying to regulate/legislate us out of existence” is the response usually provoked by this kind of argument, and hundreds of millions of dollars are spent each year by corporate lobbyists around the globe to stave off any kind of regulation.

Well, top corporate tax rates in the USA were as high as 46% as recently as the 1980s and the top marginal income tax was over 80% at the time.  Fortunes were made and large companies flourished.

The abolition of slavery, the end of child labour, the rise of the trade union movement and the arrival of the forty hour working week all evoked similar responses – yet somehow companies adjusted, and the sky never fell.  

This list of things that need to be attended to is very similar to what may be found in ESG codes, and the principles of responsible investing that emerged in recent years.

The nettle that has to be grasped is that if these things are taken seriously, then the costs of doing business will rise, and profits in the economy as a whole, will decline.  This in turn says to me that the narrative that ESG compliance is good for profits is just not correct, although particular companies may make exceptional profits, which is fine as long as they pay their taxes and their workers.

ESG (which means transforming the economy, or it means nothing at all)  is not “good for profits in the long run.”  It is the only way the planet can survive the multiple crises we face at the moment.

You cannot have  social justice and “market related returns” across the board, if these are drawn from comparisons of profits made over the past thirty to forty years.

We have to develop a different measure as to what constitutes a well-functioning  economy. If companies and financial markets participate willingly, so much the better.  But we can’t wait for their voluntary participation