Making the Case for Markets

COMMENTARY Markets and Finance

Making the Case for Markets

Dec 20, 2022 9 min read
COMMENTARY BY
Richard Reinsch

Director, B. Kenneth Simon Center for American Studies

Richard is director of the B. Kenneth Simon Center for American Studies and AWC Family Foundation Fellow at The Heritage Foundation.
America has an incredibly productive manufacturing sector, worthy of the strongest and most complex economy in the world. gorodenkoff / Getty Images

Key Takeaways

Samuel Gregg’s The Next American Economy tackles a dramatic question: What will the fundamentals of the American economy be a generation from now?

Major investment firms, corporations, and increasingly the federal government embrace ESG.

What must be recovered is the idea that America is a nation built on important principles, including economic freedom.

Samuel Gregg’s The Next American Economy tackles a dramatic question: What will the fundamentals of the American economy be a generation from now?

The current trajectory, Gregg argues, is opening us inch by inch to a state capitalist model controlled by Wall Street, Washington politicians, and an activist—if not woke—federal bureaucracy. The economy is increasingly being shaped by policy proposals that promise a more fair, equal, just, and environmentally safe marketplace. The progressive intelligentsia aims, if they are true to their word (and we have little reason to doubt them), to snuff out any prospect of authentic economic freedom and dynamism.

We seem to be sliding, almost imperceptibly, into a social democratic economy and government from which it will prove almost impossible to extricate ourselves. The wrinkle is that many on the Right have joined some of these proposals and added to them their desire for the government to engineer the economy on behalf of the manufacturing sector, labor unions, communities, the family, and low-skilled male workers.

Recent History

At one level, this trend toward the state capitalism model can be understood in light of a series of disastrous events in our economy and nation over the last two decades. In retrospect, not only the consequences, but the very policy premises embraced by our bipartisan elites seem reckless. The rhetoric justifying the policy choices, Gregg observes, did not remotely fit the reality of what transpired. Free markets, free trade, globalism that would liberalize China and democratize the Middle East, and a seemingly open-door policy to expansive illegal immigration became viewed as damaging illusions sold to Americans by our elites. We fought a “war on terror” with the further goal of establishing democracy in nations with no civic culture and experience with elective government. The war expended lives and treasure and accomplished very little.

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Those in the ruling class also profited in many ways, even when they failed or made terrible political decisions. Many citizens now equate the argument for economic freedom with insider dealing. They view capitalism as being compromised by those with market and political power who profited from their businesses being closely connected to government.

This remains one of the most enduring legacies of the financial crisis of 2008: federal bailouts for banks and other financial institutions that had been run into the ground. If support for the market goes hand in hand with corruption, then so much for markets. The distinction between being free-market and being pro-business has collapsed in the eyes of many, into just another word for elite mismanagement.

Americans were told that free trade would increase goodwill with China and make them more like us: democratic, peaceful, and liberal. That, too, seems preposterous now. As Gregg argues, free trade cannot perform miracles like that, nor should it supplant legitimate national security concerns we have with China. The final bit has been the woeful federal and state responses to Covid, which have left us buried in debt and inflation from monetary and fiscal policy hubris. The social welfare spending supposedly justified by Covid induced a significant number of Americans to leave the workforce.

Was the pro-market consensus itself a mistake? Should it too be thrown out with the bathwater? Gregg argues no, but he acknowledges that facts and circumstances have changed dramatically. If we are going to defend economic freedom and political freedom, then stock must be taken of where we are now.

Those of us who believe in the free market, and not necessarily a pro-business market, speak from a position of weakness. Economic growth, entrepreneurialism, and technological advancement as goals of the regulatory framework that supports the market seem to have fallen out of the conversation. They are now replaced on both the Left and the Right with calls to enlist government in various plans to boost the fortunes of the working class or various labor sectors. Meanwhile, the federal government’s regulatory apparatus, along with social spending—to say nothing of the self-serving nexus between federal agencies and corporations—grows constantly. As I write this, the Biden administration is urging passage of a rule that will ease the ability of shareholder activists to intervene in the governance of public corporations. If successful, the focus of corporations will turn even further to the limitless fads of contemporary progressivism whose every goal is to undermine profitable businesses. But many business leaders think they can purchase the Left’s goodwill by aping their political accent.

Woke Invades Business

One intrusion, embraced in certain respects by figures on the Left and Right, is stakeholder capitalism. In a 2019 statement approved by 181 CEOs, the Business Roundtable embraced “modernizing its principles on the role of a corporation.” Their former commitment to “principally serve their shareholders” no longer “accurately” fits “the ways in which we and our fellow CEOs endeavor every day to create value for all our stakeholders.”

Of course, businesses wanting to succeed would show respect and concern to employees, customers, local communities, and others potentially impacted by the corporation. But the “stakeholder” in academic literature means something else. That is, the corporation needs “democratization,” Gregg notes. This entails, “building into business planning a commitment to the principle that stakeholders should be treated by businesses as ends in themselves.” Rights “flow from this commitment” and companies must actively incorporate these stakeholders in their governance structures.

The list of who counts as a stakeholder is limited only by activist imaginations and the academic literature that promotes them. Gregg quotes one stakeholder advocate urging that a stakeholder is “any group or individual who can affect or is affected by the achievements of the firm’s objectives.” That’s a limitless definition. Shareholders become just another group the corporation should consider as it makes key decisions. That the cost of capital might become prohibitively expensive, or even dry up completely, as shareholders recede in importance within the corporate structure is never really considered. The stakeholders themselves should also be embraced on the board of directors and other bodies that will advise the corporation.

On the Left, this stakeholder model has prepared the way for Environmental, Social, and Governance (ESG) direction, on which Gregg has led Law & Liberty forum. Major investment firms, corporations, and increasingly the federal government embrace ESG. The ultimate goal is to make corporations ESG-compliant, or risk being ostracized–unable to receive capital or be listed on the NASDAQ and New York Stock Exchange. The federal government is likely to add teeth to this regime if it’s not resisted firmly.

In The Next American Economy, Gregg asks the most significant questions: What is the purpose of the corporation? Why does it exist? Why does stakeholder capitalism assume that profit is easy and will endlessly fund various social justice objectives, even those that make profits difficult or impossible to generate? The old way of corporations existing first and foremost to make a profit for shareholders has been damned by many. That, they insist, is the old economy of predatory capitalism built by the white man. Here, the aims of the woke agenda find their way into the boardroom through ESG investing, as antiracist ideology, gender ideology, environmentalism, and egalitarianism stalk the decisions of corporate leaders.

Many CEOs have predictably tried to embrace this agenda, cynically or not. But, as Gregg notes, the purpose of such an agenda is to destroy corporate capitalism. ESG corporatism inextricably links corporations with an ever-growing list of labor, environmental, racial and gender, local community, and various other activist groups. The corporation in this view exists for how it can serve the social justice good.

In the end, corporations will be so wedded to these groups that they approach operating like a state, servicing numerous constituencies. Logically speaking, the corporation will cease to exist. The one thing that a corporation can accomplish, i.e., return a profit to shareholders, will be buried by a thousand and one interest groups pilfering it or preventing it. State capitalism would become the long-term result of ESG corporatism. Less controlling policies are also now advanced on a bipartisan basis.

The Story of American Manufacturing

A significant number of voices on the Left and the Right contend that America has lost millions of manufacturing jobs, producing devastating consequences for communities and families across the country. The fallout, many argue, has not been exclusively economic, with widespread social disorders stemming from deindustrialization, including for male laborers who have struggled to find different employment. In what has become almost received wisdom, the depletion of the manufacturing sector by global trade, most particularly with China, has hurt America and shrunk the middle class.

The proffered solution is to embrace industrial policy, which would boost the number of middle-class manufacturing jobs by the federal government directly favoring the manufacturing sector. This could happen through any number of policy levers, such as favorable government loans to manufacturing companies, various tax incentives for preferred companies, tariffs, targeted investments, and other options. Gregg refutes the common view of manufacturing decline, adding substantial wrinkles to the story. America has an incredibly productive manufacturing sector, worthy of the strongest and most complex economy in the world.

First, the decline in manufacturing jobs has happened simultaneously with rising manufacturing output in the U.S. to the tune of 180 percent growth between 1972 and 2007. American manufacturing in most categories is the world trendsetter. And we remain a major destination for manufacturing investment for global capital. And although manufacturing jobs declined from 19 million in 1979 to 12 million in 2016, total employment grew by over 50 million jobs during this same period. Many believe these are low-paying, service-sector jobs, but the average nonsupervisory wage in the service sector is higher than the manufacturing sector, per the Bureau of Labor Statistics.

Gregg adds that most of the manufacturing jobs that have been lost—80-90 percent—cannot be blamed on global trade but on automation and technology. We continue to manufacture, but we do so more efficiently. China-Shock did happen, and certain estimates place the manufacturing jobs that were lost in the realm of 1-2 million between 1999-2011. But millions more jobs were created during this same period. And China Shock is now over. Before the pandemic, as Nicholas Eberstadt states, there were widespread job openings in manufacturing, construction, mining, and other fields that paid workers well.

What precisely would be gained by the federal government propping up work that technology and markets had mostly replaced? If those jobs were recreated in America by federal assistance, what would the average manufacturing wage be? Wouldn’t it decline unless the costs of inefficient production could be placed on consumers in the form of higher prices? But this only underscores Gregg’s point that industrial policy is inherently statist and builds crony capitalist connections between protected industries and companies and the federal government. Capital, investments, corporate strategy, and decision-making are no longer following consumer demand but government policy, making our economy more inefficient while boosting the size of government and increasing the wallet sizes of those tethered to the state.

To be clear, there is obviously a national security situation with China that may require American corporations to move or delink much of their production from that country. Gregg does not argue that trade with China should be increased or maintained at current levels because of economic efficiency, which increasingly no longer exists as China resorts to an aggressive interventionist model that will drown its own economy.

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What industrial policy does have working in its favor is a narrative, a moral core, and something intuitive that many can grasp. Who doesn’t want the working class to thrive? Who doesn’t want many opportunities for Americans to enter and remain in the middle class? Many remember the old manufacturing America and associate it with a certain kind of economic prosperity. What many do not pay sufficient attention to are the ways that the sexual revolution, secularism, family breakdown, and large amounts of social welfare spending have contributed mightily to many social pathologies that are plaguing us. The attempt to pin the blame for these ills on capitalism or trade, a move made by many on the Right and the Left, skips over the hard part. In making the wrong diagnosis, they also prescribe the wrong remedy, one that will not solve the problem, for example, of a sizable percentage of able-bodied men not working.

Gregg argues that the contest with state capitalism—and industrial policy is certainly that—will require more than economic logic to show its deficiencies. What must be recovered is the idea that America is a nation built on important principles, including economic freedom. We are a trading nation. America’s robustness has ultimately been built on commerce and the discipline and virtues it requires and can further enlarge.

Gregg looks to a series of authors who underlined how America once bred and encouraged in certain citizens the traits needed to thrive in a free economy. The Federalist Papers insist on America being a free economic country that will not engage in mercantilism, the most widespread practice of that time. Instead, Federalist 8 lists the habits required for republican self-government and for free enterprise as practices that will reinforce one another and make America strong.

Ultimately, a superior form of populism must embrace the free market, which makes the standard of economic life the consumer choices of the common citizen. Our goal as conservatives must be to protect this freedom from state intervention that would turn the market into a host of the parasitic Left and government class.

This piece originally appeared in Law & Liberty