Newt Gingrich’s latest attack on fellow Republican presidential candidate Mitt Romney’s leadership of a private-equity firm goes to the heart of today’s biggest debate in politics and economics. “If we identify capitalism with rich guys looting companies, we’re going to have a very hard time protecting it,” he said. Protecting—or, more particularly, fixing—capitalism will be a big topic at the World Economic Forum in Davos this month. With the global economy still sputtering and governments unable to successfully address big issues like income inequality, unemployment and growing debt, it’s a subject that’s front and center not only in the U.S. but also throughout Europe, Asia and the rest of the world.
A key part of fixing capitalism will be reconciling the large and growing imbalances between the public and private sector. National governments have, over the past several decades, seen the most basic pillars of their power erode. Globalization has undermined their efforts to manage their borders. The ability to control their own currency has been lost for all but a handful of major powers. Fewer than two dozen have the ability to sustainably project force beyond their borders. Meanwhile, corporations play nation-states against one another as they venue-shop for more attractive tax or regulatory regimes. This arbitrage undermines nations’ ability to enforce their own laws. Indeed, the rise of big stateless corporations, which now rival many countries in terms of economic and political clout, poses special new challenges to governments.
When early corporations were established by royal charters almost a millennium ago, there was no mistaking their purpose. They had been created by the state to serve its interests. But over the centuries, they took advantage of their special status, which allowed them to achieve enormous scale and buy political favor. The result: They helped shape the development of laws that further tipped the balance of power in their favor.
Corporations have morphed from legal entities designed to ensure an enterprise could survive the death of its owners to institutions possessing more rights than people. The 14th Amendment, established in the late 19th century, granted citizens equal protection under the law. Yet most of the times it has been invoked since its adoption were on behalf of corporate rights. Corporations have used the 14th Amendment to do things like block taxes levied “without due process” and define advertising copy as protected free speech. More recently, the U.S. Supreme Court’s landmark 2010 decision in favor of the conservative organization Citizens United—which relaxed campaign-finance limits on corporations and labor unions and spawned so-called super PACs (political action committees)—equated money spent on political campaigns with constitutionally protected speech. The practical effect has been that those with money can crowd the airwaves with their message.
The biggest companies—the Walmarts and Exxons of the world—have financial resources and political reach that rival all but a few dozen states. Even the 2,000th largest company on the planet is at the center of more economic activity than scores of small countries like Mongolia or Haiti. As borderless supercitizens, global corporations have changed the international order, yet our rules and approaches to governance remain the same.
We have also lost sight of the philosophical ideas that historically gave national governments their authority. The current argument that larger government impinges on rather than protects or advances individual liberties is a far cry from the ideas that fueled England’s Glorious Revolution and the American Revolution. It ignores the fact that the void created by smaller government is often not filled by “liberty.” When matters like the global environment or regulation of derivatives trading are left entirely to market forces, for instance, outcomes tend to serve the most powerful because markets neither have a conscience nor do they ensure opportunity. Rather, they seek efficiency, and efficiency loves scale, and enterprises that grow to scale become elephants stamping out opportunities around them. This was well understood by the father of capitalism, Adam Smith. He condemned the abuses of the megacompanies of his day, like the British East India Co., calling them “nuisances in every respect,” since the monopolies they fostered inevitably led to profit-destroying corruption.
We’ve seen imbalances between commerce, government and other powerful institutions before. In each case, new technologies that increased communication and travel and changed the ways products were made disrupted the status quo. It happened during the Thirty Years’ War in Europe, when battles between church and state resulted in today’s world of nation-states. It happened during the Enlightenment, as new technologies of mass communication linked and elevated average people, enabling them to challenge monarchies. Later it helped undo the mercantile system and colonialism. Each of these phases was marked by unrest and uncertainty. And each came with philosophical revolutions, leading to the development of ideas like separation of church and state, the notion that the legitimacy of the state is linked to the consent of the governed, and the ideological contest between socialism and capitalism. It is still happening. High-speed transportation has made it possible to produce goods anywhere, communications technologies have created 24-hour global markets, and markets in cyberspace have moved beyond the reach of national tax laws or regulators.
Today’s contest is not so much between capitalism and another ideology but between competing forms of capitalism. The financial crisis, growing inequality and faltering economic performance in the U.S. have tarnished American “leave it to the markets” capitalism, which is being challenged by “capitalism with Chinese characteristics,” eurocapitalism, “democratic development capitalism” (India and Brazil) and even small-state entrepreneurial capitalism (Singapore, U.A.E. and Israel). All these models favor a more significant role for the state in regulation, ownership and control of assets.
Whichever model triumphs, there’s a need for stronger regional and global institutions. Europe needs a more robust E.U., with powerful regulatory and central-banking institutions and weakened national governments. Global financial regulation, addressing climate issues and containing weapons of mass destruction all require better multilateral governance. But because business has grown so important, the public sector will have to work with the private. Companies will need to become more like states in providing social services. And states will need to become more like companies: entrepreneurial, flexible and less hierarchical.
All this is a continuation of history’s great upheavals, and we are in for a new period of volatility. It’s the natural effect of the blurring lines between corporations and individuals, companies and states, nations and the global community.