Curious Capitalist

Are Companies More Powerful Than Countries?

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In 2008, after Lehman Brothers fell and the financial crisis and global recession began, the conventional wisdom was that we were entering an era in which government would take back power from business. In fact, just the opposite has happened.

The high profile political figures here at Davos disappointed — Merkel was angry and depressed by turns, and Geithner was defensive. Europe remains a mess, the U.S. vulnerable, and emerging markets — the only bright spot in the last three years — are slowing down. Politicians have few solutions to the huge problems of the day — labor bifurcation, debt, and inequality. Markets want answers, but leaders can’t give them — in part because for them, nearly any sort of action poses political risk.

Meanwhile, the top companies seem to exist in a world apart — they are booming, and their executives are prospering. If there is a meta theme to this year’s World Economic Forum in Davos, it is that the world’s largest companies are moving on and moving ahead of governments and countries that they perceive to be inept and anemic. They are flying above them, operating in a space that is increasingly disconnected from local concerns, and the problems of their home markets. And if the conversations here are any indication, they may soon take over much of what government itself does.

(LIST: The Heavy Hitters of Davos 2012)

The problem was nicely captured in this week’s New York Times piece on Apple, looking at why the iPhone is mostly made outside America. As one of the company’s executives put it, “We don’t have an obligation to solve America’s problems.” It’s a sentiment that was echoed on Time’s Board of Economists’ panel, where business leaders blamed for not sharing the $2 trillion in wealth sitting on corporate balance sheets argued that they did create jobs and prosperity — just not in this country.

It’s an argument that has more moral weight that you might think. You can argue that creating jobs in China and India, for example, actually increases total global well-being more than creating them in the U.S. would, since per capita GDP in those countries is so much lower. Nitin Nohria, dean of the Harvard Business School, told me that, as an Indian immigrant to the U.S., he has some sympathy with that argument. Yet, he says, “companies are also becoming aware that if everyone feels the way Apple does, there will be a tragedy of the commons — we do rely on the health of our home markets, and multinational firms can’t turn their back on them.” Labor economist Clyde Prestowitz pointed out as much in an article in Foreign Policy this week where he noted that while Apple may not think American economic issues are it’s “problem,” it certainly depends on the Seventh Fleet to keep Asian waterways safe and clear so that it can deliver it’s products.

(MORE: Should Americans Care About Apple’s iPhone Factory Conditions?)

It’s a problem that will only deepen. President Obama tried to stoke enthusiasm for a U.S. manufacturing revolution in the State of the Union speech. But a new and very sobering HBS study surveying 10,000 high powered alumnae put the nascent in-sourcing renaissance into perspective — most of the firms that are bringing jobs home aren’t doing that because Americans have superior skills. It’s because energy costs have gone up, and it’s cheaper to do just in time manufacturing at home. Those are factors that can quickly change.

Conversely, many firms sending jobs abroad aren’t doing it because it’s cheaper — but because skills are better (at least in relation to wages) in other countries. It’s a scary trend, and one that speaks to the growing bifurcation in Western labor markets. A lot of people here in Davos — people like Nobel laureate Chris Pissarides, and a number of high level investors I spoke with — say that we can’t innovate or educate our way out of this problem. It’s only going to get worse, particularly as a coming automation revolution starts to hollow out white collar jobs in rich countries.

So, where does that leave us? Do the people running the world’s largest companies, which are growing fast and hold plenty of cash, have any responsibility to their home markets? Should they even take on certain roles that beleaguered and indebted states can’t handle any more — things like education, health care and infrastructure development? Here at Davos, there are unlikely alliances being made over these issues; people ranging from Bangladeshi micro finance founder Mohamed Yunus to financial titans say yes, what we need isn’t less capitalism, but more. Let companies pick up the slack from the state. The ideas being floated are radical — GE and Microsoft should run education in America, making it more efficient and insuring U.S. workers have the skill set they need to get jobs in the future. (Yes, everyone also agreed that such solutions were freighted with social and political problems.)

(MORE: Does Obama Finally Have a Plan to Fix the Housing Mess?)

America should get serious about industrial policy (traditionally a third rail word) and start subsidizing and pushing strategic industries as hard as China does, as well as slapping tough tariffs on competitors’ goods (the central bankers in attendance are wringing their hands about coming trade and currency wars that might result). Some say we should radically raise minimum wages for the 90 percent of people in rich countries who’ll end up working service jobs catering to a small upper class of global rich. A two-tier class system is inevitable, they say. We just have to make it palatable. Others, including a number of university presidents, believe we need to take a “by any means necessary” approach to keeping high-end jobs, particularly tech oriented ones, at home.

On that, at least, politicians would agree. In her keynote opening speech at Davos, Angela Merkel said that unless the eurozone crisis was solved, Europe risked becoming “just a nice place to take a vacation.” The same could be said of all rich countries. One thing that’s becoming clear at Davos is that the core idea of the Enlightenment — that capitalism and democracy go hand in hand to create the best society — is under fire. And the struggle to create a new model may well pit nation against nation, corporations against government, poor against rich. The world, it turns out, isn’t flat – and it’s becoming bumpier all the time.

1 comments
heroesoftheunderground
heroesoftheunderground

I was hoping the "it's" grammar mistake in this article was a one-time typo, only to see a few words later that the writer and editor both seem to have a mistaken understanding of when to use apostrophes. That makes it hard to take this article seriously.