Sanders Called JPMorgan’s CEO America’s ‘Biggest Corporate Socialist’ – Here’s Why He Has a Point
Yves here. I wish Sanders would use even more pointed messaging, like “socialism for the rich”. But for those who complain about Sanders not going after important targets, this slap back at Dimon, who criticized Sanders and socialism at Davos, shows that the Vermont Senator is landing punches, but choosing his fights carefully.
And banks are much bigger welfare queens than the public realizes. They get all sorts of subsidies, from underpriced deposit insurance to Federal guaranteed for most home mortgages to the Fed operating and backstopping the essential Fedwire system. These subsidies are so great that banks should not be considered to be private sector entities, yet we let them privatize their profits and socialize their train wrecks. As we wrote in 2010:
More support comes from Andrew Haldane of the Bank of England, who in a March 2010 paper compared the banking industry to the auto industry, in that they both produced pollutants: for cars, exhaust fumes; for bank, systemic risk. While economists were claiming that the losses to the US government on various rescues would be $100 billion (ahem, must have left out Freddie and Fannie in that tally), it ignores the broader costs (unemployment, business failures, reduced government services, particularly at the state and municipal level). His calculation of the world wide costs:
….these losses are multiples of the static costs, lying anywhere between one and five times annual GDP. Put in money terms, that is an output loss equivalent to between $60 trillion and $200 trillion for the world economy and between £1.8 trillion and £7.4 trillion for the UK. As Nobel-prize winning physicist Richard Feynman observed, to call these numbers “astronomical” would be to do astronomy a disservice: there are only hundreds of billions of stars in the galaxy. “Economical” might be a better description.
It is clear that banks would not have deep enough pockets to foot this bill. Assuming that a crisis occurs every 20 years, the systemic levy needed to recoup these crisis costs would be in excess of $1.5 trillion per year. The total market capitalisation of the largest global banks is currently only around $1.2 trillion. Fully internalising the output costs of financial crises would risk putting banks on the same trajectory as the dinosaurs, with the levy playing the role of the meteorite.
Yves here. So a banking industry that creates global crises is negative value added from a societal standpoint. It is purely extractive. Even though we have described its activities as looting (as in paying themselves so much that they bankrupt the business), the wider consequences are vastly worse than in textbook looting.
Back to the current post. As to JP Morgan’s socialism versus the old USSR’s planned economy, one recent study which I cannot readily find due to the sorry state of Google offered an important correction to conventional wisdom.
Recall that Soviet Russia initially did perform extremely well, freaking out the capitalist world by industrializing in a generation. There was ample hand-wringing as to whether a less disciplined free enterprise system could compete with a command and control economy. Economists got a seat at the policy table out of the concern that capitalist economies needed expert guidance to assure that they could produce both guns and butter.
The study concluded that central planning had worked well in Soviet Russia initially, until the lower-level apparatchiks started gaming the system by feeding bad information so as to make their performance look better (for instance, setting way too forgiving production targets, or demanding more resources than they needed). The paper contended that the increasingly poor information about what was actually happening on the ground considerably undermined the central planning process. That is not to say there weren’t also likely problems with motivation and overly rigid bureaucracies. But the evolution of modern corporations, of devaluing and ignoring worker input and treating them like machines that are scored against narrow metrics, looks as demotivating as the stereotypical Soviet factory.
Finally, this post conflates socialism, which includes New Deal-ish European style social democracy, with capitalist systems alongside strong social safety nets, which the public ownership and provision of goods and services. It should be noted that public ownership has regularly provided services like utilities very effectively.
By Paul Adler, Professor of Management and Organization, Sociology and Environmental Studies, University of Southern California. Originally published at The Conversation
With his Dimon ad, Sanders is referring specifically to the bailouts JPMorgan and other banks took from the government during the 2008 financial crisis. But accepting government bailouts and corporate welfare is not the only way I believe American companies behave like closet socialists despite their professed love of free markets.
In reality, most big U.S. companies operate internally in ways Karl Marx would applaud as remarkably close to socialist-style central planning. Not only that, corporate America has arguably become a laboratory of innovation in socialist governance, as I show in my own research.
In public, CEOs like Dimon attack socialist planning while defending free markets.
But inside JPMorgan and most other big corporations, market competition is subordinated to planning. These big companies often contain dozens of business units and sometimes thousands. Instead of letting these units compete among themselves, CEOs typically direct a strategic planning processto ensure they cooperate to achieve the best outcomes for the corporation as a whole.
This is just how a socialist economy is intended to operate. The government would conduct economy-wide planning and set goals for each industry and enterprise, aiming to achieve the best outcome for society as a whole.
And just as companies rely internally on planned cooperation to meet goals and overcome challenges, the U.S. economy could use this harmony to overcome the existential crisis of our age – climate change. It’s a challenge so massive and urgent that it will require every part of the economy to work together with government in order to address it.
Overcoming Socialism’s Past Problems
But, of course, socialism doesn’t have a good track record.
One of the reasons socialist planning failed in the old Soviet Union, for example, was that it was so top-down that it lacked the kind of popular legitimacy that democracy grants a government. As a result, bureaucrats overseeing the planning process could not get reliable information about the real opportunities and challenges experienced by enterprises or citizens.
Moreover, enterprises had little incentive to strive to meet their assigned objectives, especially when they had so little involvement in formulating them.
A second reason the USSR didn’t survive was that its authoritarian system failed to motivate either workers or entrepreneurs. As a result, even though the government funded basic science generously, Soviet industry was a laggard in innovation.
Ironically, corporations – those singular products of capitalism – are showing how these and other problems of socialist planning can be surmounted.
Take the problem of democratic legitimacy. Some companies, such as General Electric, Kaiser Permanente and General Motors, have developed innovative ways to avoid the dysfunctions of autocratic planning by using techniques that enable lower-level personnel to participate actively in the strategy process.
Although profit pressures often force top managers to short-circuit the promised participation, when successfully integrated it not only provides top management with more reliable bottom-up input for strategic planning but also makes all employees more reliable partners in carrying it out.
So here we have centralization – not in the more familiar, autocratic model, but rather in a form I call “participative centralization.” In a socialist system, this approach could be adopted, adapted and scaled up to support economy-wide planning, ensuring that it was both democratic and effective.
As for motivating innovation, America’s big businesses face a challenge similar to that of socialism. They need employees to be collectivist, so they willingly comply with policies and procedures. But they need them to be simultaneously individualistic, to fuel divergent thinking and creativity.
One common solution in much of corporate America, as in the old Soviet Union, is to specialize those roles, with most people relegated to routine tasks while the privileged few work on innovation tasks. That approach, however, overlooks the creative capacities of the vast majority and leads to widespread employee disengagement and sub-par business performance.
While socialists have often recoiled against the idea individual performance-based rewards, these more sophisticated policies could be scaled up to the entire economy to help meet socialism’s innovation and motivation challenge.
Big Problems Require Big Government
The idea of such a socialist transformation in the U.S. may seem remote today.
But this can change, particularly as more Americans, especially young ones, embrace socialism. One reason they are doing so is because the current capitalist system has so manifestly failed to deal with climate change.
Looking inside these companies suggests a better way forward – and hope for society’s ability to avert catastrophe.