Do We Need a ‘Great Reset’, or More Capitalism?

As WEF founder and Executive Chairman Klaus Schwab puts it in his book, The Great Reset (2020), published with Thierry Malleret, the goal is to make “the world less divisive, less polluting, less destructive, more inclusive, more equitable and fairer.” The COVID-19 pandemic and its economic and social dislocations, the authors say, have now created a special opportunity to “take the bull by the horns”; indeed, the pandemic is a “rare but narrow window of opportunity to reflect, reimagine and reset our world.”

The economic and social disruptions during the pandemic were primarily the result of government measures to contain the virus! It was precisely during the pandemic that the free-market capitalist economy proved to be robust, innovative, and enormously successful.

“The Great Reset” is based on the concept of “stakeholder capitalism,” which Klaus Schwab has long advocated. According to this approach, the management of a company must take into account not only the interests of shareholders and other investors, but also those of all stakeholders, that is, all those affected by corporate decisions, such as employees, customers, supply chains, society, the environment, and so on. The approach comes with a high socio-political and moral demand. And it is always accompanied by a demand that this higher responsibility of companies must ultimately be promoted by the state. The concept therefore does not merely appeal to the morals of entrepreneurs and managers, but rather, it is decidedly interventionist and appeals to the state.

No Need to Restructure Capitalism

However, there are justified doubts as to whether such a “profound restructuring” of the capitalist economy and the market economy is necessary. Indeed, the two authors suggest that the economic and social upheavals throughout the pandemic would reveal weaknesses in the capitalism of the past. The opposite is true: The economic and social disruptions during the pandemic were primarily the result of government measures to contain the virus! It was precisely during the pandemic that the free-market capitalist economy proved to be robust, innovative, and enormously successful.

Schwab’s conception fails to recognize that prosperity does not arise as the fruit of political intervention but is the consequence of an incalculable multitude of decisions by entrepreneurs and investors willing to take risks. These decisions are coordinated by the price system of the market. Through competition and the search for profitability, this in turn leads to an efficient use of economic resources in the service of consumers.

If the stakeholder concept now demands “customer satisfaction,” for example, then it is preaching to the choir! After all, this is precisely the goal of any company that wants to compete and make a profit, that is, to be profitable. It must serve the consumer. Only in this way—unless it unfairly receives government subsidies or other privileges—is it at all possible for a company to survive in a competititve market and make a profit.

Misguided Criticism of the Profit Motive

Schwab’s ideas really correspond to familiar interventionist prescriptions that entered the mainstream long ago. Their usefulness seems highly questionable. Schwab’s argumentation, for example, ignores the fact that it is precisely the pursuit of profit that works to the advantage of stakeholders who are so important to him, such as disadvantaged sectors of the population or the environment. For example, competition and the free-market imperative of profitability, that is, entrepreneurial profit-seeking, have produced increasingly environmentally friendly production methods over the past decades.

For throughout this process, as MIT economist Andrew McAfee shows in his book More from Less, growth has become increasingly decoupled from resource consumption. Of course, this also required smart regulations and laws, but not of the kind Schwab advocates (such as higher minimum wages or “regulation away” from the so-called “gig economy,” the informal employment sector). Good regulations must be incentives for innovative entrepreneurial decisions that are optimized by competitive market processes, not requirements that anticipate or even replace these processes.

Well-Known Patterns of Anti-Capitalist Thought

Implicit in Schwab’s argumentation are the well-known thought patterns of the conventional critique of capitalism; this argumentation ultimately discredits the wealth-creating function of the capitalist pursuit of profit. Schwab wants, as he calls it, “a better capitalism.” But this demand is based on an inaccurate description and moral devaluation of “normal” capitalism, which is oriented toward profitability and the interests of owners and investors.

The Great Reset was written in June 2020, but many of its analyses, assessments, and forecasts, as we now know, proved to be misguided. Schwab overlooked what anyone familiar with the logic of free-market and business incentives could have known even then: once lockdowns and other restrictions were lifted, the recovery would take care of itself, so to speak. There was damage to supply chains because of the pandemic, but in market-oriented countries, economic growth very soon exceeded pre-pandemic levels. Seen in this light, the call for a “Great Reset” now seems anachronistic.

Criticism of the Stakeholder Concept: What is the Role of a Company?

Prominent critics of the stakeholder concept, such as Harvard professor Lucian A. Bebchuk, object that “stakeholderism” shields management from the owners (shareholders) and weakens managers’ accountability to them. Second, it pushes institutional investors to be more responsive to management’s wishes, shielding them from market pressures. Third, such shielding of management leads to slackening and poorer performance, which harms both shareholders and stakeholders, and is ultimately bad for the common good. Bebchuk’s criticism is that companies should not be made responsible for things that should be regulated by law.

Indeed, the task of a company, as Milton Friedman rightly said, is to generate profits while complying with the applicable laws. It is enough for a company to think about business, provided that the laws are oriented toward the common good, that is, they do not serve the interests of individual social groups or industries. If the latter happens, however, powerful companies will try to influence legislation to gain competitive advantages. The result is what the Americans call “crony capitalism,” a corrupt system.

If a company wants to be profitable in the long term, it must first think of the people who work for it and cultivate its reputation; it must create trust among consumers, at its own location, and so on. For this, there is no need for “better” capitalism, because this has long been part of every entrepreneur’s secret for success. So long as politics stays out of it, competition will ensure that companies that do not think long-term will be forced out of the market through bankruptcy or takeover. Schwab, however, argues for the exact opposite, namely for “better coordination between public policy and corporate planning.” But this virtually perpetuates the evil by institutionalizing it.

In short, we do not need “better” capitalism. Capitalism to date has been an unbroken success story: it does not need fundamental restructuring; at most it needs to be stripped back to its essence—away from the entanglement with politics and toward more freedom for entrepreneurial initiative and creativity. Capitalism has not only lifted the Western world out of poverty and generated historically unprecedented prosperity—over the past decades, it has also lifted hundreds of millions of people out of poverty in other parts of the world.

The “Real Existing Capitalism” in Disarray

In addition to the aforementioned entanglement of legislation and group interests, however, “real existing capitalism” is ailing because of the economic and social dislocations caused by monetary policy, low interest rate policy, and the associated monetary surplus during the last two decades. This is completely ignored by Schwab and his supporters: The ECB’s policy led to stock and real estate price increases and thus higher rents; to the economically unjustified survival of low-productivity firms (“zombies”) and corresponding waste of resources; and therefore to reduced growth in productivity, to a slowed increase (or even to stagnation) of real incomes, and consequently to greater social inequality—because stock and real estate owners became richer and richer thanks to the policy of cheap money.

Now, the inflation that critics of the money surplus have always predicted is also coming—late, but still mercilessly. The ECB seems incapable of facing up to this reality. It apparently wants to stick to its current course of financing government debt through the printing press. And it probably hopes to deleverage the governments by increasing inflation. This playing with fire will inevitably lead to stagflation, recession, and enormous monetary dislocations. Inflation, however, hits hardest the very poor. Once again, the blame will be placed on capitalism and on a market that is purportedly too free. But the poison that caused the problems—abuse of monetary policy to finance government debt—will continue to be touted as the cure.

Church Social Teaching as a Solution?

From the Church side, the solution to the current problems is, of course, based primarily on Catholic social teaching. Many are of the opinion that it adheres to a middle course, a golden mean between capitalism and socialism. However, this is not true—Catholic social teaching has long since abandoned this self-image of an equidistant point between capitalism and socialism. However, Catholic social teaching is so heterogeneous that one can find arguments for and against everything in it. Unfortunately, it does not address the problems that are crucial today.

From the perspective of the latest papal encyclicals, Laudato si and Fratelli tutti, one should actually be enthusiastic about Schwab’s concept. But if we take John Paul II’s encyclical Centesimus annus as an example, things look somewhat different. For there, it is precisely entrepreneurial profit that is seen as the decisive indicator that the company is fulfilling its actual function of serving the common good.

However, that encyclical also emphasizes that a company must be seen as a “community of people.” Every successful entrepreneur knows this. “If you want to make money, you must first think of the people who work for you,” a top German entrepreneur and multi-billionaire once told me. Those who do not possess such entrepreneurial intelligence will be punished by the market—unless the state intervenes to “save the day,” with subsidies, for example. That, and not the free market, is the real problem.

On the Psychology of Conspiracy Theories

Now, quite a few—including high-ranking representatives of the Church—interpret the concept of a “Great Reset” as a conspiracy of a clique of business tycoons, politicians, and other powerful people to reshape society according to their plan. Schwab’s The Great Reset is indeed a mixture of analysis and plans of action. But it has no more to do with a conspiracy than, say, a party platform. One can criticize this plan on factual grounds without implying a conspiracy.

If, on the other hand, one interprets this plan as the program of a clique of people networked in the background, who pursue intentions that are unknown to the public and known only to the supporters of this theory, then we have arrived at the conspiracy theory. Such theories create a sense of superiority over the rest of the “ignorant.” The insiders understand the complex reality, and one can now reduce all problems to a hidden cause, compensating for one’s own inability to deal with complexity.

No “Great Reorganization” Is Called for, but a Normalization of Monetary Policy

One does not have to see a sinister plan behind Schwab’s prescriptions to understand that they are problematic or even harmful. In any case, they only reflect what has long been mainstream. But they also strike a chord: for there is a justified but widespread unease. Schwab’s theory channels this, but at the same time, it hides the actual causes of the imbalance of today’s capitalism: State failure and political failure, the wrong regulations, along with overregulation, and most especially an inflationary monetary policy (low interest rate policy) of recent years. This has resulted in nations being over-indebted, which has largely undermined market-based corrective mechanisms and rendered them ineffective. This has now placed us in a quandary.

For a rise in interest rates will lead to recession and sovereign bankruptcies, but without raising rates, there is the threat of socially unsustainable inflation. That could likewise end in disaster. It was not capitalism that got us into this mess, but politics—including the euro bailout policy. It was the same for the last financial crisis, which was ultimately also caused by the low interest rate policy (that of the Fed) and by the government guarantees for subprime mortgages, which then caused a real estate boom. Of course, it was right for the central banks to save the financial system from collapse after 2008—that is, after U.S. mortgage banks with government guarantees had injected these toxic subprime loans into the international banking system.

Government spending was also necessary because of the containment measures during the pandemic. However, we must once again reduce this mountain of debt. The current medicine must not be allowed to become normal fare. However, getting rid of the government debt mountain through inflation, as the ECB apparently intends to do, is a high-risk gamble with our prosperity—quite apart from the fact that we now have a war on our doorstep, which will force us to spend more on defense, not to mention the fact that it is a costly challenge in terms of energy policy. These seem to me to be the real problems we face right now, but Schwab’s idea is no solution.

 

This text is based on an interview the author conducted with the Catholic newspaper Die Tagepost. It was published under the title “Wir brauchen keinen besseren Kapitalismus” (We Don’t Need Better Capitalism” on p. 3 on April 21, 2022. Online here.

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