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Speaker 1: Hello and welcome to On Watch by MarketWatch. I’m Jeremy Owens. Capitalism has been declining in popularity in America. Surveys in recent years show overall support for capitalism waning, with much of the distrust stemming from younger generations such as millennials and Gen Z. Can you blame them? These young people have graduated to adulthood during the subprime mortgage crisis and subsequent recession, as well as the inflation shock of recent years. With housing costs at all time highs and wages struggling to keep up with rising prices, there’s good reason for young people to be skeptical of the American economic system. Now, look, MarketWatch covers capitalism and free markets, this is what we present to you as a news organization, but part of covering capitalism is also looking at different ideas for how it should work in practice. Today, we’ll talk to a Nobel Prize winning economist about how he thinks Americans could work to change capitalism for the better, then we’ll talk to a man using the courts and advocacy to shift shareholder capitalism to a focus on the diversified shareholders many of us now are. First, let’s talk to the economist, Joseph Stiglitz.
Joseph Stiglitz won his Nobel Prize for Economics in 2001, thanks to research into how markets can be affected by participants having different levels of information. In the years since, he’s authored a series of books on different economic topics, including the monopolization of big tech and inequality. One of the major through lines of his books in recent years has been a need for capitalism to change and progress. Stiglitz has spent his time working for change in the halls of power, serving as one of the top economic minds in Bill Clinton’s Administration and as chief economist for the World Bank. With his books though, he seeks action from Americans to push our version of capitalism toward its stated aims of freedom and opportunity for all. His most recent book, The Road to Freedom, Economics and the Good Society was published this spring. Professor Stiglitz joined us recently to discuss the changes he’d like to see, and how Americans can make them happen.
Speaker 2: Let me highlight several key ways in which the notion of progressive capitalism differs from what we have today. Where I would begin is, what firms are supposed to do, and neoliberal capitalism. Firms are supposed to do whatever they can to enrich the owners of the firms, anything they can get away with within the law. I joke sometimes that what we teach in business school is how to stay out of jail, and sometimes people go over the border and wind up in jail, but basically you want to maximize your profits. No more morality, it’s just what you can get away with, if it entails polluting, if it entails mistreating your workers, cheating your customers, so be it.
Speaker 1: Yeah, a big proponent of neoliberal capitalism is fewer laws. Trying to take the reins off of big business, and you’re saying no, that doesn’t end up the best for the people, that just didn’t look best for the businesses.
Speaker 2: The point here is the following, that the Chicago economists, the free market economists believe that markets on their own are naturally competitive. The assumptions under which that is true are not satisfied by any real world economy, and anybody looking at the mega profits of some of our largest corporations has to recognize that those profits ought to lead to the entry of new firms that would drive down those profits. That’s the old theory, but there are very large barriers to entry, and firms have learned how to construct even bigger barriers to entry. I think there is an important role for government action. Markets on their own are not stable. We had the Great Depression, we had the Great Recession, government saved us from a disaster during the pandemic. If we hadn’t had government-provided unemployment insurances, where would so many Americans have been? Basically, we can do collectively things that we couldn’t do individually.
What is it that is the basis of our technological superiority? It’s our universities, our educational establishments, and none of them are for-profit. They’re either state universities or not-for-profits, endowments like Columbia, Princeton, Yale, Harvard. They have created Fox of Knowledge, which working with the private sector, they’ve translated into ways of increasing our standards of living and extending our life expectancy. We need a rich ecology of institutional arrangements, NGOs, co-ops, the structure of our economy is moving much more to a care economy, a service economy in which education, healthcare, caring for the aged, caring for children become an increasingly large fraction of our GDP. In those sectors, often the for-profit motive doesn’t work very well.
Speaker 1: Yeah, especially in healthcare and education, I mean, those are supposed to be areas in which the goal is something more holistic than profit. It seems like, from what I’m hearing from you so far, a lot of this is on institutions, on our governments, on our colleges, on others. What can individuals do to push our capitalist system toward a more progressive stance? What kind of economic decisions can they make? This podcast really talks to people about the current economy and how it should affect their individual decision making. Are there decisions that individuals can make besides voting for politicians who would institute laws that can make a difference, that can push toward the version of capitalism you see?
Speaker 2: The most important thing, I think, is political participation, because what I’ve been talking about is the basic economic framework of our society. The rules of the game. Markets don’t exist in a vacuum, they are structured by these rules, and we could have rules that favor the very rich and the powerful corporations, or we can have rules that actually enhance broader societal welfare. Political participation and understanding better how the rules affect our society, to me, is the beginning, but as you say, people want to do more than that. There are multiple areas, in our individual action, we make decisions about investment and about consumption as just examples, and investment for those who are well enough off to be shareholders need to vote with their dollars for companies that are doing the right thing and sometimes get engaged in shareholder, proxy.
Speaker 1: When you say voting there, you don’t mean like voting in elections, you’re talking about proxy voting, shareholders get to vote every year at the annual shareholder meaning on major issues facing a company. Let’s be honest here, unless you’re a huge investor, that voice is not going to be very loud, you’re not going to be able to really change things at that company. I think this is the problem we face as Americans is not having agency, not having a voice in what happens. I really want to talk about that with monopolies in big tech. You’ve written a lot about monopolization and especially in big tech, and there, consumers don’t really have a choice. I mean, if you’re trying to get a cloud computing system, if you’re trying to get a mobile operating system, you only have two or three choices in some of these things that really work.
How do we attack that? I mean, I know antitrust laws is how the government is doing it now, but they’re using antitrust laws that were written for a different generation of monopolies. I know the big pushback I get from the tech companies when I talk to them about antitrust is that the laws are built to protect consumers, and consumers are actually probably getting cheaper deals, are being helped by their monopolies, is their contention. How do you combat that? Do we need to update these laws at this point to better reflect what monopolies are doing in this era?
Speaker 2: Your rightful complaint that we often don’t have choice is a strong reflection of the view I expressed in the beginning, that we have to approach these issues through politics. We have to get the right rules. In direct response to the question you’ve posed, the answer is, we need new antitrust laws. Our antitrust laws were written at the end of the 19th, beginning of the 20th century. Antitrust laws designed to break up an oil company or a deal with monopoly and steel or tobacco are very different from what we need now in the tech sphere. Now, in response to the question of the view that Google or Amazon, that says, oh, we’re really helping the consumer, it’s actually a con game in some ways. An example, Google gives you free Gmail, but meanwhile, what are they doing? They’re taking all your data and they monetize that data. They monetize that data as a weapon against who? Against you.
The game is about targeted advertising so that they can extract more monopoly profits from you. Main Street in America has been traditionally characterized by a lot of small businesses that have been really the core of a lot of communities throughout the country. Well, they’re being devastated by the unfair practices of Amazon and others in the tech world because a small business that does business over Amazon in the Amazon Marketplace, Amazon can monitor what it’s doing and undercut it, that has information which gives it a competitive advantage. It’s an example of asymmetric information, which is of course what I got my Nobel Prize in. It, really, more broadly undermines the foundations under which we established that markets worked well. The irony is that the basic theorems, the basic analysis of why markets worked well, entailed everybody facing the same prices. What’s happened now is, you have discriminatory pricing. Something that should be illegal was made illegal under one of the earlier antitrust laws, which has not been enforced for more than a half a century.
Speaker 1: Well, professor Stiglitz, thank you so much for joining us, I really appreciate it.
Speaker 2: Thank you.
Speaker 1: We’re going to take a quick break. Coming up, a new approach to shareholder capitalism. Stay with us.
Welcome back to On Watch by MarketWatch. Before the break, we talked with Joseph Stiglitz about his ideas for changing capitalism. Now, we welcome Rick Alexander with a very specific idea for doing just that. Rick’s nonprofit group, The Shareholder Commons advocates for diversified investors. That’s what most of us are now, thanks to what’s called Modern Portfolio Theory. That theory holds that investors should be more risk-averse and put money into a very basket of stocks instead of yoloing into just one. According to Rick, company is seeking to live up to today’s version of shareholder capitalism, which seeks to maximize that single company’s profit, as Professor Stiglitz outlined earlier are not acting in the interest of diversified shareholders. Rick believes that those leaders should be seeking to maximize the valuation of all companies to support their investors diversified holdings. This theory mostly known as system-level stewardship or universal ownership has bounced around academia for many years.
Rick recently put it into action for the first time, working with others to sue Facebook parent company, Meta Platforms, for putting Facebook’s profits ahead of concerns about the larger economy or society. While the lawsuit was eventually tossed out of court, Rick believes the ruling provides room to test the theory further. Let’s talk to him about it. Well, Rick, we just talked to Joseph Stiglitz about how he believes that a new form of shareholder capitalism is needed in this country, and I wanted to talk to you because you seem to have an idea that you’ve been pushing forward to change shareholder capitalism. Can you kind of walk us through what you’d like to see what this theory entails?
Speaker 3: The idea is that the way we’re running capitalism right now is driving us to externalize a lot of dangerous costs that threaten environmental systems, social systems, economic systems. The reason for that is, we ask individual companies to maximize their returns, and we reward those companies and the people who work at those companies, if they’re successful in making the company more valuable and producing a lot of profits. When we do that, we’re not accounting for pollution, social unrest, things like that, that those individual companies might cause.
Speaker 1: The harms of that profit incentive could create wide scale outside of the company are not being accounted for?
Speaker 3: Right, and the thing that’s different about us and the way we address that is, we are trying to take advantage of the fact that almost all investors these days are very diversified. Like say, maybe you own the S&P 500, and that means you’re basically invested in the economy, you own a slice of the economy. All those costs, even though supposedly the individual companies are maximizing return on your behalf, they’re actually making a very bad trade on your behalf because while they’re increasing their individual value, they’re threatening the long-term value of the entire economy that you’re invested in. What we try to do at the Shareholder Commons is to help investors who are exercising their rights as shareholders around issues like the environment or worker rights or just corporate governance itself, to make sure that they understand that that’s an important part of the value proposition, because that can make their tools much sharper.
Speaker 1: You mention modern portfolio theory a lot, and this is something that we see a lot in individual investment in the last couple of decades, just about every American that does have some form of retirement account or investments, owns S&P 500 index funds, owns diversified funds, and the executives, directors of the companies that they own should be optimizing for their shareholders to get the most return from their entire basket of stocks instead of maximizing the value of one stock.
Speaker 3: I’ll say that this idea that we all buy into index funds is very true for retail holders, but it’s even more true for the big investors like pension funds or sovereign wealth funds because they’re fiduciaries… You mentioned modern portfolio theory. Well, modern portfolio theory tells us that the way to optimize your return along with the risk that you take, is to diversify, and so it’s written right into the laws, like ERISA, the law that governs retirement plans in the United States, you’re required to diversify your portfolio as an ERISA trustee, so this is really true for the big pension funds, et cetera.
Speaker 1: The theory you’re talking about, I mean, it’s been floating around academic circles for near 30 years, very small group of people that talk about this. What your group did is, really go to the courts and test it for the first time in the past year. Can you walk through the thought behind jumping in and going ahead and taking this to the courts to see what they had to say about it and what happened?
Speaker 3: A few years ago, listeners may remember, there was the Facebook whistleblower and a lot of press around Frances Haugen, who was a former employee, and a lot of internal documents that showed that Facebook was intentionally using algorithms that caused harm to certain audiences because those algorithms maximized the revenues that the company would get. Sort of the idea was, if you got people really angry, they’d forward things around more and that would mean more eyeballs and that would mean more advertising revenue, so that was the idea. This became quite a controversy, and it was written up in a lot of different newspapers and reported on TV, and everybody was talking about it. She went in front of Congress and she testified. This was sort of a famous line, she said that the company was putting the interest of its profits before the interest of its users, all the people who use Facebook and Instagram and WhatsApp, et cetera.
What we thought at the Shareholder Commons was, well, they’re not just putting the interests of the company and its profits before the interest of its users, that’s just capitalism, that’s what you do, you make as much money as you can. They’re actually putting the interests of those profits before the interest of their own shareholders because all those bad things that happen as a result of Facebook’s algorithms really threaten the economy. It’s things like enabling climate denialism and threatening the health of lots of their users because of body image issues. That was a big part of it. There was a lot in the papers about threats to the rule of law around the world because of the political instability the platform was creating, and so we thought, well, this is a great chance to sort of have a legal test of this theory. Let’s bring a lawsuit, let’s see if we know any shareholders who would like to bring a lawsuit against the directors of Facebook and say, hey, you’re not really helping your shareholders at all, even though you’re increasing the price of this individual company.
Speaker 1: Yeah, and the lawsuit was not successful, it did get dismissed, but the judge took like a hundred pages to actually discuss the theory. He obviously found it interesting, even though he basically said, y’all don’t have standing to keep going with this case, basically.
Speaker 3: When you have an impact litigation strategy, you don’t win the first time. We were not shocked that the claim was dismissed. What happened was, we filed a long complaint that explained all the ways that diversified shareholders who we thought made up about 75% of the shareholder roster were being harmed by these decisions and we’d like a chance to have a trial about that. The other side came back, Facebook came back and they said, well, this is Delaware, in Delaware it’s very clear that it’s a shareholder primacy state so the company should be working on behalf of its shareholders, and that means maximizing value of the company. In cases like this, before you have a trial, you can test out the theory with a motion to dismiss, and that’s what Facebook did. They said, even if everything you said is true and we did all those terrible things to our users, and it hurt the diversified portfolios of our shareholders, it doesn’t matter, because we made as much money as we could.
One of the very interesting things was, the court sort of said upfront, oh, this is a new issue, this hasn’t been decided before. He said, I think it’s implicit that what you do as a director is maximize the value of the company, but although it’s implicit, he spent 100 pages sort of explaining why it was implicit. He said some very interesting things along the way, but the piece that was most interesting was, he said, technically the interest doesn’t run to shareholders, but rather to shares.
Now, that’s a new one, okay? There’s decades and decades of Delaware corporate law that talk about the duty to maximize the value of the company for the benefit of shareholders, but he said, it’s really shares, and so your job is to make the shares as valuable as possible, and any impact that has on the human beneficiaries is just incidental. I think that’s a really interesting thing for us to think about as a society. He said, well, this is the law to date, I’m bound by that law. What it means is, you run companies as if the value they deliver to human beings is incidental. I think that’s a good thing for us to think about as a society and say, is that really a good idea?
Speaker 1: Let me just point out one flaw here, is that you don’t really know as an executive or a board when you’re making these decisions what the second order, third order or fourth order reactions outside of the company are going to be. It’s hard enough to run a company, but when you’re saying, but you have to consider what your actions might do to the entire economy or a competitor or the larger world or your users, that’s asking a lot, and it seems like if this was installed, that there would be even more shareholder lawsuits. I mean, right now we see so many shareholder lawsuits. If your stock goes down, you get sued. Right? It just happens, so how do you expect executives to know what the effects of their decisions are going to be? Very large ripples out. What do you think ends up happening? Do you believe that this would end up in just a ton more shareholder lawsuits?
Speaker 3: Yeah, I think that is the right question to ask. Actually, this is what distinguishes our theory of change, this idea of universal ownership from stakeholder capitalism, because with stakeholder capitalism, you really do as a director or officer, have to think about these second, third, fourth, an infinitum orders of impacts, and that’s very difficult. How would you ever even weigh them?
With this idea of universal ownership or system stewardship, you really are still asking the directors and officers of the company to maximize returns, because that’s still a very important part of the universal ownership way of looking at capitalism, however, the caveat is, you want the directors and officers to do that within guardrails that make sure they’re not cannibalizing broader systemic value that’s going to come back to haunt their diversified shareholder base. For instance, we’re involved in a campaign right now around shareholders asking companies that have meat in their supply chain to limit the use of antibiotics because, not everyone knows this, but there’s a big crisis coming where because of the rate at which we use antibiotics, they’re becoming less and less useful, and microbes are becoming more and more resistant.
There’s hard numbers behind this, like, the UK Treasury has done a study that says the economic harm from antimicrobial resistance over the next 30 years is going to be a hundred trillion dollars to the global GDP. We are working on a campaign where shareholders are asking companies to adhere to the World Health Organization guidelines for the use of antimicrobials in the animal agriculture. If they did that, you could say, good, go ahead, maximize value, you don’t have to figure all these things out, we’re just asking you to stay within this guard rail. That’s the kind of system you would have. You would have these players who are impacted by the system, namely diversified shareholders, sort of pushing on companies to stay within reasonable guard rails.
Speaker 1: Well, Rick, thank you for coming by and sharing this fascinating theory with us and talking through it. Rick is from the Shareholder Commons, you can check out his website at the shareholdercommons.com, get in touch, check out his newsletter. Rick, thanks so much for joining us.
Speaker 3: Thanks Jeremy for having me.
Speaker 1: That’s it for this episode. Thanks to Joseph Stiglitz and Rick Alexander. For your daily dose of capitalism coverage head to marketwatch.com. You can subscribe to the show wherever you get your podcasts, and please do. If you like what you heard, please leave us a rating or review, it really helps others discover the show. Let us know what you want to hear from us. You can reach us at onwatch@marketwatch.com. The show is hosted by me, Jeremy Owens, and produced by Jackson Cantrell, Isaac Gaines mixed this episode, Melissa Haggerty is the executive producer. We’ll be back next week with a new episode, and until then we’ll be watching.
