Steve Ohana: “We must put an end to the false liberalism of rentiers”

By Steve Ohana, professor of finance at ESCP Europe

The criticism leveled at the current economic order, often called the "neoliberal" order by its detractors, is mostly focused on the fact that it tries to subject all human activities to the "relentless law of the market". . It is therefore an excess of liberalism that would be the cause of the disorders observed today: increase in inequalities, unemployment and persistent underemployment, etc.

This somewhat dogmatic reading of the current situation must be nuanced, because the capitalism of rentiers which dominates today is at the antipodes of the ideal described by the founding father of liberal thought, Adam Smith.

The first distortions of competition are those favoring multinationals over their smaller competitors.

These distortions are of different kinds. Firstly, large groups have tax optimization possibilities that SMEs do not have, which allows them to sometimes pay barely 1% tax on their profits by locating them in tax havens. Secondly, multinationals optimize their labor costs by “offshoring” their production to countries with low wage costs. A third rent effect is related to the increasingly important advantages conferred by size, in particular (but not only) in the digital sector, where innovations enable and accelerate the erection of barriers to entry. In the distribution sector, we know that size is a key factor in being able to further pressure small producers on their selling prices. The tvery important movement of mergers and acquisitions which has taken place over the past fifteen years bears witness to this search for dominant positions by the leading companies in each industry. A fourth rent effect is linked to intense lobbying efforts, and more generally the capture of political power by large groups. Here, the examples are particularly numerous. "Free trade" agreements are no longer, strictly speaking, agreements facilitating the trade of goods between countries but agreements between multinationals and States allowing the former to extend or protect their rents. In most of these agreements, arbitration tribunals allow multinationals to obtain reparation from States when the latter put in place regulations (health, ecological, social) that could harm them. Another recurring aspect of these free trade agreements relates to the protection of the "intellectual property" of large groups, at the expense of their competitors and the consumer. Also targeted by the lobbying efforts of major corporations are the various burdens weighing on labor as well as collective wage bargaining structures, particularly in the context of social dumping in the euro zone since the start of sovereign and bank debt in 2010. Another major distortion of competition linked to size is that relating to so-called "too-big-to-fail" banks, whose creditors, in violation of one of the founding principles of liberalism, have been systematically protected by governments since the 2008 crisis, resulting in the increase in public debt and the implementation of austerity programs in all advanced countries. Many have pointed to the capture of political power by “big business” since the rescue of the banking system began about ten years ago.

Some economists have tried to separate what, in the increase in the value of companies since the 80s, stems from productivity and innovation efforts and what, on the contrary, stems from rent effects. Mordecai Kurz of Stanford University recently estimated that nearly 80% of the market value of listed companies' stocks today can be attributed to annuity effects., a large part of these effects being concentrated in the high-tech sector. It is a complete paradigm shift from the economic system that prevailed before entering the era of “neoliberalism”.

These observations, moreover, provide a new angle of approach to the question of the stagnation of productivity gains and wages, which we mentioned in a previous Article. Rent-seeking has supplanted investment in R&D and productivity as a tool for creating shareholder wealth. This is probably one of the reasons why the wealth created over the past thirty years has not been transferred to wages or even to traditional capital income (interest on corporate debt and dividends), which have not reached abnormally high levels in view of the long history. As Joseph Stiglitz reminds us, the five American giants Apple, Microsoft, Google, Cisco and Oracle hold more than 500 billion dollars in reserves in tax havens, which they do not return to their shareholders in the form of dividends so as not to pay taxes. It is therefore through the increase in the value of the shares of these new "monopolistic" groups that the wealth created has above all manifested itself.

To this economic rent on the shareholder capital, it is necessary to add another rent on landed property, from which benefit the inhabitants of large metropolises who acquired their property before the great surge in real estate prices since the beginning of this century. In this case, it is another market deficiency that is responsible for the rent: the restrictions on the supply of housing in the center of large cities, which are often the result of political resistance on the part of landlords anxious to protect their annuities…

Asset holders have also been clearly favored by the “Quantitative Easing” programs operated by all the main central banks since the 2008 crisis, in parallel with the budget cuts. Indeed, these programs have had the effect of increasing the price of assets (particularly the most liquid, and therefore those less linked to the productive economy) at a much higher rate than that, very little sustained, of the real economy, resulting in an aggravated divergence between the remuneration of labor and capital.

In the case of the United States and the United Kingdom, another important movement was a capture of almost all the increases in wage income by the 1% highest earners. It is now widely documented that the salaries of the bosses of large companies and financial sector employees incorporate a large share of rents. But this is also the case for other professions highly represented within the richest 1%, and benefiting from high barriers to entry, such as doctors and lawyers...

The rentiers of neoliberalism adopt a “liberal” posture in relation to the various forms of public intervention aimed at restricting or taxing rent income (taxation of capital, labor market regulations, minimum wage, collective bargaining structures, unemployment insurance etc.). On the other hand, they look favorably on State intervention in the market when it allows them to protect their rents more (provisions protecting intellectual property and investments abroad, exemptions from charges, program of purchase of assets by the Central Bank, bailouts, restrictions on housing supply, etc.).

Dance what contexts, as Simon Wren Lewis explains, "neoliberalism" is defined less as a doctrine aiming to entrust the market with the regulation of the economy, than as a political system of extraction and conservation of rents, using the "liberal" discourse as a weapon of circumstance to justify its maintenance. Demystifying this false liberalism is a democratic priority so that a political proposal for radical, yet democratic and genuinely liberal reform of the status quo can emerge.