Has Climate already changed for Liberal Political Economy’s two Prominent Institutions?
Milton Friedman was an American economist and the 1976 winner of the Nobel prize in Economics. He is considered as one of the intellectual leaders of neoclassical economics thought with its emphasis on free market and rational expectations. He wrote an article in 1970 in the New York Times asserting the purpose of corporations, as stated in the title of the article, “The social responsibility of business is to increase its profits”.
There is no statutory law on the corporate management responsibility. However case law from previous court verdicts on this issue suggests that the corporate management has responsibility for protecting and managing the interests of its shareholders. Largely, this responsibility was interpreted in business circles as the maximization of shareholder profits above all other stakeholder interests.
However, current trends show a shift away from this Milton Friedman corporate responsibility doctrine. Business Roundtable, an association of Chief Executive Officers of America’s leading companies made a Statement on the Purpose of a Corporation in August last year (2019), signed by 181 major corporation CEOs. The signatory CEOs commit themselves to lead their companies for the benefit of all stakeholder- customers, employees, suppliers, communities and shareholders.
Irrespective of whether the CEOs act according to the commitments they have made, the shareholders themselves are already acting in favor of these trends. Kiplinger, a Washington DC based online and in print publisher of business forecasts and personal finance advice published an article on ESG ETFs to buy for Responsible Profits in last November (2019). The article states that “Investors are rapidly moving toward investing with environmental, social and corporate-governance (ESG) qualities in mind. Assets in ESG ETFs and other exchange-traded products (ETPs) grew by $7.6 billion, or 29.5%, in 2018. That growth rate is several times higher than the 4.6% increase in overall ETF/ETP assets”.
Similarly, Capgemini, a leader in consulting, digital transformation, technology and engineering services, in its latest 2020 Global Wealth Report highlights the growing trend among High Net Worth Individuals (HNWI) in Sustainable Investment (SI). The report states that “HNWIs plan to allocate 41% of their portfolio to SI products by the end of 2020, and 46% by the end of 2021. Wealth management firms have recognized the trend and are prepared to meet the demand as 80% now offer SI options.” It goes on to state “The top reasons driving HNWI interest in sustainable investing are higher returns and lower risks — 39% expect to receive higher returns from SI products, while 33% view SI as sound and less speculative.”
If these trends in CEO and shareholder behavior still don’t convince you, there is also new research evidence that the growth in the stock market correlates with the reduction in Carbon pollution. The European Bank for Reconstruction and Development (EBRD) working paper Financial Development and Industrial Pollution from 2018 states: “At the country level, we observe that growing credit markets are associated with higher levels of CO2 pollution while, in sharp contrast, larger stock markets are associated with substantially less CO2 emissions.” The paper recommends countries to grow their stock market to reduce pollution, benefiting from this linkage between growth of stock market and pollution reduction.
One can perhaps reach to the conclusion that the purpose of the modern corporation, a venerated liberal political economic institution, as stated in Milton Friedman’s doctrine and that as stated in the Business Roundtable statement are not in conflict with each other, but a true manifestation of the invisible hand.
Political thinkers of the seventeenth and eighteenth centuries gave us a definition and purpose of another political institution, the State, based on liberal principles. Thomas Hobbs, John Locke and Jean-Jacques Rousseau thus defined the State in the Social Contract Theory as an institution that protects all its denizens from capricious and opportunistic but socially harmful behavior of the few individuals. The purpose of the State therefore cannot be any different than the environmentally sustainable growth in economic well-being of its subjects. As yet, the current executive branch of the US government albeit minority elected, and responsible for the execution of this social contract, has abdicated its responsibility on environmental sustainability issues despite mounting scientific evidence of the impact of those issues.
In order to interpret this paradoxical evolution of these two liberal institutions, one further longs and craves for neo-enlightenment thoughts and ideas for today’s world.
