Global Policy Forum

By William Pfaff

The orthodox response to the crisis of American capitalism is to reform the system, but reform is useless when the system itself has failed. Enron was a scandal but also the product of a pathological mutation in capitalism.

Most people who are not economists, probably including most graduates of American business schools, do not understand that the capitalist model we now use is a recent invention. It is not the system that created the modern industrial economy and modern Western prosperity. It rests on a conception of the business corporation that became generally accepted only in the 1970s and '80s, and was substituted for what before was known in the United States as "stakeholder capitalism," in which management was considered accountable to employees and community as well as owners.

A French economist, André Orléan, has called the new system "patrimonial" or "owners' capitalism," because "all the economic actors (managers, employees, small investors, banks, the state) are expected to align their interests to support the interests of the owners of the company." These owners are the stockholders, whose interest is a return on investment. This means that they expect a high and rising value for the stock and a steady increase in profits.

The theory is open to criticism for its indifference to social issues, but is coherent. However, as the international public has discovered in recent months, the theory has not been practiced. Instead, in the United States and in countries that have adopted the American business model, something new, "managers' capitalism," has been substituted for owners' capitalism. This new version of capitalism functions primarily to enrich corporate managers as a class.

. In 1941, James Burnham, a repentant Trotskyite, published a book called "The Managerial Revolution," which was to have a lasting effect on economic thought and business theory. Burnham said the old class struggle had been overturned by the emergence of a new class, the managers, who were replacing the old-style capitalists of classical Marxist analysis.

Burnham said the American economy of the 1930s, shaped by New Deal government interventions, and the economies of the Soviet Union and Nazi Germany all were run by this new class. Other business theorists refined his idea, and a general agreement emerged that the classical capitalist as a social type had been replaced.

Companies today are rarely controlled by individual owners or families. Pension and investment funds have become the most influential holders of corporate stocks, but they do not function as old-style owners. Their sole interest is investment return, and that is the criterion by which they judge a corporation's professional management.

In theory, of course, professional managers act in the interest of the owners. It has been taken for granted that the objective of professional management is efficiency and the well-being of the corporation. Yet this proves not to have been the practice of many managers. The corporate scandals revealed during the last year all have one thing in common. In all of these cases, the corporation was being run to profit its managers, in complicity if not conspiracy with accountants and the managers of other corporations.

Managers served complaisantly on one another's boards and on the remuneration committees of one another's companies. "Independent" directors were beneficiaries of corporate business or charity. These managers often proved indifferent to the long-term interests of their companies, making decisions for short-term advantage that were predictably damaging to the company, if not ultimately ruinous. Their purpose seems to have been to get out in time, with a fortune acquired at the expense of stockholders and employees.

Since "everyone" was doing the same thing, including persons eminent in successive administrations in Washington, why should they have looked upon what they were doing as reprehensible? Employee interests were systematically disregarded. The stock option system tied employee pensions to company investments, under company management, and pension funds were frequently exploited to management advantage, if not simply looted.

Owners' capitalism failed in practice because the markets have so diffused corporate ownership that no responsible owner exists. Managers exploited that void to turn corporations into mechanisms for their personal enrichment. This is morally unacceptable, but it is also a corruption of capitalism itself, and of the society in which it functions.

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