West of Eden

Why corporate boardrooms are the root cause of US homelessness

On November 12th, the last day before stricter Corona measures were enacted again in the Netherlands, we had cause to gather and celebrate the Scientific Director of the initiative, Martin de Jong, who gave his inaugural lecture at Erasmus University on the topic of Inclusive Prosperity. In his very passionate and also personal speech he offered the audience insight into his mind and his ideas about capitalism and how to work towards his concept of inclusive capitalism. In this month’s blogpost Martin de Jong will elaborate on his inaugural lecture and talk about his concrete ideas to ensure a future in which everyone can participate in the wealth our world has to offer.

Watching the darkness of the homeless in my cozy home at night

For ambitious mid-career adults with young children, it is never a challenge to find productive ways of passing time in the evenings. In my case, this generally translates to a feverish search for academic books attractive enough to keep my eyes open, yet serious enough to somehow count as reasonably relevant to my job-related research. That excludes novels as ‘too frivolous’ and academic journal papers as ‘too tedious’.  But then, one night not long ago in a momentary lapse of discipline (shame on me!), I suddenly found myself back sipping tea in front of my cell phone with earphones in, watching YouTube videos about homelessness in America. There were many, many of them. Excursions into run-down and almost deserted suburban neighborhoods across Pennsylvania; 12-minute shots of makeshift tents all over the downtown streets of Los Angeles stretching for miles and miles on end; secret peeks taken from a blacked-out car into terrifying scenes of erratic individuals on Philadelphia’s fentanyl-clad Kensington Avenue; documentaries made by good-natured local journalists spotting the growing anxiety and disgust among local inhabitants and police officers amidst passive local governments (not) trying to come to grips with an ineffable surge of visible homelessness in Seattle; reports by a British journalist on corruption and corrupted food in the shelters of New York City; and countless students and young professionals living in their cars and trailers with no access to regular bathroom services. Tuition fees are too high and early career salaries too low.

I was apparently not the only one shocked by the images and underlying socio-economic trends. It was obvious that the homelessness in various liberal and creative cities in the United States had become an undeniable phenomenon. It was also obvious that it put such a strain on liberal people that they almost naturally ceased to be liberal when directly confronted with the painful issues at their doorstep. What was less self-evident is how viewers and commenters to the videos were able to make sense of what was happening here. Although locals invariably lamented the year-on-year increase in the numbers of homeless and foreign viewers found refuge in stating that such problems did not exist at home in Britain, Russia or the Philippines; all were in agreement that the context and reasons for the new sadness were ‘complex’ and had something to do the welfare state falling apart and people coming from all over to find cheap drugs ‘here’. But a root cause could not really be given, and apart from a limited number of evil drug dealers, no easy culprits could be identified, publicly accused and hanged. Instead, it was my nocturnal mental tranquility that was sacrificed: surely one of the lesser evils.

The synchronicity of breaking up and raking in

We all know that synchronicity is a beautiful dream for anyone who wishes to see the light rather than an objectively demonstrable reality. So why was it that I went through William Lazonick and Jang-Sup Shin’s (2020) ‘Predatory value extraction: How the looting of the Business Corporation became the US norm and how sustainable prosperity can be restored’ in that same week and felt I was able suddenly to put the pieces together? In it, the two unconventional business economists claim that there was a time when American corporations were controlled by their original owners and managers, without undue interference from shareholder activism. They were (or tried to be) good at manufacturing a product or delivering a service, developed visions and strategies to sell them at a profit, set up and coordinated an organization and its operations, and secured long-term financial commitments to make it through demanding start-up times and economic recessions while being able to reap sweet harvests in due course when the time was right. In their opinion, owners, managers and employees know best how to handle relevant technologies for their enterprise and what work procedures match their needs. Stable success requires long-term vision and investment, while true innovation is the poster child of sustained care and craftsmanship and of persistent effort for the good of their beloved firm. If corporations needed money, they would lean on their own cash reserves, bank loans or financial input from dispersed, placid and respectful small or passive institutional investors. In short, companies could do their work in peace and the various stakeholders involved (employees, creditors, suppliers and customers) could appropriate their fair share of the profits while enough funds remained for future R&D and expansion. Idealized picture of pre-1980s corporate America or not, they see a crucial turning point appear with the rise of the Chicago School of Economics, the popularity of its ideas among right-wing US and UK politicians and the encroachment Michael Jensen’s agency theory made into textbooks on corporate governance and corporate law. From then on, the view that markets should always be efficient, and that shareholders are principals who entrust their capital to lazy and selfish agents within the firm and have the solemn duty to suck out any unnecessary slack enters the ethos of a new generation of corporate investors and managers. The loyalty of the latter category is to maximizing shareholder value and the incentives their conduct is subject to are aligned as much as possible with those of hedge-funds and larger investors hijacked by these hedge-funds. Share buybacks among top leaders and managers to push up stock prices become common, and the nature of corporate performance is thoroughly redefined. Breaking up the integrity of organizational processes for the sake of raking in maximum short-term revenues while downsizing and selling companies to influence trends at the stock market are promoted to the level of socially presentable practice; this is true both in academic theory and in corporate governance. Other stakeholders lose the initiative and can do nothing but moan: worker salaries barely rise but continue to be hit for the brunt of governments’ shrinking tax income, massive layoffs become the order of the day, US technological advancement vis-à-vis its global rivals stalls, the decline in the quality of public services is frightening and the emergence of a so-called ‘precariat’ in most American cities can no longer be denied. It all happened under our own eyes when we naively succumbed to the dominant narrative of endless economic growth for all.

From Lazonick to LA zoning

We can also say it á la Piketty: in recent decades the trend for capital to grow faster than economic growth (as conventionally measured) and much faster than labor is systematic, and this has led to a dramatic increase in socio-economic inequality. Small wonder that as the oligarchs grew wealthier they were also able to buy up multiple villas and apartments at the most attractive locations within the city: near the sea, in historical city-centers, near quality parks and in the presence of top-level schools and hospitals. Fine real estate investment, excellent quality of life. Their accomplices, the highly trained professionals (also known as the ‘creative class’) enjoy decent enough salaries still to buy upper middle-class dwellings around those prime locations. But since the middle classes are gradually going extinct, most other members of urban society are either service class or working-class members forced to accept temporary positions with low wages and are pushed further and further out of town. They may have to accept several jobs, be forced to live far removed from their workplaces, have little time for family life and raising kids, avoid hospital care at any price and face the reality that crime and violence are rarely far away. For them, the final leap downward to membership of the ‘precariat’ is always a badly unwanted but genuine possibility. Times may have changed substantially since Karl Marx and Friedrich Engels hailed the rise of a proletariat, but their terminology has returned with a vengeance and their applicability to modern society is at times nearly irresistible. Who can refute the existence of a process of capital accumulation? What cynic can still afford to overlook the relentless expansion of an alienated precariat of deprived individuals washing over creative cities, especially in raw capitalist societies without a social safety net? Who would by now not qualify the widespread belief in an endless flux of toothless initiatives for corporate social responsibility, updated SDGs, green GDP and global summits organized for frequent flying members to ‘fight’ climate change as remarkable instances of false consciousness? And who may not have considered that with all due government regulation and legislation accommodating the wishes of invincible multinational corporations, the state is duly a toy in the hands of capitalists (Unilever and Shell, may the Dutch government please you by abolishing all dividend taxes and entice you not to fully move your headquarters to London, please)? The names of the social classes may have changed, their internal subdivisions may have grown more complex, the urban zones where those various classes find their ‘homes’ may have shifted inward or outward in space, but much of the problematique seems to have returned to the social agenda. Then as now, much of the analytical instruments taken from Marxism are helpful to make sense of new realities. But then as now, policy prescriptions taken from Marxism are harmful in fixing those new realities. Is there something we can do?

Blueprint for revisionism 2.0

If current capitalism can indisputably be called extractive and exclusive, what does an inclusive version of it look like? If agreements reached thus far to boost responsible business, innovation and green growth have many characteristics of a fig-leaf intended to postpone real action, then what is real action?

Let us return to the corporate boardroom and its incestuous relationship with short-term oriented owner-shareholders of large public enterprises. The name of the game they play at the expense of many other stakeholders in the firm and the rest of society is maximizing shareholder value – i.e. the efficient extraction and reinvestment of wealth elsewhere in the economy. This is not a filthy accusation, but an explicit instruction from the agency theory handbooks embraced to teach corporate law and governance. In order for this process to be managed seamlessly, any production factor that can be utilized for further capital accumulation must be either owned: nature (land/air/water) and entrepreneurship (information/knowledge/technology); or controlled: labor. It is government with its monopoly of legal services that can effectively respond to this private sector need by allowing for these property rights to be enacted and deployed by those that successfully lobby for them. The result is the sheer unlimited creation and unequal distribution of wealth through converting all other production factors into liquid financial and earthbound physical capital. And since any wealth is eventually expressed in currency (Dollar, Euro, Yuan or Yen), financial capital parasites on natural capital, human capital and social capital, and all value in society is calculated as market value. We are literally consuming our planet, monetizing our skills and are encouraged to instrumentalize our social ties.

Looking for a critical anchoring point where all these flow together, corporate boardrooms, with their dependency on stock market developments and the manner in which company law facilitates this, immediately come to mind. What is the justification of allowing only shareholders to determine who sits on the board? Why is it that CSR and ESG made everybody feel good about sustainability without altering the essence of extractive and exclusive corporate practices? How can we still justify that people who spend most of their lifetime in the office or on the factory floor to fulfil tasks they may (wrongly?) experience as meaningful work are invariably characterized as lazy sponges and doubtworthy embezzlers best managed with Taylorist rigor from the top-down? If agency theory was really about corporate stakeholders as ‘agents’, it should deal with them as agents; not as programmable robots or exploitable slaves. If nature, knowledge and relations with people were just that, we should resist the temptation of asking ourselves for how much they would sell at the market, and what the stock exchange would think of them. What if natural capital, human capital and social capital were no longer expressed in monetary terms, as making a contribution to market value, but seen as value in themselves? They would have their own entities and unities when we calculate them, and they would be speaking with the forces behind financial capital on equal terms. What if nature and labor both had recognized seats on the corporate board, their own duty to report to the stakeholders they represent and their own veto powers within that same board? That would be tantamount to turning this board into the representatives of stakeholders rather than shareholders. Would it be a revolutionary change? Yes, it would require profound change in corporate law and corporate governance globally. Would it be a dangerous type of socialism? Many corporate lobbyists will definitely want to make you believe so, but it would actually be an extended, enhanced and updated version of North-European-style co-determination. It would be a governance model that allows capital investment to take place just when socio-economic and ecological inclusion are safeguarded and under no other conditions. Remember that it takes more than yet another shiny GRI report or anointing certificate awarded by a famous accountancy/consultancy firm to operate at Triple-Bottom-Line. The name of the game we are supposed to play now is power, not efficiency. Lulling us into sleep has been too easy for too long.

An umbrella for the winter

Last night, I walked from The Hague’s central station to the city center to pick up my bike which was parked there. By the side of the pavement somebody was lying covered under cloth with his/her face hidden from view by an open umbrella. Winter is well on its way. You had not really believed that Europe is immune to homelessness, had you?

Professor

Prof. Dr. Martin de Jong

Martin de Jong is responsible for the academic direction and long term continuity of the initiative. His academic areas of interest are sustainable urban and infrastructure development in China, city branding, urban planning & governance, and institutional transplantation.

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