Jan 27, 2012

Why Corporate Regulation is a Socioenvironmental Necessity. Part 4 of 5: Why does the current Economic System tend towards Uniformity and Instability?

Welcome to the fourth and penultimate episode of a five-part Arkadian analysis which works towards the conclusion in the series title by seeking the answer to a simple question: –

“What difference between natural / social systems and the current economic system causes the former to tend towards diversity and stability, and the latter, uniformity and instability?”

In Weeks 1 and 2, we explored why ecosystems and ‘civilisations’ tend towards diversity and proposed virtuous dynamics (the ‘Diversity Engine’) that power increasingly fine-grained specialisation / cooperation, whilst inhibiting environmental dominance by particular species or social ‘groups’. Last Week, we looked at three examples at different ‘levels’ (social group, societal, global) which illustrated why overall systemic stability and resilience, and, thus, the common good,  depends on a shared responsibility for productivity produced by this trend.

Today, we aim to get the crux of the issue at the heart of this series by investigating why the current global economic system behaves in the opposite way.

The last few decades have seen a dramatic global trend towards economic uniformity across most market sectors – most notably and worryingly, finance, media, food and agriculture, and manufacturing. A recent systems analysis by PLos One revealed that a network of 1318 companies directly represent a quarter of global operating revenues and, indirectly, via shareholdings in blue chips and manufacturing, a further 60%. Of these, a super-group of 147 companies, mostly financial institutions controls 40% of the total wealth in the system.

This homogeneity has also correlated with a spectacular increase in the scale and financial muscle of global corporations. A 2002 UNCTAD analysis, which used the sum of salaries and benefits, depreciation and amortization, and pre-tax income to compare firms with the GDP of countries, found that a third of the world’s 100 largest economic entities were transnational corporations. The biggest, Exxon, rivaled the economies of Chile or Pakistan; Philip Morris was on a par with Tunisia, Slovakia and Guatemala; and a more recent study research shows General Motors, DaimlerChrysler, Shell, and Sony to outsize Denmark, Poland, Venezuela, and Pakistan, respectively.

Many other corrosive trends have gone hand-in-hand with this expansion. According to statistics gathered  by the New Economics Foundation, income inequality is now higher than at any other time in human history with the CEOs of the 365 biggest US companies earning over 500x that of the average employee. Corporate strategies to augment profits – outsourcing, temporary employment contracts, mechanisation and process efficiency – have eroded wages, job satisfaction and security, and human labour productivity, with the world’s biggest 200 transnationals now accounting for a third of world economic activity but employing less than 0.25% of the global workforce.

So what are the dynamics underpinning this pernicious trend? MODEL 3 of our analysis below proposes an answer (N.B. If you have trouble reading the text, click on the diagram to open it in a new browser tab and then refer back to the explanation here).

Whilst Model 3 involves more-or-less identical variables to the Models 1 (Ecosystems) and 2 (Civilisations) we explored in Weeks 1 and 2 respectively, there are several critical differences. Firstly, we broaden the definition of ‘diversity’ to include both socioeconomic and natural systems. Secondly, the term ‘group’ (which referred to political elites in Model 2) now refers specifically to the small alliance of people for whom a given corporation is a vehicle of wealth-creation: board executives, major shareholders, higher management and, to a lesser degree, senior employees, i.e. the people who don’t lose their jobs or bonuses during cutbacks.

Thirdly, and most fundamentally, is a change in the polarity of the two arrows (coloured red) connecting variables (2), (3) and (4).  Unlike dominant species in ecosystems and ruling elites in political systems,  these ‘groups’,empowered by (7) policy and infrastructure that enable vast geographical reach, promote their self-interest and shield them against personal accountability for abuses, are able to reduce systemic diversity without their actions having corresponding negative effects on the stability and resilience of their own local environment.

Indeed, (3) the greater the ‘group’s’ impact on diversity, the more prosperous and secure their personal environment becomes. Thus, in the current economic system,  (1, 4, 5 and 6) the drive for dominance of rules and resources is invigorated by growing wealth, social mobility and political influence, unlike  ecosystems and civilisations, where it was curtailed by its weakening and destabilising impact on the environment  And so it turns: not a Balancing Loop, but a Vicious Circle: a feedback loop where one trouble leads to effects that aggravate the first trouble, and so on.

To exacerbate problems, the absence of limiting environmental feedback also reverses the dynamics of the ‘Diversity Engine’, turning it into its ominous alter ego: a Vicious Circle we’ve named the (6) ‘Benefits-of-Big Engine’.

Here, instead of a trend towards economic diversity facilitating healthy competition and new business opportunities, and making market domination progressively more difficult, a small group of dominant players is able to harness ever greater resources, economies-of-scale and mechanisms of influence (price, lobbying, political office, advertising, media, academia) to overcome existing competition and render future challengers increasingly futile and improbable.

Disturbingly, whilst in nature / society the weaknesses and instability resulting from systemic impoverishment ultimately defeat the dominant species and ruling groups responsible, thereby facilitating a new order, in the current economic system they increasingly further the interests of the corporate ‘groups’ that have caused them.

These giants can downsize, buyout or price-out smaller floundering competition,  and their huge economic significance means that, even if things get really bad, national governments are likely to intervene rather than risk the impact of bankruptcy.  As touched upon in Week 2, the crisis-stricken financial sector is a perfect example, where after the panic of insolvencies, public bailouts and recession, a run of mergers and buyouts gave birth to a more monolithic, powerful and fragile banking system than ever before.

Possibly the darkest characteristic of ‘The Benefits of Big’, however, is that the larger and more ubiquitous these corporate vehicles become, and the more competitively priced their products and services, the more difficult it becomes for us to avoid participating in their expansionary activities.

Thus, as customers, suppliers and employees, we all unknowingly or unwillingly, become complicit in dynamics that increasingly impoverish and endanger the systems upon which we depend.

In short, in the current economic system there appears to be no constraint on the wealth-creation of ‘groups’ at the helms of corporations other than a total socioenvironmental meltdown.

Happily, there is much we can do to change this. We hope you’ll join us next Friday for our final installment, when we shall use what we’ve learned from the virtuous ‘Diversity Engine’ of ecosystems / civilisations to propose interventions that could reverse the vicious ‘Benefits of Big Engine’ and create a self-sustaining economic system that benefits people and planet

Leave a comment

Recent Posts