September 16, 2009

The Lehman Paradox

Posted in America, Economics, History, Politics, Society, Tax Justice at 9:00 am by Paul Sagar

Yesterday marked the anniversary of the collapse of the investment bank Lehman Brothers. I’ve had some time to mull-over the signficance of this anniversary. Here’s my rather ambitious contention: that it will be looked back upon by generations to come as a paradox that marked the start of a brief period in which the evolution of global capitalism could have been radically redirected, but wasn’t.

Of course, predicting the future is a mug’s game. But here goes anyway.

I believe that the 21st Century will be defined by the rise and rise of the multinational corporation. That the growing prevalence of mega-corporations – many of which have long-been recognised as being bigger than most nation states – will fundamentally re-shape power relations across human societies.

This is, in part, because I think the rise of the modern, limited-liability multinational corporation is genuinely something new. Whilst academics of globalisation have pointed-out that cross-border movements of finance, capital, labour and goods is nothing particularly new (pre-World War 1 levels were as high as for much of the post-World War  2 period, apparently), what these “nothing’s changed” accounts miss is that the nature of international trade has in fact changed dramatically. Over 60% of world trade now takes place within the structures of multinational corporations. At one level, this fundamentally changes the dynamics of international market economics: rather than diverse suppliers competing for diverse buyers in competitive markets, with countries using their comparative advantage to maximise the benefits of trade, we have monolithic corporations shifting resources within their own structures with disregard for national boundaries. Arguments about the benefits and desirability of free international trade need to be drastically re-appraised in the light of the fact that substantially less free trade is going on internationally than might be supposed, because of the nature of modern corporations.

This radical change has other consequences. One that Tax Justice advocates will be familiar with is the way in which gigantic corporations use their structures to firstly deny tax revenues to the governments of jurisdictions they operate in (usually by transfer mispricing and creative accounting via secrecy jurisdictions aka tax havens), and secondly to  dictate policy to weaker regimes: demanding extensive tax holidays in exchange for agreements to invest. (One result is that many developing nation governments in particular are denied the tax revenues they need to adequately develop, becoming reliant upon international aid as they are not individually strong enough to turn away the investment promised by tax-policy-dictating MNCs).

These phenomena are both constitutive and indicative of the fact that the global picture has changed. For thousands of years – to the Greeks and before – international relations has been conducted primarily between states. There have been exceptions – acts of international terrorism, for example – but predominantly the picture was one of states interacting with states. The rise of the multinationals in a world of globalised economics has changed this. As Susan Strange, former Professor of International Relations at the LSE, argued in her 1992 paper States, Firms and Diplomacy:

“Governments must now bargain not only with other governments, but also with firms or enterprises, while firms now bargain both with governments and one another. As a corollary of this, the nature of competition between states has changed, so that macro-economic management and industrial policies may often be as or even more important for governments than conventional foreign policies as conventionally conceived.”

The rise of the MNCs has changed the dynamics of international power.

It has also changed the dynamics of domestic societal power. Multinational corporations impact upon all our lives: when MNC energy companies hiked prices in 2008 after the oil-price spike, and then conspicuously refused to lower their prices as oil value collapsed, ordinary people felt the pinch. But the story goes deeper than the now centuries-long relationship between small, powerless consumers and the large, powerful suppliers of essential goods and services (be they states or firms). Indeed, let’s take the Lehman Collapse and subsequent bank bail-out as a case in point: civil society across the globe was so dependent upon the continued existence of the financial system, that millions of ordinary people saw their governments plow tax-payer money into these private, global institutions simply to keep them afloat. It’s not just at the international level that power-balances are changing: at the societal level the same is true – we individuals must now reckon not just with our states, but with the MNCs that may well be bigger and more powerful than the governments that predominate in our states.

So what has this got to do with Lehman Brothers, and why did I call its collapse a paradox that may shape future conceptions? Think of it this way. The Bush administration let Lehman fail, on the basis that a private banking corporation in the capitalist system must sink or swim by its own merits. Yet in letting Lehman fail, panic spread throughout the banking institution and partly as a result – but also because of other, deeper, structural factors – the entire banking system teetered on the brink of collapse. The US – and in turn, European – administration(s) realised that there could be no repeat of Lehman. The banks, it turned out, were too big to fail. The state would have to save them with taxpayer money, in the best long-term interests of taxpayers (bailouts being better than economic collapse and anarchy). The paradox of Lehman is that in letting it fail on the principle that capitalist enterprises ought not to be rescued by the state, it became apparent that this principle was thereby untenable: Lehman’s financial brethern would have to be saved.

So why do I think this will be viewed as the start of a crucial period in shaping the coming century (and beyond)? It’s simple: Lehman’s collapse was not – could not have been – repeated. As a result, the rest of the banks got their bailouts. Yet with their bailouts came a unique moment in the evolution of the multinational corporations which have reshaped – and will continue to reshape – our world. The most powerful governments on the planet suddenly had a chance to radically re-strike the balance of power between themselves and the global financial powerhouses that are at the centre of our globalised economy. In exchange for taxpayer-backed guarantees, national governments could have extracted radical reforms from the banking institutions, fundamentally transforming the banking system itself. The balance of power between some of the most important globalised corporate institutions – which represent, in turn, some of the most important aspects of the globalised economic system – could have been fundamentally redirected in favour of democratic governments which, unlike corporations, are at some level amenable and accountable to ordinary people.

But we all know that this isn’t what happened. The financial power-houses got their bailouts, and our governments – and by extension, all of us little people – got nothing in return. The great opportunity to redefine global financial capitalism – and in turn, the entire global economic system – slipped away. I suspect that the consequences of this lost opportunity will reverberate throughout the next hundred years, and beyond. I believe that people will look back to 15th September 2008 and the short months that followed, and will say dejectedly to themselves, “if only those heads of state had been braver, if only they had seen the true nature of the opportunity that lay within their grasp…”

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