Competing for the common good

Faced with the scale and complexity of 21st century challenges – including the climate emergency, the 2008 financial crisis, digitization, rising income and wealth inequality, globalization, and the Covid-19 pandemic – governments are struggling to find solutions within existing socio-economic models. In a new research paper, Marcel Boyer (University of Montreal professor and member of TSE Sustainable Finance Center) warns that the road to hell is paved with the good intentions of autocratic social planners. Instead, he argues that reform should encourage individuals, firms and governments to contribute more efficiently to social wellbeing, building on the ESG movement’s efforts to promote sustainable corporate behavior. Here, he presents a summary of his proposals for a radical overhaul of capitalism and social democracy, with competition as its touchstone.

Begun in the 1960s, the welfare state is now under threat, as governments face a world of tax competition weighed down by the increasing costs of the social safety net. Confusion over social, economic and political objectives, and the means to pursue them, has encouraged the growth of gargantuan bureaucracies protected from competition and subject to capture by partisan, trade union and technocratic powers.

The market economy, the freedom to undertake and to challenge the established economic order, and competition-based capitalism remain the best guarantees of responsible development and growth in living standards and therefore, among other things, of the development of representative diversity, the eradication of poverty, and the reduction of inequalities in consumption and inequalities of opportunity. The concept of value is central to such reform.

Pursuing real value means promoting value creation that takes into account long-term environmental impact and both personal and social wellbeing; it relies on competitive markets and prices integrating all externalities in both costs and benefits. Competition-based capitalism reorients capitalism towards the pursuit of this true value, focused on the protection and enhancement of natural, social and financial capital rather than towards the pursuit of ill-defined financial profits and economic efficiency.

‘Don’t hug a tree, hug an economist’ – Bill Moyers, 2001

In many instances, economists are strong and credible advocates for the environment. Above all, they are experts in system efficiency. In the context of environmental protection, the economist’s approach is to identify shortcomings attributable to the absence of markets, leading to overexploitation of environmental resources. Information asymmetries are likely to cause endless posturing and bickering. The solution lies in the definition of tradable property rights and the use of environmental resource pricing. In both cases, free-market instruments and mechanisms allow us to achieve the optimal level of environmental protection with an efficient use of social resources.

New competitive capitalism

The real generators of wealth and wellbeing for all are not low prices but competitive prices. The right signals of value and scarcity are then sent to companies: produce goods and services that are useful to customers, and ensure that employees and suppliers are compensated at level competitively tied to the value of the best alternative use of their competencies, goods and services. This is the gist of Friedman's assertion that the social responsibility of corporations is to maximize profits. The reform of capitalism proposed here focuses on competitive markets, taxation of externalities, and regulation of liability aligned with incentives.

1. Use ESG-type programs to discourage firms from doing business with “heavily” subsidized firms. Procurement and investment ESG-policies should oppose manipulated prices, such as those of the environment, or firms that benefit from crony-capitalism subsidies. It would be interesting to develop a price manipulation index by industry, sector, region or country.

2. Ensure the separation of business and politics. A clean divorce is needed to prevent corporations from subverting democracy and politicians from distorting competition. When all factors of production are priced at their competitive value, and all end products are sold at competitive prices, firms will be forced either to use an optimal blend of factors to produce valuable goods and services, or go out of business. There is no need or reason for business to interact with politics, if not to pursue anti-competitive advantages. The role of CEOs is to be business leaders, not social or political leaders.

3. Pricing, auctions and competition policy can encourage firms to consider their social and environmental impact. By internalizing externalities, we can avoid the overexploitation of common resources due to inefficient pricing and regulation (the tragedy of the commons), and the under-exploitation caused by excessive protection (the tragedy of the anti-commons). For example, the best instrument to curb carbon emission is a carbon tax that sends the correct price signal. Similar policies could be used to tackle water pollution and other market failures. Social acceptability could be enhanced by redistributing the tax proceeds.

4. Extend liability for environmental and industrial disasters, including bankruptcy, to all the firm’s partners. A proper incentive alignment requires holding borrowers and lenders (and insurers) jointly responsible for damages in order to protect workers and the environment, and to induce firms to properly manage risks. Creditors will then price the risk and improve monitoring, and debtors will have powerful incentives to improve their handling of hazardous wastes. Technological providers and management consultants can be included too. An incentive-compatible compensation system, especially for executives, could also improve environmental and industrial risk management.

5. Abolish taxes on corporate profits to focus businesses on fulfilling their mission and to favor investments in R&D and productivity. Tax systems have reached a worrying level of complexity. Zero taxes on corporate profits would render irrelevant the fiscal competition between countries to attract businesses, as well as many fiscal optimization and tax avoidance schemes. Considering the taxes paid by their employees and shareholders, abolishing actual or proposed taxes on GAFA+ (Google, Amazon, Facebook, Apple, Microsoft, Netflix) profits would have barely perceptible net impacts on government revenues.

6. Expand free trade, respecting partners’ different stages of economic development. Tariffs, quotas, and other barriers generate unnecessary and unjustified costs on all sides. But development also takes time, and we cannot expect a poorer partner to immediately adopt policies and lifestyle adjustments that wealthier partners adopted over 50 years or more. An operational free-trade agreement may help a poorer country to develop harmoniously while allowing the developed country to benefit from its comparative advantages.

7. Encourage transparency and creative destruction. Protect competitors and new entrants with tougher legal constraints on anti-competitive practices by incumbent firms. Replace the avoidable-cost criterion, used to detect illegal predatory pricing, with more direct full-cost sharing. All products sold by a firm would be attributed a share of total costs, defining the firm’s minimum price. To eliminate crony capitalism, auction off government assistance projects. The winning private financial consortium would assume responsibility for the outlays and benefit from repayments under conditions determined by the project, in exchange for a government premium.

8. For mergers and acquisitions, competition reduction is more important than efficiency gains. Balancing the potential harm to consumers and competition and the potential efficiency gains through economies of scale, scope, network, etc., is a very difficult task. Whatever the methods used to measure impacts, implement a legal requirement for a relative weight ratio of 2 to 1 for competition harm over efficiency gains.

9. Use incentive mechanisms to ensure equitable access to networks, platforms, licenses and patents. To curb the market-power risks created by digitization, regulation of access should embrace the following principles: dynamic competition processes and information systems; dynamically efficient access prices and conditions, and efficient investment in network maintenance and development; non-predatory pricing rules through full cost sharing, including the value of real options exercised to build the network.

10. Abolish or outlaw counterproductive regulations. Competition is harmed by “abusive” non-compete clauses and professional certification requirements (for those who do not interact with the poorly informed public) as well as various forms of employer and union lobbying. Capitalism should be synonymous with radicalism and disruption, not managed and soft competition. Where certification is useful, it should be developed using market-based systems.

Competitive social democracy

We need a new social-political-economic philosophy, together with an efficient set of policies for the production of public sector goods and services (PSGS). This project must clearly define objectives; determine the most efficient ways and means; reaffirm political and economic rights, including the right to challenge and replace existing providers of PSGS; and encourage transparent competitive processes. As a starting point, it should replace the public-private sector dichotomy with a clear separation between government and competitive sectors, both with clear responsibilities for maximizing citizens’ wellbeing.

1. Define the core competencies of the governmental and competitive sectors. The role of the government sector is to identify citizens’ needs in terms of public sector goods and services; to design mechanisms to arbitrate conflicts between baskets of PSGS and between coalitions of citizens; and to manage contracts with the competitive sector for the production of the chosen goods and services. The design of the baskets is best managed centrally by the government sector. Citizens will then choose baskets by voting for the political party offering the one they prefer. The role of the competitive sector is to produce private and public sector goods and services, making use of the most efficient forms of organization and factors, resources and technologies.

2. Use transparent, competitive mechanisms to develop contracts for the production of public goods and services. For competitive mechanisms to be accepted, promote the liberalization, dissemination and better understanding of economic rules. Competitive prices and processes can reduce waste and generate innovative solutions. Competitive-sector organizations must face a level playing field; any advantage given to participating organizations should be announced and quantified transparently at the outset.

3. Develop competitive-sector organizations with a capacity to bid efficiently for public contracts. Competitive markets require that a sufficient number of organizations be present in the tendering process, which the government sector must insulate from market power risks. Competitive-sector organizations must be able to submit credible offers in a level playing field contest. The government should favor the development of competencies through efficient competitive-sector organizations, without interfering directly in the contract-allocation processes.

4. Promote competitive prices and mechanisms in all sectors. Price manipulation is a major source of social and economic waste. Individuals are induced to make inefficient consumption and investment decisions, while the providers of goods and services are induced to make choices that favor the interests of price-manipulating political authorities and interest groups. In contrast to bureaucratic, centralized decision-making by poorly informed social engineering planners, competitive markets induce individuals and organizations to adapt their consumption and production to its relative social value.

5. Favor modularity, flexibility, experimentation and change through multiple sourcing. To encourage innovation, no single competitive-sector organization should be allowed to dominate the production of a private or public sector good. To favor competition and identify real-world best practices, modularity and experimentation should be continuously undertaken under proper safeguards allowing the evaluation and implementation of new ways and means.

6. Develop efficient mechanisms and institutions for adapting to creative destruction. A significant obstacle to desirable socio-economic change is the absence of efficient mechanisms or institutions allowing individuals and firms to reduce their cost of adaptation. To improve social wellbeing, flexibility must be a characteristic of all sectors; the education sector should provide the necessary skills and competencies; and R&D investments must efficiently generate new ideas and useful products and services. In a flexible society, innovation thrives for the benefit of all.

7. Support the needy, but discourage dependence. In any society, some individuals will make bad decisions. An empathetic public program of income and wealth support is thus not only necessary but conducive to growth and social wellbeing. Such programs must be efficient, direct and transparent, and developed under a single government authority to increase accountability. Strong incentives to leave support programs successfully, quickly and efficiently, will allow better and more generous programs to be developed. Similarly, government support and subsidies must be continuously reassessed, transparent, accountable and incentive-compatible.

8. Foster regular, systematic, and credible evaluation of public programs and policies. All government programs should contain sunset clauses so that their efficiency can be reassessed on a regular basis by independent, accountable and credible organizations, using state-of-the-art, transparent methodologies. More rigorous evaluation, as well as competitive processes leading to incentive contracts for organizations chosen to produce public sector goods and services, will favor programs that are better designed and implemented.

9. Adopt a tax system that is simple, cohesive, inclusive and incentive-compatible. Consumption taxes such as VAT, with a single percentage applied to all goods and services, are preferable to taxes based on labor. If some level of income tax is maintained, decrease the implicit marginal tax rates of the unemployed or socially assisted when they find jobs; reduce the marginal rates applicable to significant annual increases in earnings; and simplify the system, including all income in the tax base while imposing a minimum rate on overall income to promote social inclusion. Empower any citizen to directly distribute, say, 3% of their taxes to an educational or health institution, or an approved foundation or charity. An amount distributed to friends or family should be considered as consumed by the donor. Consumption should be taxed when it occurs or at the time of death, under the assumption that individuals are deemed to have consumed all their wealth at the time of death.

10. Promote free trade with developing countries. The search for social and economic efficiency relies in part on free trade, which offers competitive advantages to developed as well as developing countries, which can become prime allies as providers and developers not only of intermediary products but also, in time, of new technologies, products and services.

The above recommendations for a new competitive capitalism and competitive social democracy call for sweeping reforms that are extremely ambitious, but feasible and mutually reinforcing. They put citizens, rather than producers and politicians, at the center of the calculus of costs and benefits. The foundations, tools, and instruments required for the implementation of these reforms are already available. A profound reorganization of governments’ activities and priorities is necessary, but these projects pave the way for such a change. Competition, properly understood, measured and regulated, must be at its heart.