Disconnecting capital from labor (#19)
19. Behind all these changes is the fundamental reality that capital has acquired new freedom: no longer does it have to account to the people in the countries where its profits are made.10 It is as if economic power had acquired an extraterritorial status. Companies are able to react to profit opportunities quite independently of their national authorities—and in so doing they play a key role not only in the organization of the economy but of society. Thus globalization is modifying the foundations of the economy and the polity, reducing the degrees of freedom of nation-states: the familiar nation-state’s political-economic instruments are tied to a well-defined territory, whereas multinational companies can produce goods in one country, pay taxes in another, and claim assistance and state contributions in yet a third. Business has become much more influential in this changed context and consequently carries the potential for great good or harm.
COMMENTARY: As the world has shrunk and capital moves at the speed of light, profits are often produced in one locale and quickly move to another, perhaps where the corporate office is located. As the document points out, this is neither good nor bad but certainly has the potential for either.
There are certainly a number of potential negative outcomes:
- Local labor is exploited because it will work for almost any wage, but the profits from that labor are consumed by executives half a world away.
- Private equity firms buy and sell companies without regard to the local impact, exercising power that used to belong to sovereign states.
- Sovereigns are pressured to lower business tax rates under the threat that capital will flee to places like Ireland where those rates are lower.
There are some positive possibilities as well:
- The Internet-enabled reduction in transaction costs are helping to break companies into smaller pieces, creating the potential for small businesses to form where large subsidiaries have been closed or sold off.
- Companies can more quickly and easily invest their capital in new facilities in areas they may never have considered when capital was created and resided in the same locale. This may help poorer countries move out of poverty sooner.
The untethering of capital from the work that produced it is a fact, and Catholic businesspeople have to apply the principles of Catholic Social Doctrine to ensure these new realities provide positive outcomes.