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International Herald Tribune

Capitalism under fire

William Pfaff

THURSDAY, MARCH 30, 2006

PARIS The demonstrations by French students, workers and would- be workers, with unions and the French left riding on their bandwagon, have amounted to a spontaneous revolt in France against something that I suspect few of the participants fully appreciate.

The protests' ostensible purpose is to force withdrawal of a minor change in this French government's employment policy, but they have taken on a radically different significance.

The crowds in the street contest a certain form of capitalist economy that a large part, if not the majority, of French society regards as a danger to national standards of justice and, above all, to "equality" - that radical notion of which France is nearly alone in proclaiming as a national cause, the central value in its republican motto of "liberty, equality, fraternity."

Prime Minister Dominique de Villepin undoubtedly had little notion of the consequences when he launched what seemed to him a small but constructive employment initiative, intended to loosen current structural inhibitions to job-creation.

He inadvertently opened what many of the French see as a central question to their national future, just as two years ago they saw in the European constitutional referendum disturbing questions about the future nature of the European Union and about the model of capitalism that would prevail in Europe's future.

They are not alone in this concern. A kindred debate about "models" of capitalism has been a persistent factor in Germany, now suffering labor unrest, and in the European Commission itself, which since EU expansion to 25 members, has tipped away from the traditional European "social" model. Even in Britain last Tuesday there was the biggest strike since the 1920s, on the question of pensions.

The French, of course, have been against "capitalisme sauvage" ever since that rough beast loomed amid the satanic mills of Britain in the 19th century, subsequently making its trans-Atlantic journey to establish another lair.

A recent international opinion poll on the free-enterprise and free-market system, found that 74 percent of the Chinese say they think it the best system of all, compared to only 36 percent of the French. (The Germans were not far off the French.)

The essential question is, what capitalism are we talking about? Since the 1970s, two fundamental changes have been made in the leading (American) model of capitalism.

The first is that the "stakeholder," post-New Deal reformed version of capitalism (in America) that prevailed in the West after World War II was replaced by a new model of corporate purpose and responsibility.

The earlier model said that corporations had a duty to ensure the well- being of employees, and an obligation to the community (chiefly but not exclusively fulfilled through corporate tax payments).

That model has been replaced by one in which corporation managers are responsible for creating short-term "value" for owners, as measured by stock valuation and quarterly dividends.

The practical result has been constant pressure to reduce wages and worker benefits (leading in some cases to theft of pensions and other crimes), and political lobbying and public persuasion to lower the corporate tax contribution to government finance and the public interest.

In short, the system in the advanced countries has been rejigged since the 1960s to take wealth from workers, and from the funding of government, and transfer it to stockholders and corporate executives.

While that may seem an incendiary comment, it seems to me a simple factual observation. The criticism currently made of Europeans who resist "reform" is that their policies block managers from downsizing and outsourcing jobs, in order to add "value" to the corporation. (A recent headline in the International Herald Tribune read: "AT&T- BellSouth deal gets Wall St. applause. Merger would lead to 10,000 job cuts.")

I once called this "CEO capitalism," since corporate chiefs today effectively control their boards of directors and are also the biggest benefactors of the system, subject only to critical attention from investment-fund managers, themselves interested in maximizing dividends, not in defending workers or the public interest. (The well-known American fund manager, John Bogle, now retired, has taken up my argument and advances it in his recent book, "The Battle for the Soul of Capitalism.")

The second change that has taken place is globalization. The crucial effect of this for society in the advanced countries is that it puts labor into competition with the poorest countries on earth.

We need go no further with what I realize is a very complex matter, other than to note the classical economist David Ricardo's "iron law of wages," which says that in conditions of wage competition and unlimited labor supply, wages will fall to just above subsistence.

There never before has been unlimited labor. There is now, thanks to globalization - and the process has only begun.

It seems to me that this European unrest signals a serious gap in political and corporate understanding of the human consequences of a capitalist model that considers labor a commodity and extends price competition for that commodity to the entire world.

In the longer term, there may be more serious political implications in this than even France's politicized students suspect. What seems the reactionary or even Luddite position might prove prophetic.