The world consists of both highly interventionist states and global corporations but it is misleading for commentators to assume that they are in competition with each other
The recent controversy over tax avoidance by the likes of Amazon, Google and Starbucks has revived old arguments about the power of global corporations. Such companies, it is argued, have become so big and pervasive that they can circumvent national governments.
Margaret Hodge, a Labour MP and chair of the Public Accounts Committee, is a high profile leader of the charge against such firms. She has accused them of immorality for avoiding tax even though she concedes they have not broken the law. For instance, she told Matt Brittin, the head of Google for northern Europe, that his company’s tax affairs were “devious, calculated and, in my view, unethical”.
Robert Reich, a US politician and academic, is one of the best-known corporate critics on the other side of the Atlantic. The former US Labour Secretary has argued that: “global capital, in the form of multinational corporations as well as wealthy individuals, is gaining enormous power over nation states”.
It should be readily apparent that politicians have a vested interest in making such claims. By focusing on the alleged misdeeds of corporations they can avoid their own culpability for problems. Railing against allegedly immoral tax practices by companies is a way of sidestepping awkward questions about the inadequacy of the legal framework created by legislators.
But just because politicians have a vested interest in criticising corporations it does not necessarily follow that the charges are entirely misplaced. It is true that many companies have become highly international. They trade overseas, invest abroad and have many other global connections.
It is also often said that about 70 per cent of the earnings of FTSE 100 companies derive from business overseas. Admittedly the figure is skewed as it refers to the biggest companies rather than the whole corporate sector. Large companies tend to be, on average, more global than smaller ones. Nevertheless, it is striking that UK companies lean so heavily on their international operations.
The mistake made by corporate critics is to assume that more international companies must mean less state power. In their view one necessarily takes power from the other.
This argument makes a false counter-position. Companies have become more international while, at the same time, states have become more extensive in their operations.
Probably the most graphic illustration of this trend relates to state spending. Public spending in the UK still accounts for about 40 per cent of GDP despite all the talk of cuts. In other words government spending directly underpins a high proportion of economic activity.
Even this figure understates the true economic role of the state in contemporary economies. The state plays a key part in virtually every area of economic life. It transfers vast sums from some areas to others, enforces an extensive framework of rules and plays a key part in maintaining infrastructure. This extensive role in maintaining economic activity applies to supposedly free market economies, such as the US and the UK, just as it does to continental European ones.
For better or worse, the world consists of both highly interventionist states and many international companies. It is misleading to assume the two are directly in competition with each other let alone to argue that corporations dwarf governments.
Although the debate on global capital has come to the fore recently it goes much further back than is generally assumed. Between about 1870 and the onset of the First World War in 1914, the world became highly internationalised. Back then cross-border trade and investment also accounted for a high proportion of economic output.
It is said 70 per cent of the earnings of FTSE 100 firms derive from overseas
Against this backdrop many high profile figures argued that global capital was overwhelming nation states. John Hobson, an important influence on John Maynard Keynes, wrote a book called Imperialism (1902) that argued a unified international oligarchy was emerging. As a result, he concluded that nation states were becoming less important. In many respects, contemporary critics such as Robert Reich echo Hobson’s arguments.
A few years later, a prominent writer and Labour MP Norman Angell, wrote a book called The Great Illusion (1909). He put a positive spin on internationalisation by arguing that the world economy was so integrated that the great powers no longer had any interest in fighting each other.
Angell’s argument was discredited in the most brutal way possible when a few years later when the first world war erupted. As mainland Europe descended into bloody carnage it was no longer possible to maintain that nation states were becoming irrelevant.
It is only recently that the world economy has become as internationalised as it was before the first world war. In the decades following 1914 the economic ties between countries were weakened by two world wars, the Great Depression and the advent of the Cold War. The second period of globalisation only emerged in the 1970s after a gap of several decades.
None of this is to suggest that the world is on the brink of another world war. Thankfully this is not the case. But it does show that critics who counter-pose national states to international companies make a misleading argument. In the contemporary world powerful nation states co-exist with a high degree of international economic integration.
Daniel Ben-Ami is a writer on economics and finance. His personal website can be found at www.danielbenami.com