WSJ-The ‘Stakeholder’ War on the Enlightenment

ESG advocates would return society to the communal and stagnant world of the Dark Ages.
By Phil Gramm and Mike Solon
May 23, 2022 12:53 pm ET

No one appreciated the power of capitalism more than its greatest antagonist,
Karl Marx.Born of the Enlightenment, embodied in the Industrial Revolution, capitalism, accordingto Marx, “accomplished wonders far surpassing Egyptian pyramids, Roman aqueducts,and Gothic cathedrals . . . achieving more massive and colossal productive forces thanhave all preceding generations together” in “scarce one hundred years.”

Based on the erroneous notion that all value comes from labor, Marx assumed that thefi nancier, entrepreneur and manager were noncontributing claimants on the fruits of theworker’s labor and that government could displace them and then “wither away” asgrowth occurred spontaneously. Most subsequent collectivists have assumed the samething. In this utopia, workers would then receive all value created in society.

Government was never able to replicate the effi ciency and innovation of private fi nance,entrepreneurs and managers, and it was freedom and prosperity, not government, thatalways withered away. But because of the misery Marxism has imposed, the world has aliving memory and therefore some natural immunity to a system in which governmenttakes the commanding heights of the economy.

No such immunity exists to the older and therefore more dangerous socialism of the pre-Enlightenment world. In the communal world of the Dark Ages, the worker owed fealty tocrown, church, guild and village. Those “stakeholders” extracted a share of the product ofthe sweat of the worker’s brow and the fruits of his thrift. Growth stagnated as therewards for eff ort and thrift were leached away.

The 18th-century Enlightenment liberated mind, soul and property, empowering peopleto think their own thoughts and ultimately have a voice in their government, worship asthey chose, and own the fruits of their own labor and thrift. As Enlightenment economistAdam Smith
put it, “the property which every man has in his own labor, as it is theoriginal foundation of all property, so it is the most sacred and inviolable.”

The British Parliament repealed royal charters, permitted businesses to incorporatesimply by meeting preset capital requirements, and established the rules of law governingprivate competition. Most important, laws were made through a process of opendeliberation with public votes. This democratic process replaced the intimidation ofmedieval stakeholders, who under the communal concept of labor and capital took a shareof what others produced.

These Enlightenment ideas spawned the Industrial Revolution and gave birth to themodern world, as described by Marx. As people sought their own advancement under asystem of private property and the rule of law, as if guided by Adam Smith’s “invisiblehand,” they promoted the public interest without intention or knowledge of doing so.Freedom and self-interest unleashed the world’s greatest productive eff ort and continueto drive progress to this day.

The pre-Enlightenment world was dominated by the powerful, who defi ned the publicinterest to benefi t themselves and imposed their will on productive members of society.When labor and capital are forced to share what they produce with stakeholders, thereward for working and savings is plundered.

In the post-Enlightenment world, people were empowered to pursue their own privateinterests. Private interests and free markets accomplished what no benevolent king’sredistribution, no loving bishop’s charity, no mercantilistic protectionism, and nopowerful guild ever did—deliver broad, unending prosperity.

Remarkably, amid the recorded successes of capitalism and failures of socialism rooted inMarxism, pre-enlightenment socialism is re-emerging in the name of stakeholdercapitalism. These stakeholders claim that “you did not build your business” and that yourlabor and thrift should serve their defi nition of the public interest.

The initial target of this extortion is corporate America. Stakeholders argue that richcapitalists who own big businesses already get more than they deserve. But since roughly70% of corporate revenues go to labor, the biggest losers in stakeholder capitalism areworkers, whose wages will be cannibalized. And of course, the idea that rich capitalistsown corporate America is largely a progressive myth. Some 72% of the value of publiclytraded companies in America is owned by pensions, 401(k)s, individual retirementaccounts, charitable organizations, and insurance companies funding life insurancepolicies and annuities. The overwhelming majority of involuntary sharers in stakeholdercapitalism will be workers and retirees.

The mantra that private wealth must serve the public interest has been boosted by one ofcapitalism’s great innovations, the index fund. What investors gained in the effi ciency ofthe index fund’s low fees, they are now losing as index funds use the extraordinary votingpower they possess in voting other people’s shares. Whether their motives are promotingthe marketing of their index funds, doing “good” with other people’s money, or, as WarrenBuffett’s longtime partner Charlie Munger claimed, playing “emperor,” they haveempowered the environmental, social and governance (ESG) agenda. Other stakeholdersare sure to pile on, as evidenced by Sens. Bernie Sanders and Elizabeth Warren’s effort to get
BlackRock to use its share-voting power to pressure a private company to yield tounion demands.
Stakeholder capitalism imperils more than prosperity, it imperils democracy itself. Self-proclaimed stakeholders demand that workers and investors serve their interests eventhough no law has been enacted imposing the ESG agenda.

The fi duciary laws require those entrusted with the investors’ money to use it “solely inthe interest of . . . for the exclusive purpose of providing benefi ts to” the investor. Theindex funds that enable stakeholders to intimidate public boards are violating federal duciary requirements and those government agencies that enforce stakeholdercapitalism are engaged in an unconstitutional takings under the Fifth Amendment of theConstitution.

In our post-Enlightenment world, public interests beyond the confl uence of privateinterests are defi ned by the public actions of a constitutionally constrained government.By overturning the Enlightenment, stakeholder capitalism not only endangers capitalismand prosperity, it endangers democracy and freedom as well.

Mr. Gramm is a former chairman of the Senate Banking Committee and a nonresidentsenior fellow at American Enterprise Institute. Mr. Solon is a partner of US Policy Metrics.