Stephen King: Chris Martin is wrong. Shareholders are crucial to eliminating poverty in Africa

Click to follow
The Independent Online

To give Mr Martin the benefit of the doubt, it may have been that his comments were aimed primarily at EMI's shareholders, who had been forced to wait for a little longer than they'd hoped for Coldplay's latest effort. And, here, I have some sympathy with Mr Martin. In fact, I wish the shareholders had been forced to wait still longer because, in my view, X&Y isn't quite as good as A Rush of Blood to the Head (my wife agrees with me on this point and, overall, she's a much bigger fan).

But, on a more serious note, Mr Martin's comments are symptomatic of a more general backlash against businesses and corporations: and, because Coldplay, alongside other like-minded rock stars, have a huge global audience, they cannot help but influence the moral compass of others. So, if Chris Martin thinks that shareholders are evil, a lot of other people are going to end up thinking the same thing.

It's easy enough to see how this view can take hold. Some companies, and some shareholders, don't always behave in quite the right way, whether it's their use of sweatshops in Asia, or their unwillingness to provide drugs to combat HIV in Africa. These observations, though, are not good enough to suggest that all shareholders are really in league with the devil. It's a bit like saying that, because Hitler was an evil leader, all leaders are evil. And that would be less than fair on, say, John Major.

The real problem, I think, is that people simply don't understand fully how economies work, and how successful economies get wealthier over time. In these circumstances, it's easy to suggest that the haves benefit only at the expense of the have nots. This "static" view simply assumes that each of us is struggling to get our hands on a decent share of a fixed pie. But the really big issue, the one that matters in explaining the difference between rich and poor, is how the pie can be made bigger and bigger over time.

And whether or not Mr Martin thinks that shareholders are evil, they play a vital role in this process as, indeed, do companies. Why do companies exist in the first place? The answer lies with the role of savings and investment. There's no real point in saving unless someone does something useful with the money. If I stuff my cash under the mattress, I am simply refraining from spending today in exchange for spending tomorrow. My total spending, taking today and tomorrow together, is unchanged.

If, on the other hand, I give my money to someone who has a clever wheeze to organise resources in ways that will increase output tomorrow relative to today, and both of us are able to benefit from this wheeze, then my savings have helped make the world a better place. And, if that someone with a wheeze is able to raise money from lots of people and delegate responsibility for the production of the wheeze to lots of people, then he's created a joint stock company - a company that creates jobs, earns a profit for its shareholders (who, in turn, can sell their shares to others), delivers revenue to governments and, in some cases, is able to turn travelling minstrels into global megastars.

This, of course, is not the end of the story. Over time, the shareholders might become very rich relative to the workers, or the workers might do well relative to the shareholders. And it may be the case that governments will step in to alter the distribution of wealth and income between the various interested parties (political philosophers to this day find it difficult to deal with the conflict between the right to engage in voluntary contractual arrangements and their possibly iniquitous effects, mostly unintended, on income and wealth distribution). Nevertheless, there's no doubt that shareholders play a pivotal role in the process of wealth creation: without them, the joint stock company wouldn't exist and nor, for that matter, would the economic growth that's allowed wealth to increase unimaginably over the last 200 years. The chart shows the relationship between stock market liquidity and economic growth.

Companies, though, will only be able to survive and to flourish in certain circumstances. Property rights have to be established and a legal framework has to be put together to protect those rights. Otherwise, why would you become a shareholder? Without that legal protection, the wheeze that you're investing in might be no more than an elaborate form of theft. Of course, even with laws, there are still those who embark on a life of fraud but if, like Bernie Ebbers, they're caught, a life behind bars beckons.

More generally, proper enforcement of property rights and legal protection is pivotal to the success of any economy that's based on capitalist principles. Otherwise, stock markets and credit markets would never exist. Without those, there would be no easy way, other than discredited state planning, to connect savers and investors. And, if that connection is lost, there is no easy way to ensure that the pie expands in ways that can, conceivably, benefit us all.

The weekend's Live8 concerts were an extraordinary success in drawing attention to the plight of people in Africa and elsewhere who, through no fault of their own, have ended up in the most terrible state. Yet aid, debt relief and fair trade will not, in themselves, be enough to allow countries to embark on a period of sustained expansion to enable people to escape from the dependency on - all too frequently unforthcoming - handouts from others. Aid, debt relief and fair trade are all designed to ensure that the existing pie is divided up more fairly: they are not likely to generate an ever-expanding pie.

The irony is that those who are most sympathetic to Africa's plight are often those who are most critical of capitalism. This is understandable. Capitalism has nothing to say about the distribution of income and wealth: instead, its concern is limited only to the efficient allocation of resources. Yet the joint stock company, underpinned by the legal rights and framework that allow and protect its existence, has been one of the most successful institutions in the history of mankind in creating wealth for the many rather than for the few.

Live8's open letter to the G8 leaders was absolutely right: "African governments must be free from corruption and thuggery and put in place recognised practices of good governance, accountability and transparency towards their own people and towards the world." Corruption undermines the very principles of trust that allow contracts to be drawn up, that allow credit to be advanced, and that allow stock to be issued. Enshrining a proper legal code is vital: and that means respecting the rights of, among others, shareholders. If people like Chris Martin, uniquely placed to broadcast that message, fail to do so, then the chances of Africa emerging from its dismal economic and humanitarian record will remain worryingly slim.

Stephen King is managing director of economics at HSBC

stephen.king@hsbcib.com

Comments