Moral Legitimacy of Capitalism Challenged

Opinion Piece
Ethics Institute of South Africa
27 October 2012

Does the current wave of violent unrest in the mining sector signal that capitalism is close to losing its moral legitimacy—and how can it refurbish its image?
By Deon Rossouw, CEO, Ethics Institute of South Africa.

When President Zuma finally responded to the unfolding crisis in the mining industry by calling unions and employers into a meeting, one of the outcomes was the now infamous call for executives to accept a voluntary wage freeze. The proposal was stillborn, drowned on a chorus of cat-calls for the president to practice what he preaches.

The mere fact that the proposal was made at all should give us pause for thought. However bloated executive salaries have become, freezing them is unlikely to make any material impact on the wages paid to thousands of employees. Nonetheless, the proposal was telling because it points to the cancer that is eating at the heart of capitalism’s moral legitimacy in South Africa: the extraordinarily high gap between the rich and poor, which is a function of the gap between the highest and lowest paid within corporations. It is this gap that contributes to South Africa’s high GINI coefficient. (The GINI Index measures income inequality, with 0 indicating perfect equality and 100 perfect inequality.) South Africa’s GINI coefficient of 63.6% makes it the country with the most unequal income distribution in the world. [1]

We need to be clear that in capitalism, as in other economic systems, it is morally acceptable for people to be rewarded differently. Typically, these differentials reflect the different contributions people make to the enterprise, the risk they assume and the skills they offer. There is no expectation, in other words, of equal reward.

Unequal, fine, but what about fair?

Unequal the rewards may be, but that inequality has to be seen to be fair in order to be moral. When the reward structure becomes too skewed, people start to question the fairness of the economic system as such; they become alienated, and cease to be willing participants in the system. And because any system’s legitimacy depends on its moral acceptability, the perception of unfairness begins to delegitimise it.

In other words, any system’s moral acceptability is dependent on the extent to which it serves the needs of society as a whole—it is this principle that underlies King III’s focus on stakeholder rather than purely shareholder capitalism.

We have now reached the point at which those at the lower end of the pyramid—the miners, in this case—have lost faith in the basic fairness of the system. It is not that they are uneducated and cannot read their payslips properly, as many say: the real issue, for them (and for many others in society at large) is that the gap between what they earn and what the executives earn is just too large to justify. This perception is spreading to other industries, and will similarly begin to bring into question the bona fides of the system that permits inequality of rewards of such proportions to occur.

The sense that the current system of capitalism rewards a minority excessively is not confined to South Africa, I should add. It is a global phenomenon, of which Occupy Wall Street and its clones are perhaps the most high-profile example.

Courage will be needed

I think we are, indeed, close to a tipping point that could delegitimise capitalism—and executive remuneration is both the symptom and the symbol of this lack of legitimacy. A crisis of this nature is always a moral one; a good example is the collapse of apartheid, which occurred when it became clear to the majority that it was not contributing to a better life for all.

To resolve this crisis, is clearly vital that the country develops an economic model that enjoys broad acceptance amongst South Africans, one to which the majority is committed. Without this commitment, the National Development Plan’s call for faster economic growth will remain unanswered.

One of the ways in which companies can begin to regain their own legitimacy, and to influence developments generally, is to begin vigorous educational programmes about how the economy works. However, in the course of this process, this issue of fairness will be raised by workers, and the difference between highest and lowest salaries will have to be justified. That will require coming up with convincing explanations for those differences in order to meet the criterion of fairness.

These will be very difficult conversations to have, and great courage will be needed. But let us be clear: without them, the current system could lose its remaining legitimacy and who knows what will follow?

ENDS
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[1] See the special report from Euromonitor International, Income equality rising across the globe, March 2012.
Available at click here.