The reward system is just plain wrong

It can certainly be said that our technological proficiency far exceeds our moral, social, and political development.¹

(Oliver Stone and Peter Kuznick)

It is not unnatural that we react positively to rewards. But when the rewards are wrong, in the sense that they generate havoc in the ecological, social and economic environment, fixing the system becomes a permanent and generally useless uphill struggle. We are awash with sayings that try to reconcile economic success with the common good: ‘greed is good, nothing succeeds like success,’ and in particular the academic argument that maximizing your own advantages will naturally generate the best possible results for society. The general idea is that you can get very wealthy, yet sleep well according to the way you are managing it.

George Monbiot goes straight to the point. “To mainstream commerce, the Earth is both loot and dump. Commercial activity, broadly speaking, consists of extracting resources from a hole in the ground on one side of the planet, inducing people to buy them, then dumping them a few days later in a hole in the ground on the other side. Whether or not they were useful to those who purchased them is irrelevant: if marketing can persuade people to part with their money in exchange for goods, the interests of humanity have been served. The faster we do this, the more successful economic life is deemed to be, and the greater is the sum of human progress.”²

My wife Fatima had a nice house built in São Paulo, but she prefers to live in Bahia in a more modest home, and the former house provides her with a nice rent. Nothing wrong with this. But when a corporation buys tens of thousands of houses, and gets a stronghold on access to housing and rent, we are in another universe. In Berlin, where housing prices have roughly doubled in a decade, the government is trying to buy houses back from financial giants, Vonovia and Deutsche Wohnen, so as to bring the housing business back to a place-to-live issue.

In the US, according to The Economist, “the biggest names are well known. BlackRock and JPMorgan Chase’s asset-management business feature among the stampede of buyers. KKR, a private-equity firm, is building out a new single-family landlord entity in America. The sums involved are rising fast.”³ Goldman Sachs, Lloyds Banking Group and other giants are all in this rent extraction business. China is laying a heavy hand on real estate speculation groups, with President Xi stating that housing is for people to live well, not to enrich speculators. But wealthy Chinese are buying houses in Vancouver, not for living, but as capital investment. A housing shortage for residents pushes prices up, and the capital value grows.

The key issue here is that real-estate investment trusts (REITS) make more money. They are not building houses, they are doing business. Going down the financial ladder, individuals will place their money in financial papers, instead of having more houses built. There is nothing wrong with a family renting their home out for the time they do not use it, as it is standing capital better used. But when Airbnb starts buying whole buildings and expelling residents, be it in Paris, Venice or Barcelona, the whole system is skewed. Money is going to where it grows faster, and in this case, it is not building more affordable houses for people to live better. Economic success is pointing in the wrong direction.

When you are investing in the production of goods and services, you can be making profit, but it also generates a richer society. The Economist calls it ‘productive investment,’ as different from ‘speculative investment.’ Quoting Monbiot again, “one is the funding of productive and socially useful activities, the other is the purchase of existing assets to milk them for rent, interest, dividends and capital gains. Using the same word for different activities ‘camouflages the sources of wealth,’ leading us to confuse wealth extraction with wealth creation.” It is clearer in French, with ‘investissements’ and ‘placements financiers’ making the difference plain.

Institutional investors, banks and other financial corporations obviously prefer using just ‘investment.’ But the key issue is that speculative investment on a large scale pays more than productive investment, as Thomas Piketty has shown so well. What pushes housing prices up is not building more houses, but making access more difficult. It has been called the tollbooth economy.

With the pandemic, travelling has become a straining experience. Having to go from São Paulo to Luanda (Angola) through Lisbon, I took the Covid test according to what Portugal demands, unaware that Angola demands the PCR test. I was prevented from boarding the plane, and directed to the vaccine unit the Albert Einstein Hospital created at the airport, a private unit charging heavy prices. For the whole trip, I was charged around $300 US dollars in certificates that I was fit to travel and had my nose visited an awful lot of times. You just raise your nose, lower the mask, and hope you are having the right test. Covid makes good business, and generates financial dividends out of proportion as compared to the cost of the services. You need to take the plane, you pay what they charge you.

Lena Lavinas studies the deformation of health services through privatization. “Health companies’ assets are purchased by investment funds or by foreign investors to win dividends and resell shares afterwards in the stock exchange. In this scenario, health insurance premiums are overdetermined by speculative movements by shareholders, who wish to increase expected average profit rates, a key variable to attract investors in the healthcare area under globalization.”⁴ Asset management giants like BlackRock are investing in private health companies in Brazil and extracting dividends for investors throughout the world, at the cost of what health services cost to the population.

They are not providing more or better health services, they are milking them for financial gains. They are asset management corporations, with no particular knowledge of health, but their activity pays more, both to them and to the shareholders. Shareholders find it more profitable to invest in financial papers than providing health services. We are in the hands of financial middlemen, but down the overall income chain, their huge profits attract capital that would otherwise have been used in productive investment. When rent extraction pays more than productive activities, the systemic reward system goes against social interest.

Producing plastic is ridiculously cheap. The petrochemical industry uses an accumulated natural wealth (oil) to produce huge quantities. The production costs are very low, and this enables the industry to flood the world with plastic, make huge profits and pay handsome dividends. The huge environmental cost generated by this industry does not concern either the industry or the shareholders. They call them externalities, but they are not ‘external’ for society, which bears the huge costs of cleaning up, or for nature where we have dramatic extinction. Polluting the whole planet thus represents a huge source of profit for the few. If the complete product cycle cost was accounted for, plastic would be very expensive. In financial terms, polluting generates high profits, and it attracts investors.

They say that we as consumers should act responsibly, but we obviously have little choice, and the attempts in supermarkets are ineffective. The system is rigged. If the full cost, both production, use and cleaning up was put into the price of plastics, we surely would already have alternatives. But the costs are pushed over to whomever will have to clean up. Remember the pleasure of a plastic-free beach? Well, it does not generate dividends.

Our accounting is rigged. Simon Kuznets, who set the basis for the GDP accounting system, wrote that “the welfare of a nation can scarcely be inferred from a measure of national income.” The rents we have mentioned above, as a few examples of economic deformation, are all included in our GDP figures, and convey an idea of growth and progress. But they are creating a social, economic and environmental disaster. In Brazil, industry represented over 20% of economic activities a decade ago, a figure that fell down to 12% in 2020. But exports of agricultural and mining raw materials are booming. Since 1996, production for exports is not subjected to taxes, which makes our products much cheaper for China and other markets. The result is that the decapitalization of Brazil generates huge returns and attracts shareholders. These are returns on environmental and social dramas, but since they are higher it pays to invest in them.

In our universities we are teaching the importance of ESG (environment, social, and governance), of stakeholder approach instead of just shareholders, and as the slow-motion catastrophe gets deeper, people are talking in one direction and acting in another. They follow the rewards. The Economist brings a curious example. “A takeover in Britain shows shareholders still rule the corporate roost: talk of the importance of stakeholders is just that. On September 20th Philip Morris International (PMI), a giant cigarette-maker, announced it had convinced over three-quarters of the shareholders in Vectura, a British pharmaceutical business, to back its takeover plan. Thus, a maker of inhalers designed to combat respiratory diseases will soon be fully owned by a firm whose products often cause them.”⁵ An example among so many: you are not expanding production, you are expanding control.

The key issue is that creating systemic disaster is more profitable than going according to long term basic sustainability demands, and money just flows to where it pays more. Free markets in times of corporate giants, massive-impact technologies, immaterial money and high frequency trading are creating chaos. A global new deal is long overdue. Make it green, too. The way it is, wrongdoing is getting the best rewards.