Saturday, November 29, 2014

Virtuous Capitalism

In an early television episode of the science fiction series Star Trek the Next Generation, the crew of the USS Enterprise recovered an old, unmanned late 21st century spacecraft carrying the cryogenically frozen dead bodies of dozens of people.  Rather than have their bodies buried, their families chose instead to have their dead bodies cryogenically frozen and sent into space in hopes that in the future there would be medical cures for the diseases they succumbed to.  Fortunately for them, the ship’s doctor managed to revive many of the deceased patients using advanced 24th century medicine.

As the story unfolded, a man who’d been quite wealthy back in the 21st century desperately wanted to reclaim his entire fortune (hopefully with interest).  But he was astonished to discover that in the 24th century all forms of monetary economic exchange were now obsolete, and people no longer had to work for money to support themselves because all their human needs were met through technology, which costs nothing!  People only worked for altruistic reasons such as to improve themselves or help society advance.

But this story is only optimistic science fiction and unfortunately in our lifetimes we’ll probably never live to see that day.  Life’s sad reality is that the natural law of scarcity decides how big of a piece of pie each of us will get in life.  Some will get more, others less, and some will get none at all.  

“Survival-of-the-fittest” is a famous phrase attributed to a man named Herbert Spencer (1820-1903), a contemporary of Charles Darwin.  Spencer was a proponent of a popular 19th and early 20th century belief call eugenics.  Eugenics is a social philosophy which, among other things, tries to justify economic and social inequality on the basis of inherited traits.  Spencer, and many others of his day, believed that if we just allowed the rich to get richer that it would be good for the whole of society because it would discourage the poor from having more children and ultimately surviving.  In the 19th century it was called "laissez-faire capitalism," but today it has been re-packaged under the name "free-market capitalism."

In the 19th century, the economic abuses of laissez-faire, free-market capitalism gave birth to the disastrous economic philosophies of socialism, communism, and fascism.  And when you examine the differences between laissez-faire, free-market capitalism and these opposing economic philosophies one thing you’ll discover they all have in common is their oppression and economic slavery of their workers.  Essentially they’re different sides of the same coin.  On one side, large multinational corporations control the means of production whereas on the other side the government does.  Since the 19th century, most developed economies have regulated capitalism in order to prevent a repeat of those abuses.


The famous economist Milton Friedman (1912 - 2006) of the University of Chicago was a big proponent of an unfettered, laissez-faire, free-market form of capitalism with little government intervention.  In an influential article he wrote for The New York Times Magazine in September 1970 titled The Social Responsibility of Business is to Increase its Profits, Friedman makes the case that nothing other than the profit motive should drive business decisions.  Not altruism, not the good of employees, not the good of society, not the good of any other business stakeholder should be considered other than what is good for the shareholders (or owners) of the company.  And what is good for the shareholders is simply maximizing profit.

Since the publication of Friedman’s article, there’s plenty of anecdotal evidence to show that the shift in focus to maximizing profits for shareholders has led to a profit-at-any-price mentality by business managers.  And today many academics, politicians, and pundits believe that we should return to the laissez-faire, free-market capitalism of the 19th century believing it will lead to greater economic prosperity.  They believe that if we loosen the reins of government regulation then businesses will prosper and the economy as a whole will improve.

So is the purpose of business to only make money as Friedman, and many others like him, believed, or is it something more than this?  Do we continue to follow this laissez-faire philosophy or do we develop new ones?  

In the July 30th, 2012 edition of the Wall Street Journal, Charles Murray (of the American Enterprise Institute) wrote an interesting essay called, Why Capitalism Has an Image Problem Murray makes a very good argument that in order to be successful capitalism must be coupled with virtue.  He writes, 

“Historically, the merits of free enterprise and the obligations of success were intertwined in the national catechism.  The freedom to act and a stern moral obligation to act in certain ways were seen as two sides of the same American coin.  Little of that has survived.  To accept the concept of virtue requires that you believe some ways of behaving are right and others are wrong always and everywhere.  Correspondingly, we have watched the deterioration of the sense of stewardship that once was so widespread among the most successful Americans and the near disappearance of the sense of seemliness that led successful capitalists to be obedient to unenforceable standards of propriety.  Many senior figures in the financial world were appalled by what was going on during the run-up to the financial meltdown of 2008.  Why were they so silent before and after the catastrophe?  Capitalists who behave honorably and with restraint no longer have either the platform or the vocabulary to preach their own standards and to condemn capitalists who behave dishonorably and recklessly.  And so capitalism's reputation has fallen on hard times and the principled case for capitalism must be made anew.”

So let’s start by changing our paradigm of the purpose of business.  It should be to satisfy a customer’s needs as well as survive.  When a business consistently and successfully satisfies a customer’s needs then they’ll make a profit and satisfy their own need to survive.  So the heresy I’d like to propose is that profit is a natural byproduct of consistently and successfully satisfying customer’s needs, and not the other way around. 

If companies were only in business to make money then anything they did to make more money would be all right.  For example, if a business did not honor their warranties they’d leave their customers with defective merchandise or poorly performed services.  Customers in turn would stop buying from them.  If a business consistently mistreated and indiscriminately fired their employees, they’d have a hard time keeping their employees and getting new people to work for them.  And what if businesses wouldn’t pay their bills?  Suppliers and creditors would stop doing business with them.  If a company’s only business is making money without considering the consequences to its customers, employees, suppliers, and creditors then it won’t be in business for long.  To survive, a business has to strike the right balance between making money and satisfying their customer’s needs.

So if you think about it, businesses aren’t really in business just to make money; they’re really in business to satisfy their customer’s needs.  And if they’re consistent and successful in satisfying their customer’s needs, then they’ll earn a profit and the firm will thrive and survive.  If a business doesn’t make a profit it’s an indication they’re not successfully satisfying the needs of their customers.

Unfortunately, over the past three to four decades publicly traded companies have been more fixated on only satisfying the needs of their owners, short-term investors, and managers at the expense of their customers, employees, suppliers, creditors, and distributors.  And all the businesses that have behaved unethically, immorally, dishonestly, and illegally over the past few decades are just a reflection of the American business culture today.  Just as the crime-rate in a city is a general indicator of the health of a community, so the crime-rate in business is a general indicator of the general health of business in our society.  Where corporate scandals are high, so are greed, profit-at-any-price, and unfair dealings with customers, employees, suppliers, creditors, and distributors.

For the most part, companies meet the community’s moral, ethical, and legal standards because it is in their own best interest to do so.  The consequences of breaking laws or being sued by consumers are higher than the cost of doing the right thing in first place.  Laws are generally made to criminalize what is wrong, but do not legislate what is right.  There are unenforceable standards of right and wrong.  Some examples would be that murder is a crime, but no law can be passed forcing someone to love their neighbor.  Embezzlement is a crime, but no law can be passed forcing someone to be generous with their employees.  Perjury is a crime, but no law can be passed forcing someone to be consistently honest.

In the same way, many companies have rules set out in inspiring mission statements, guiding principles and value statements, but when push comes to shove their real mission and goals are to meet the shareholders earnings expectations and to drive management bonuses (which are usually based on short-term profit goals).  And many times this is done at the expense of the other stakeholders (customers, employees, suppliers, creditors, and distributors) who really do add the most value to their organizations.

So companies focus on short-term profitability, while keeping regulatory and liability issues in their peripheral vision. They avoid doing what is absolutely wrong, but their corporate culture does not focus on doing what is right.  Corporate America in general has become greedy and short sighted because most business leaders have lost their moral and ethical way. Without a moral and ethical foundation, people naturally choose what makes them feel good, or look good, but not always what is good.  They choose the least painful or the most profitable solution, and they use situational ethics because they have no absolute standard of what is right or wrong. There’s only acceptable or unacceptable options in any given situation.

By developing a more virtuous form of capitalism by following tried and true moral and ethical guidelines we can define standards of conduct that will prevent moral and ethical lapses in business.  Just as the founding fathers of America applied Judeo-Christian values to our Constitution, yet separated religious organizations from civil affairs, so too can businesses apply these same Judeo-Christian moral and ethical teaching to create a culture of doing what is right while not infringing on anyone’s personal religious beliefs.

Fostering a business attitude of consistently and successfully satisfying customer’s needs is a legitimate profit strategy because it helps companies focus on what’s really important: their customers, employees, suppliers, creditors, and distributors.  These are the stakeholders who really do add the most value to a company.  If a company satisfies the needs of these important stakeholders it will ultimately be more profitable, and this will satisfy the needs of the other important stakeholders: the owners, investors and managers of a company.  And society in general will benefit from a thriving business.  Warren Buffett said it well, “If a business does well, the stock eventually follows.”

It’s essential that a company make a profit otherwise it will go out of business and not survive.  Rather than narrowly focusing on profits, companies should focus instead on satisfying the various needs of its primary stakeholders: the customers, employees, suppliers, creditors, and distributors.  Doing this will not only make a company more profitable, it will produce much better results, prolong its life, and provide its employees and managers with a more fulfilling livelihood.

Profit, after all, is a natural byproduct of consistently and successfully satisfying customer’s needs.  Over the long run, working and doing business in an honest, ethical and moral fashion will be more profitable and professionally rewarding.  Whereas giving in to short-term, expedient solutions is actually more expensive in the long run than doing the right thing in the first place.

If living in a utopian world like that of the fictional 24th century Star Ship Enterprise is something you dream of, then changing our paradigm of the purpose of business will bring us one step closer to realizing that dream.   

Wednesday, November 26, 2014

Thanksgiving Day - the True History by Fred E. Foldvary

The Thanksgiving Day that millions of Americans celebrate, with turkey and stuffing, is a myth. The true history was forgotten long ago, and even most of the history books have it wrong.

The Pilgrims landed in 1620 and founded the Colony of New Plymouth in what is now Massachusetts. They had a difficult first winter, but survived with the help of the Indians. The usual story in the history textbooks relates how in the fall of 1621, the grateful Pilgrims held their first Thanksgiving Day and invited the Indians to a big Thanksgiving-Day feast with turkey and pumpkins.


There was indeed a big feast in 1621, but it was not a Thanksgiving Day. This three-day feast was described in a letter by the colonist Edward Winslow. It was a hunting party with the Indians, but there was no Thanksgiving Day proclamation, nor any mention of a thanksgiving in 1621 in any historical record.


The history of the colony was chronicled by Governor William Bradford in his book, Of Plimouth Plantation, available at many libraries. Bradford relates how the Pilgrims set up a communist system in which they owned the land in common and would also share the harvests in common. By 1623, it became clear this system was not working out well. The men were not eager to work in the fields, since if they worked hard, they would have to share their produce with everyone else. The colonists faced another year of poor harvests. They held a meeting to decide what to do.


As Governor Bradford describes it, "At last after much debate of things, the governor gave way that they should set corn everyman for his own particular... That had very good success for it made all hands very industrious, so much [more] corn was planted than otherwise would have been". The Pilgrims changed their economic system from communism to individual enterprise; the land was still owned in common and could not be sold or inherited, but each family was allotted a portion, and they could keep whatever they grew. The governor "assigned to every family a parcel of land, according to the proportion of their number for that end."


Bradford wrote that their experience taught them that for society as a whole, communism, or sharing all the production, was vain and a failure:


"The experience that has had in this common course and condition, tried sundrie years, and that amongst Godly and sober men, may well evince the Vanities of the conceit of Plato's and other ancients, applauded by some of later times; that the taking away of propertie, and bringing into commone wealth, would make them happy and flourishing, as if they were wiser than God."


Their new incentive-based economic system was great success. It looked like they would have an abundant harvest this time. But then, during the summer, the rains stopped, threatening the crops. The Pilgrims held a "Day of Humiliation" and prayer. The rains came and the harvest was saved. It is logical to surmise that the Pilgrims saw this as a was a sign that God blessed their new economic system, because Governor Bradford proclaimed November 29, 1623, as a Day of Thanksgiving.


This was the first proclamation of thanksgiving found in Bradford's chronicles or any other historical record. The first Thanksgiving Day was therefore in November 1623. Much later, this first Thanksgiving Day became confused and mixed up with the shooting party with the Indians of 1621. And in the mixup, the great economics lesson was forgotten and then discarded by the time the Plymouth Colony merged with the Massachusetts Bay Colony in 1691.


The Pilgrims recognized that the land itself would be their common community property, but that it is proper for the fruits of the labor of each person and family to belong to those who produced them. This was the great economics lesson about incentives that the Pilgrims learned, a lesson that so impressed them that they commemorated it every year thereafter. This should have been the day we remember their vital economics lesson, but this lesson was later forgotten in the mixup with the shooting party with the Indians!


This bitter lesson would be learned all over again by the people of the Soviet Union and other command economies, where socialism and communalism of production failed again. Fortunately the Pilgrims, a smaller community in simpler times, were able to switch quickly and realize the great prosperity that comes from applying the two principles of individual enterprise: sharing the benefits of land, and keeping what you individually earn.


Thanksgiving Day should be remembered not just as a day when we give thanks for our abundance, but more deeply and historically why we have this abundance. In our Thanksgiving Day celebrations, let us therefore tell one another the true origins of the thanksgiving and the great economic lesson that the Pilgrims hoped we would remember.

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