The Enlightened Capitalists

The Enlightened Capitalists: Cautionary Tales of Business Pioneers Who Tried to Do Well by Doing Good  by James O’Toole

Is it possible for a business to make money without exploiting workers, polluting the environment, dodging taxes (and other social responsibilities), or swindling customers? Well, sure. Probably, anyway. At least for a while, under certain conditions. But it’s not as easy as one might think. And those that try often fail. In this book, a business professor at the University of Southern California profiles some ‘enlightened’ business leaders who have tried, and he explains why so few large corporations have been able to adhere to the enlightened principles of their well-meaning founders.

I’ll try to summarize a few key points that I took away from this below.
*SPOILER ALERT* It all comes down to money.

Every now and then, someone with high ideals will start a business that respects all its stakeholders: owners, workers, customers, the local community, the environment, humanity in general…. It acknowledges its impact on them and its responsibilities to them. That’s an ‘enlightened’ way of looking at business.

But there is another way, a Wall Street way. Many people in the business profession seem to believe that the primary business of any business is to make money. In their eyes, a business has a fiduciary responsibility to maximize profits for its owners/investors. And that’s pretty much its only responsibility. Everything else, such as making better products, providing good service, creating jobs, responsibly discarding industrial waste…, aren’t necessary. A business still might do such things, as long as they don’t lower profits, but it isn’t obligated to. If it can get away with making cheaper products, charging its customers more, cutting its workforce, working them harder, paying its remaining employees less, discarding its trash in the local duck pond, and then selling the dead ducks as a secondary product line, then that’s what it should do. That’s good business. Profit comes before all else.

So, when in the course of events and the passage of time, control of a business passes from its original enlightened founders and into the hands of investors, priorities change. The business that had once been someone’s life’s work, possibly with a goal of making at least one small corner of the world a better place, comes under the control of people who view it as little more than another profit generator. With little or no personal stake in the business, it’s employees, or the surrounding community, the investors demand higher profits. New managers are brought it, managers who share the ‘normal’ business school outlook. With a keen eye and the ethical principles of loan sharks, they review the practices of the newly acquired business and discard those that don’t add to the next quarter’s profits. If the business still can’t generate the level of profits needed, they have no qualms about dismembering it and selling the parts.

The author doesn’t really provide any solutions to this state of affairs. Sadly, it seems to be an unavoidable consequence of free market capitalism. He is writing, as the subtitle states, a collection of cautionary tales to warn current and future entrepreneurs of what to expect if they seek to go public by selling stock to investors. He’s warning them that they have to decide if the ‘soul’ of their company matters more than the money they can get from selling it.

Empty Planet

Empty Planet: The Shock of Global Population Decline by Darrell Bricker and John Ibbitson

Birth rates are falling. In many countries, fewer children are being born than are needed to replace the previous generation. (The replacement rate is 2.1 – each woman, on average, would need to have 2.1 children to maintain a population at its current level.) In some nations, the populations are already falling. In others, the populations are being bolstered through immigration. That seems to be the central point the authors are making in this book. Immigration can offset the declining birthrate of the native population and allow nations to maintain robust and even growing populations and economies. Nations that severely restrict immigration, such as China and Japan, are likely to find themselves in a world of hurt as their populations age and they are left with too few people of working age to support or care for their senior citizens.

That’s all true and fairly obvious. Immigration has long been a proven means of creating and maintaining a vibrant economy, although it takes a special kind of society to embrace it. Those that are especially xenophobic cannot, but nations like the United States and Canada, which are defined as as being nations of immigrants, may do well…at least for a while (unless they screw up by closing their borders).

But immigration is not a long term solution because, as the authors point out, the declining birthrate is a global phenomenon. As societies become more urban, educated, secular, free, gender-equal, affluent, and healthy, they have fewer children. And although there are no guarantees, it seems reasonable to expect that these kinds of societal advances will continue to be achieved by nations around the world. This may take longer than the authors seem to envision. Societal change can be slow. There are even people who cherish traditions that enforce ignorance, superstition, and oppression and are willing to go to extreme measures to preserve them. But these are exceptions, and eventually, and not all that far in the future, the global population seems likely to start falling.

This, of course, has all sorts of implications, both good and bad. Pollution is likely to decrease. The number of fish in the sea is likely to increase. But the world economy may suffer from lack of workers and consumers and, as may all of the old folks who are dependent on them. Innovation may slow because of fewer young minds working on fresh ideas. This book doesn’t go into any detail about the cultural and technological changes that might mitigate such problems, but I can imagine several, which is why the prospect of a declining population wouldn’t bother me even if I were young enough to still be alive to witness it.

All in all, this is highly readable book about an important issue. I recommend it.

Debt: The First 5,000 Years

Some debts are formal and quantifiable, like the ones you take on in our modern world when you buy a house or a car. Some are not, like when you tell someone you owe them one or that you’re in their debt when they do you a favor. The latter kind came first. Before there was money, people did one another favors and built a kind of social credit based on their honor and their reputation. In close knit communities, most exchanges, even for things like eggs and milk, were based on people swapping favors. Everyone carried a social debt and everyone was a social creditor.

Despite popular myths about the origins of money, there never was an economy based on barter. Direct trades of one item for another were uncommon and only needed between people who did not trust one another. The very first economies were based on a kind of communistic cooperation. Competitive economics, the kind in which people selfishly seek gain or attempt to come out ahead in a deal, came later. In large part, it was necessitated by war.

As the title states, this book is a history of debt. But it’s also about money, wealth, poverty, capitalism, and people. But is all comes back to debt because it’s about what we owe to one another. It’s an informative and enlightening read.

The Unbanking of America

The Unbanking of America: How the New Middle Class Survives by Lisa Servon

Taking jobs at a check cashing service in New York, and at a payday lender in California, a professor at the University of Pennsylvania (and a writer and lecturer on consumer financial services) attempts to obtain some ground truth on the plight of financially insecure Americans.

I think it comes as no surprise that a great many Americans are struggling financially. The economy isn’t what it once was. Adjusted for inflation, wages have declined since 1972. Secure jobs with benefits are relatively scarce. Although productivity has increased over the past few decades, most of the resulting benefits have filtered up to CEOs, managers, and stockholders. They no longer trickle down as pay raises or benefits for average workers. Personally, I don’t see how this situation is sustainable. Too many people are living paycheck to paycheck, saving little, and are unable to cover contingencies such as medical expenses or car repairs, let alone luxuries. What may come as a surprise to some is how pervasive economic insecurity is. It’s not just for the poor anymore. It’s now affecting the middle class. Far too many find themselves marginalized in an economy that still hinges on consumer spending. With so many consumers effectively excluded, how can the system endure?

Anyone interested in this subject has seen the statistics. The author of this book goes beyond those to the personal level, showing what the impact is on some of these excluded individuals and relating how they cope. Many have turned away from banks to alternative financial services such as check cashers and payday lenders. When you simply look at the numbers, these services may seem predatory. Paying close to 2% of the value to cash a check, or 400% annual interest on a payday loan certainly seem excessive. But for some, this turns out to actually be less expensive than similar services from traditional banks, which do not offer small, short-term, unsecured loans, and charge exorbitant fees for maintaining low balances and for overdrafts. It’s an interesting read about a subject that I think should be getting more political attention. There is a problem here that needs to be addressed.

Everybody Lies

Everybody Lies: Big Data, New Data, and What the Internet Can Tell Us About Who We Really Are by Seth Stephens-Davidowitz

Will the availability of Big Data permit the social sciences to collect objective information, test hypotheses, and provide predictions in ways traditionally possible only for the hard sciences? In this book, a bright young economist argues that that the answer may be yes.

The title, Everybody Lies, refers to the fact that people lie, a lot, about all sorts of things. They lie in interviews, on surveys, and even on anonymous opinion polls. They even lie to themselves. Until recently, the best way for social scientists to understand what people were thinking and feeling was to ask them. But because people lie, the information collected was unavoidably flawed. Enter Big Data. It seems a person’s internet searches and online activity are better predictors of their behavior than what they are likely to tell you. Mining such data is becoming not only a powerful tool for the social sciences but also a big business.

Despite the author’s undergraduate degree in philosophy, he doesn’t address the question of whether or not this is a ‘good’ thing. He makes few value calls. He simply demonstrates that these data are out there, and they can be used to understand, predict, and even manipulate human behavior. But there is an an unaddressed ethical question here. Can special interests successfully manipulate human attitudes and behavior for selfish economic or political gain? Are they doing so already? That’s a rhetorical question, of course. Advertisers and politicians have been waging wars of domination for the minds of people for years, but now with Big Data, they’re better armed. My cynical soul quivers at the thought.

Glass House

Glass House: The 1% Economy and the Shattering of the All-American Town by Brian Alexander

The business of business is to make money. That’s the basic premise of an economic theory advocated by the late Milton Friedman and embraced by politicians from Reagan to Trump. Investors entrust companies and corporations with money with the expectation of receiving even more money. Investor value is therefor the primary concern of businesses. It’s not about producing goods and services, at least not primarily. Those are simply a means for making money. It’s certainly not about creating good-paying jobs. Employees are human resources to be used as needed and discarded when not, just like any other resource. An efficient business creates as much product as it can sell while employing as few people as possible, paying them only what it must. Anything beyond that cuts into profits that could otherwise be returned to investors. Generating more money at less cost makes a business efficient. It makes it successful. It increases its value and attractiveness for even more investment. It raises the price investors can get when they want to sell their shares. It’s a fairly simple idea. Investors provide capital to fund businesses in which workers create wealth, and then the investors extract the wealth beyond that necessary to maintain the business. It’s a great mechanism for making money, and somehow, through the magic of the invisible hand of free market capitalism, it brings prosperity to all. Or so the theory goes.

Glass House provides a case study of how the theory has worked for Lancaster, Ohio. It’s a compelling account of the Anchor-Hocking glass company, once a major U.S. producer of glassware and the lifeblood of this small city. The company has generated a lot of wealth for investors over the last half century, but there has been a cost. This is the story of those who paid it.

New York 2140

New York 2140 by Kim Stanley Robinson

This book firmly stands in the tradition of cautionary tales of the future that have been told in such classics as Brave New World, 1984, and Fahrenheit 451. The title, New York 2140, tells you when and where the story is set, and the cover art suggests one of the two great threats to human civilization it is warning us about. That’s right. It’s climate change. Our imaginary descendants in this this book are muddling through that, as humans tend to do. We’re innovative and adaptive creatures, after all. We may not have a lot of foresight when it comes to avoiding self-inflicted injuries, but when we do harm ourselves, we’re quick to apply a bandage and get on with life.

The other existential threat featured in this story is—
No, not terrorism.
Not another large asteroid.
Not religious extremism.
Not alien invaders.
Not renegade robots or homicidal artificial intelligence.
No, Not even Donald Trump.
As scary as those are, the threat Kim Stanley Robinson warns us about here is far more insidious, and it’s real.

Wall Street.

The author obviously did some background reading in economics as he was drafting this fictional book because the kinds of financial manipulation he describes are far from fictional. They have gone on and are going on still today. (I’ll list a few recent and popular books on the subject that he may have consulted below. You may want to read them. But I’ll warn you; they’re scary.) But New York 2140 book isn’t just a warning, or an apocalyptic thriller, or a tale of likeable characters overcoming adversity. It’s not even just a painless lesson on macroeconomics. It is all of those, but it also proposes a course of action that could, conceivably, change things. To say what that is would be a spoiler, so I won’t. I will, however, recommend this book.

——————–
Makers and Takers: The Rise of Finance and the Fall of American Business
The New Grand Strategy: Restoring America’s Prosperity, Security, and Sustainability in the 21st Century
Saving Capitalism: For the Many, Not the Few
Capital in the Twenty-First Century

The Money Makers

The Money Makers: How Roosevelt and Keynes Ended the Depression, Defeated Fascism, and Secured a Prosperous Peace by Eric Rauchway

It is said that history repeats itself. That’s not quite true, but it does often rhyme. When FDR took office in in 1933, the United States was in much worse shape than it is today. The Great Depression had destroyed businesses and jobs. Discontent was raging, and there was a real threat of populist movements that regarded democratic capitalism as a failure and were willing to consider fascism, communism, or some kind of totalitarian system to replace it, as long as it provided a promise of security and a sense of hope for the future.

People today are feeling much the same, but for reasons far less dire. Still, with wages stagnant and with the promise of upward mobility lost, there is again this urge to find an alternative. In 1933, Roosevelt understood where the real problem lie, and he drew on the insights of British economist John Maynard Keynes to help him to not only restore the economy but to make America greater than it had ever been. The history related in this book is especially important for our time. As the author says, “So we face a choice. We can return to the lately prevailing orthodoxy that discounted Roosevelt and Keynes, and which led to our current discontents: or we can heed the lessons of their success.” (pg. 245)

The End of Progress

The End of Progress: How Modern Economics Has Failed Us by Graeme Maxton

This isn’t a post-apocalyptic thriller. It’s not a horror story. It’s far scarier. Published in 2011, the author warns of events to come…the rise of religious extremism and right-wing nationalism, the increasing disparity between the rich and everyone else, the exploitation of people and the depletion of natural resources, unmanageable debt and economic collapse…. The cause, he claims (on page 209) is that “Modern economics has twisted the ideas of classical economics. Economics was a subject that originally stemmed from moral philosophy. Its theories were based on concepts of equality, fairness and value, not undeserved profit and selfishness.”

The author suggests that we in Western society, the beneficiaries of the Enlightenment, have forgotten, or are simply ignoring, the aspect of social responsibility inherent in Adam Smith’s theories about the ‘free market’. The enlightened self-interest necessary to guide Smith’s invisible hand is now operating in a very unenlightened manner. We’re still all on board with the self-interest part, though. We’ve come to equate ‘progress’ with ‘profit’, as if money is the only proper way to measure the value of things. We’ve allowed speculators, financiers, and profit-seeking corporations to shape public policy with little or no regard for anything beyond their next quarterly earnings, and we’ve crippled governments from being able to provide a counterbalance to their selfish interests. After all, functional, responsible governments might insist that banks and businesses consider the effects of what they are doing on people other than their shareholders, and that might cut into their short-term profits. We can’t have that!

The author’s observations and predictions are disturbingly accurate, in my opinion, although he tends toward alarmism. He briefly mentions nations such as Germany, which has not allowed the quest for profit to run as badly out of control as the US and UK. But rather than seeing this as a hopeful sign, he suggests that the problems we’ve created are so great that all nations are endangered, regardless of their national policies. He also discounts the efforts of entrepreneurs. He acknowledges that they exist, but he questions their motives. He may be right in this, but when I see people like Elon Musk using his wealth to advance space exploration (Space X); develop new, more efficient transportation (hyperloop and Tesla electric cars); and develop improved solar technology (Solar City roof shingles, etc.), I think that all might not be lost. Yes, governments have weakened. They don’t regulate or tax to the extent they perhaps should. They invest too little in education, scientific research, national infrastructure, and other things of long-term benefit. And there is no doubt that the financial sector is skimming billions of dollars from the economy and providing nothing of true value in return. And many corporations, so concerned with keeping their stock prices and dividends high, are cutting back on R&D and labor. But I have to believe, or at least I want to believe, that there will always be someone, a nation or an individual, who has the right combination of wisdom, assets, and drive, to keep the dream of the Enlightenment alive. In order for humanity to continue to progress, we need that.

The final section of the book is devoted primarily to suggestions of what needs to be done to get us out of the jam we’ve gotten ourselves into. We need to stop consuming so much. We need to be more skeptical. We need to be more optimistic. We need to tax more. We need to develop a new economic model. We need to ask ourselves what life is truly about…. Maybe, but we won’t; at least not before things fall apart. After about two hundred pages convincingly relating how shortsighted and selfish interests have taken over the economy, he tells us it’s possible to turn it around. Who’s going to do that? The same shortsighted selfish people who got us here? They’re the ones in charge now! I wish we could suddenly get a lot wiser, but I’m doubtful. When anticipating collective human behavior, I’ve found it’s normally best not to assume too much. Individually, we can be rational, responsible, and insightful, but as a whole, we tend to behave like an impulsive six-year-old. We’ve dug ourselves a deep hole. For the last thirty-plus years we drank the Kool-Aid that said we could buy on credit, consume, and waste as if the bill would never come due, as if today was all that mattered because tomorrow would take care of itself. Well, we’re fast approaching tomorrow. It looks like it’s going to be pretty dark and cloudy.

 

Makers and Takers

Makers and Takers: The Rise of Finance and the Fall of American Business by Rana Foroohar

It is obvious that there is something fundamentally wrong with our economic system, a system in which the CEO of a corporation is paid several hundred times the wage of its average worker. A system in which the wages of workers have remained flat despite decades of productivity growth. A system in which well over half the wealth of the nation is held by 1% its people. A system in which (as the author tells us) “the top twenty-five hedge fund managers in America make more than all of the country’s kindergarten teachers combined.”

But unjust wealth distribution is not the only problem. Our financial system as it exists today may actually be detrimental to our economy.

In this book, Rana Foroohar (a business writer for Time Magazine and a CNN economic analyst) argues that Wall Street financiers have warped the system to their benefit. They have successfully pushed the idea that making money, rather than making goods, creating jobs, or providing services, is the primary job of any business. They see money as the ultimate gauge for measuring the value of all things, and they treat it almost like a commodity to be traded and manipulated as if it has some intrinsic value.

It doesn’t, of course. Money is simply a tool, a means to facilitate the trade of goods and services. It is, at best, a representation of the value produced by makers who build, grow, and create things that have real value. When banks loan money to makers, they provide a legitimate service. Loans can help business get started. They can help makers make.

But our financial system has mutated beyond simple banking. It has become a system that allows money manipulators to become takers. These takers provide nothing of real value to our economy themselves, but they can skim a great amount of wealth from those who do. Worse, they exert pressure on businesses to maximize short-term monetary gains over long-term growth and innovation. If an expenditure (such as R&D or worker benefits) is unlikely to increase quarterly profits, it’s less likely to be made. Money spent on growing a business is money that can’t be given to investors.

This isn’t a comforting picture. It seems fairly obvious to me that a system that gambles on debt, places quarterly profits above long-term benefits, that skims wealth from those who create it and then hordes that wealth rather than recirculating it back into the real economy, is destined to fail. It has before, most recently in 2008. The government bailed out the financiers then, but the government is heavily in debt now as well, a fact that can also be attributed to the influence of the financiers. Wall Street controls a great deal of wealth, which is used to further the interests of financiers in the halls of government and in the offices of businesses. It promotes policies and practices that allow it to squeeze wealth from the economy like water from a sponge. This can continue only as long as the wealth being created by makers exceeds the wealth being squeezed out by takers. As long as this is true, economic growth can still happen, although much slower than it might be otherwise. When the takers squeeze out as much as goes in, the economy will stagnate. It may collapse.

At the end of this book, Foroohar suggests some strategies to prevent takers from squeezing dry our economy. These include simplifying our economic policies, better regulation of financial services, and a few philosophical changes about what businesses and banking are actually for. I wish I could say that I thought these might happen, but I fear that they won’t. The influence of the financial system is too great. Countering that would take more courage from our politicians and greater interest from voters than they have demonstrated in the recent past.