Tuesday, October 23, 2007

What if we measured a community's capitalized income stream?

As I was sitting during our 22nd Caux Round Table Global Dialogue in Seattle last week listening to a discussion of intangible assets as enhancing company value, my thoughts suddenly jumped to a construct of a community – city or nation – as a company.

What occurred to me was a thought form of the community as a system of cooperation to achieve better outcomes in this world for its members. How would we measure the success or failure of such a venture? What would be its bottom-line metrics?

Well, in the first place they would be mostly intangible – quality of life, educational achievement, health – mental as well as physical, culture, morality, happiness, in addition to wealth, infrastructure, rule of law etc.

Then I thought what if we got simple and looked to the income flow of the community – to the entire amount of earnings that flowed to its members in a year. The more income, the higher the capital value of the community. Lower income would result in a lower capital value.

We would need to arrive at a capitalization multiplier to apply to the income stream to establish the capital value number – a million dollars income X 10 would be a capital value of ten million. If the capitalization multiplier were higher, the community would be worth more; if the multiplier were less, the community would be worth less.

So what? I then thought.

Well, if a community has higher income or a higher capitalization multiplier, it could do more – pay more in taxes, buy more goods, spend more on culture, public health, education, obtain a more reliable and fulsome social safety net, build better roads, buy newer, more sustainable technologies, take better care of the environment. In short, with more money, it could provide for more social justice.

And, further, higher value would mean that members of the community would be able to move up Maslow’s scale of needs and motivations from satisfaction of the material to cultivating more abstract concerns for meaning and purpose.

The capitalization multiplier would be some measure of social capital – the risk of loss or harm to the income flow as against the chance of increasing progress and success.

But with respect to both earning income and having a high capitalization multiplier, business would be central to community justice. Business – of all forms – is the primary generator of income for any community.

We might do well, therefore, to value well what business can do for us and so work to minimize its harmful externalities.

Just a thought.

Thursday, October 11, 2007

What is so culturally different about American Capitalism?

In so many conversations about the ethics of business, corporate social responsibility, and social safety nets – especially in Europe – American capitalism has been singled out as being more harsh than other national versions of the free market economic system.

America, it is said, glorifies “cowboy” capitalism, a full adversarial, devil-take-the-hindmost, form of competitive advantage where the investor’s dollar trumps all other values and where the money kings of Wall Street set the goalposts of success.

It does seem to be true that the voice of free market fundamentalists is stronger in American culture and politics than it is in the UK, Canada, Australia and Europe, all of which share common cultural origins.

For these American secular fundamentalists, as seems to be the case for many other kinds of fundamentalism, a sense of self-righteousness about their beliefs and behaviors is palpable in their conversations and their judgments. They are convinced that wealth elevates and brings with it moral redemption.

So, for example, from this perspective, government taxation of private wealth is an invasion of one’s personal righteousness and an attack on one’s meritorious achievements. The approach is a curious blend of materialism and spiritual superiority, but it galvanized the politics of Ronald Reagan and George W. Bush, among others.

At the level of the corporation, this creed holds that seeking bottom line financial profits is sufficient to meet moral expectations of right conduct in business.

Where did this fundamentalism in business ethics come from?

I think I have finally stumbled across the foundational experience of this special American approach. It was in the 1880’s, especially in the year 1883 when Yale Professor William Graham Sumner wrote an article entitled “What Social Classes Owe to Each Other”.

Sumner created a fusion of old American Calvinism and Herbert Spencer’s Social Darwinism. The mixture proved to be a heady and powerful brew for subsequent generations of Americans. It became the gospel of the Republican Party which used it to win many elections.

Calvinism had sought eternal salvation from sin through faith and submission to the grace of Jesus Christ. Calvinists were sober, hard working, honest, reliable, trustworthy and, therefore, good credit risks. They gave birth to modern capitalism in Holland, England, Scotland, and the American colonies during the 16th, 17th and 18th centuries.

Calvinism did not set out to create the material advantages of capitalism; rather it appears that capitalism evolved as an unexpected consequence of Calvinist beliefs and behaviors. (This is the thesis of Max Weber, which is noted but controversial, especially on the part of Marxists.)

On the other hand, Herbert Spencer writing in 1851 did not seek to prove the truth of religious beliefs. He was a materialist looking for scientific laws about evolution and necessary human behaviors. Spencer argued that human society was a struggle where the fittest would survive best.

Sumner, in the American Calvinist tradition where correct conduct led to worldly success, fused Calvin’s theology with Spencer’s fascination with competition. Sumner asserted that those who succeeded in the capitalist race for wealth did so because of their character. They were worthy and so their dedication, self-sacrifice, and shouldering of risk were rewarded as if by the laws of nature and nature’s God with material success.

Those who did not succeed, suggested Sumner, were not morally worthy. They were slackers, he said, and received the just deserts of their inferior aptitude for virtue. Their sinfulness, as it were, produced their lower socio-economic condition.

We might say that Sumner’s vision has it that God loves winners; those who gain wealth are winners; those who don’t are losers; God doesn’t love them and so neither should we.

In particular, both Spencer and Sumner vigorously opposed public programs to tax the rich and subsidize the poor. As Sumner put it, the upper social class owed nothing to the lower class. How clear, simple and harsh. He wanted to “put down schemes for making ‘the rich’ pay for whatever ‘the poor’ want.

Sumner said that to learn how to live happily we should investigate “the laws of nature and deduce the rules of right living in the world as it is.” These rules, he said, call for labor and self-denial (how Calvinistic!) repeated over and over again in learning and doing.

Sumner concludes at one point: “Hence it appears that the man who has his self-denial before him, however good may be his intention, can not be as the man who has his self-denial behind him.”

To the victor in the competition demonstrating self-denial go the spoils. He or she becomes the successful capitalist and has wealth to prove his good character.

For Calvin, possession of a character worthy of God’s grace led to other worldly salvation; for Sumner, the American, possession of that same worthy self-discipline, humility and resolve led to capital accumulation and victory in the race of life in this world.

For Sumner then, as for many American social conservatives today, it is not the proper place of government to rearrange what nature and God have ordained.

So American “cowboy” capitalism may not be just run-of-the-mill Social Darwinism, but more exactly a kind of Calvinistic Darwinism.

Friday, October 5, 2007

GM's new union contract - a revolution in capitalism?

A revolution in the modalities of capitalism just happened in the American auto industry and few took notice.

General Motors Corp., a once hugely successful manufacturer of automobiles, negotiated new terms of employment with its union. No doubt, union acceptance of these new terms was forced by the downturn in GM’s profitability and financial prospects.

This year, for the first time, foreign brands captured more than 50% of the domestic American market for automobiles, with Toyota overtaking Ford in number of vehicles sold to boot.

Under the new contract, the United Auto Workers accepted responsibility for payment of health-care needs of retired GM employees, some US$51 billion in future expenses. For its part, GM financed these future costs with a one-time contribution of US$35 billion into a trust fund. The fund will be managed by the union. Income from the fund will pay future health-costs of GM retirees.

By removing from its balance sheet this liability for future costs, GM no longer needs to reserve against such future expenses out of current income. It will become more profitable immediately, or it can cut the prices of its cars to better compete against foreign brands.

The revolution in capitalism inherent in this innovation has two aspects: first, the employer – the capitalist – is no longer put in the position of providing full and fair life-outcomes for its workers. The relationship between capital and labor becomes less adversarial. In classical 19th century capitalism, for the company to gain, its workers must lose, and vice-versa, in a zero-sum competition for a share of enterprise profits. Now, once these future liabilities have been off-loaded from the company to the union, workers - through their union - must look more to their own welfare.

The company can more easily look to the market for pricing signals and brings its costs in line with customer preferences. And from the worker’s perspective, there will be less reason to load all their financial hopes and expectations on the company’s shoulders, forcing it to lose market share through higher costs. With alternative structures protecting their interests, workers can be more market savvy, in line with company needs and objectives.

Second, once unions provide health-care benefits for retirees, they are aligned in concept with provision of other long-term advantages for workers, such as life-long learning, skill enhancements, relocation assistance upon layoffs, etc.

The unions can plan to meet the financial, intellectual and retirement needs of workers more independently and creatively. This challenge, if well met, will give workers new reasons to value union membership as a kind of life-long cooperative to enhance the capital values – skills, educational accomplishment, savings, etc. – that they bring to global competition.