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

As I was sitting during our 22^nd 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.

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 16^th, 17^th and 18^th 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.

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 19^th 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.

Who is on the central committee of the American ruling class?

An old chestnut of the Marxist left had it that captains of industry were the central committee of the ruling class in capitalist societies. The mythic stereotype persists in progressive circles that what is wrong with society flows from the selfish proclivities of its ruling elite – an elite that, in capitalist societies, grows out of business as lichens on a rock.

Remove the elite, this theory goes, and all will be well, or at least much better.

This month’s Vanity Fair magazine in the United States offers an opportunity to reflect a bit on this thesis about capitalist elites.

The magazine identifies the 100 members of the New American establishment. Where do they come from?

Thirty one made their money in or through Hollywood.

Fifteen come from the world of fashion (Gucci, Revlon, etc.).

Nineteen from the media.

Eighteen from Wall Street or other finance and investment houses.

Nine from business – but consumer businesses like computers, Google, Walmart, Sony, Amazon.com, Starbucks.

Three held political office, but those one was from media and another from Hollywood before they reached elected office.

Then there were five outliers - an architect, a casino owner, a philanthropist, an advertising mogul, and a Russian Oligarch.

This list hardly looks like the traditional capitalist conspiracy to squeeze out the surplus from the sweat of peasants and proletarians.

The themes of success here are: consumer self-indulgence, celebrity, low-brow entertainment, and easy money taken from all those tempted to speculate in securities. Kind of a disparagement of American values and standards if you ask me.

Of course, Vanity Fair does not represent your top of the line Marxist sociology or even very good class stratification analysis. But it does reflect well its own cultural biases.

It reveals the commanding heights (again to use old Marxist terms) of the post-industrial society.

I am not sure what systematic role there might be within this elite for business ethics or corporate social responsibility. Warren Buffet and Bill and Melinda Gates, however, were included in the group and they are major philanthropic donors now. So all is not lost.

No Free Lunch

A story in our local paper makes for general reflection about markets and capitalism.

Out of concern to reduce greenhouse gas production and hold off global warming, many are turning to the use of ethanol for a fuel. Ethanol in the United States is made from corn. Demand for ethanol is pushing up the price of field corn. This makes some farmers very happy.

But not all farmers. The corn farmer's win is the hog farmer's loss - and the dairy farmer and those who feed cattle for the slaughterhouses. Corn is a cost for these farmers, so higher corn prices mean lower profits for them or higher prices for consumers of meat and dairy products.

The National Corn Growers Association is lobbing the Congress for more ethanol production but the meat and dairy lobbyists are opposed.

Prices are like that; they divide to conquer. A high price is good for some and bad for others and vice-versa. It is hard to think of a price that can keep everyone happy in the status quo. Prices change and such changes impact standards of living, use of technology, accumulation of savings, etc. Markets are constantly shifting opportunities and upsetting establishments. They are demanding and uncompromising. Some would say disciplined while others call them immoral and insensitive to human needs.

One has to be nimble and flexible to ride the currents of markets without capsizing. Facing up to the need for change, for invention, adaptation, is a character trait and an intellectual ability. Surviving in a market environment is a return on human capital.

But it also takes finance capital. Having a rainy day fund makes it more probable that new opportunities will be found and used when prices shift against status quo expectations.

Steve Young

For Samuel P. Huntington

Where have all the ideas gone?

We have academics by the droves and more graduating every year but where are the ideas that drive civilization to its highest and best uses?

As modern society specializes more and more, sub-divides and compartmentalizes to get better mastery of technique, great and grand ideas are more and more marginalized and pushed to the sides of our consciousness. Nowhere is this more true than academia where professionalization in specialities leads to promotion.

Prof. Samuel P. Huntington over a decade ago put forth an idea - is there an inevitable clash of civilizations? His vision of a problem has colored our lives and policies after the collapse of Communist and the rise of sectarian fundamentalism and ethnic zenophobias.

Sam was my tutor 40 years ago in my senior year of undergraduate study. I have kept in touch, not regularly but fondly, now and then over the years. Sam has remembered me and been warm and helpful in our subsequent meetings.

But I learned yesterday that he is not well and most likely will be unable to contribute any more "ideas" to academia and global civilization.

Sic Transit Gloria Mundi. All must pass and this too will pass.

But right now I feel a deeper sadness over the sumbolism of this loss - where are the ideas? How will we move forward for our children and grandchildren without ideas? How will we find courage and the will to work for a common good without profound thoughts and understandings?

If all is trivialized, then everything about us, in us, around us, will be trivialized.

I feel grateful to have worked with and been challenged by Sam Huntington.

And I hope our work at the Caux Round Table will always gather in and promote "ideas" in the face of all that seeks to marginalize our humanity.

Steve Young

Look what the cat brought in!

from Warsaw

Globalization has its fans and its detractors. Human trafficking around the world has indeed spread new technologies and changed living conditions. But transportation as a human contrivance has its drawbacks as well.

I think of invasive species coming into the United States through international commerce: the Zebra mussel and Dutch Elm Disease and now Asian pythons loose in the Florida swamps and doing very well in their new habitat to the distress of older occupants.

But a visit to Cracow yesterday brought me an example of humans as invasion species. There is now a booming trourist trade from the UK and Ireland of people coming just to Cracow for a weekend to get as drunk as their bodies can stand. They fly in on cheap discount airline flights. They get so drunk they fall over over the streets around the old market square.

A brochure in my hotel room advertised the "booze cruise" - you sign up for a cruise on the river to get so drunk that you can't walk - but the boat has chaperons at the railing to keep you from falling in the Vistula River. But you are assured by the brochure, no matter what, the booze will keep flowing.

Cracovians are less than pleased with this turn in their tourist market. One said to me: "This is not what we had in mind when we joined the European Union."

They also worry over a Gresham's law of tourism - offensive tourists drive away the good ones.
and cheapen in all manner of ways the community that seeks to live off the largess of strangers.

Entrepreneurial cost-cutting as an innovation in service delivery has led to this threat to an existing environment. Do these innovative carriers have some social responsibility to correct the external costs to older Cracow customs and habits that their actions have caused?

Should they raise fares to reduce demand for the service? Screen their passengers? Demand damage deposits payable to the city of Cracow?

Should Cracow impose a tax on drinks? Ask tourists to get a license in order to drink within city limits?

Steve Young
Sept 9, 2007