It’s the Economy Stupid! The Five Myths of Capitalism – Part 5 of 5

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I stated in parts 1-4, that unless we change our attitudes and policies regarding Corporate Capitalism, it will destroy our country, our way of life, our freedoms, and our environment.  Furthermore, we will undoubtedly take some of the rest of the world along with us.  This is a serious accusation and one I do not take lightly.

I have already described four of the five myths that are largely responsible for the mistaken policies and laws that have allowed Corporate Capitalism to become a dangerous disease.  A disease that is infecting our government and policies in myriad ways and causing untold damage to our country and the world.

In this blog, I will describe Myth #5 and how it contributes to the problems we are now facing.  Myth #5 is:

What’s Good for Corporate America is Good for the USA:

shanghai-gm-monoply-guy-720x340 (1)A version of this myth is the “Too big too fail idea” widely heard during the “Great Recession” and now during the Coronavirus epidemic.  General Motors was one of the first giant corporations in America and even as late as 2019, it was ranked 13th on the Fortune 500 rankings of the largest United States corporations by total revenue.  In 1952 during his nomination hearing for Secretary of Defense, Charles Wilson (former CEO of General Motors) was asked if he could make a decision as Secretary of Defense that ran contrary to the interests of his former company.  He replied with the now infamous remark YES but that he could not conceive of such a situation: “because for years I thought what was good for our country was good for General Motors, and vice versa.” — Wikipedia

220px-23_Things_They_Don't_Tell_You_About_Capitalism_cover_artThe foregoing belief in the common interests that corporations shared with America came to epitomize the ideology of Corporate America.  American corporations then used the media and astute public relations to convince the majority of US citizens that they are indispensable, and that the welfare of the average person depended on the welfare of the corporation.  To put it another way, the interests of a giant corporation are claimed to be synonymous with the interests of the average person. “What is good for America’s Corporations is good for You.”  “What is good for Microsoft, Google, Amazon, Exxon, Facebook and Pfizer is good for you.

This belief system, that corporate welfare is synonymous with our country’s welfare, is inevitably betrayed by at least two major factors.  These include: Externalities and Short-Term Thinking.

  1. Externalities (Lack of responsibility)

imagesWhen a company makes and sells a product, it is no longer responsible for the effects of that product on either the buyer or the environment.  Unless evidence can be shown that somehow the corporation either lied or had some kind of criminal intent in the sales process, the consumer and society are responsible for the negative effects that a product or service might have.  For instance, oil companies sell gasoline but are not responsible for the effects of polluting the atmosphere by burning gasoline.  Another example is the packaging that many companies use for their products.  Amazon is notorious for over boxing even the smallest products.  The boxes must then be thrown away or recycled in a landfill.  However, the cost of this recycling is not born by Amazon but ultimately by the taxpayer who must pay for the recycling through taxes or direct payments.  Meanwhile, Amazon makes a great profit by being able to take advantage of tax loopholes and escaping any costs.  These costs are called in economic terms: “Externalities.”

“In economics, an externality is the cost or benefit that affects a third party who did not choose to incur that cost or benefit.”  Wikipedia

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  1. Short-term thinking

Corporations will tell you that consumers benefit from the aforementioned transfers of costs.  The consumer pays a cheaper price for the product than he/she would if the total costs to the environment were factored in.  However, this is only considering short-term costs.  In the long term, the consumer/taxpayer pays a much greater cost.  For instance, the pollution in the atmosphere has caused the overall temperature of the earth to rise resulting in global warming.  This warming has destabilized weather patterns all over the earth resulting in extremes of weather:  more frequent tornadoes, stronger hurricanes, longer droughts, greater rain in many areas resulting in flooding.

The impacts of these weather changes have already cost the world billions of dollars.  One study found that: “Climate change could directly cost the world economy $7.9 trillion by mid-century as increased drought, flooding and crop failures hamper growth and threaten infrastructure.”Climate impacts ‘to cost world $7.9 trillion’ by 2050.  This study does not measure the misery to human beings all over the earth in terms of famine, pestilence and the impact of more and more “natural” disasters.

So, what we have here is the typical example of “Short-Term” thinking on the part of our Corporate Capitalistic economic system.  From worrying about the daily price of their stocks, the quarterly dividend, the monthly financial statements and the quarterly financial reports, corporations are guided by short-term thinking.  They will compete for short-term profits at the cost of destroying our environment, our way of living and ultimately our world.  This is the nature of the beast as it is bred and chartered.

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When I was a store manager at the now defunct W.T. Grant Company, we used to get a report each month which showed us our store ranking in relation to the 200 or so other stores in our division.  Our regional management would send these out every month to motivate us to raise our ranking.  Thus, if we were ranked 76th out of 200 in sales and profits, it would behoove us to try to improve.  However, these rankings were more or less random since some stores would always be in the top rank because of their size or other demographics.  Even without changing a single factor in our operation, the next month might see our ranking go up to 50th.  This could simply mean that our seasonal sales had kicked in before some other store areas.  The following month we might drop to 125th out of 200.

Each month brought a great deal of shifting between stores.  One soon learned that these reports were worthless.  We regarded them as a big joke.  They told us nothing except that management was focused on the short-term and that it could not look longer ahead than a month.  I worked for W.T. Grant for two years and left 4 years before they went bankrupt.  At the time of their bankruptcy, they were the largest American corporation to ever declare bankruptcy.

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A number of years ago, the average lifespan of an American corporation was 60 years.  The first list of Fortune 100 companies published in 1954 showed that less than fifty years later more than ½ of these companies no longer existed.  A corporation which is regarded as a person by such ridiculous decisions as “Citizens United” lives considerably less than the lifespan of an average person.  Even that limited a lifespan for a corporation has dropped.  The average age of an S&P 500 company is now under 20 years, down from 60 years in the 1950s, according to Credit Suisse.

Why? You may well ask.  The answer is simple.  For two reasons:  Greed and Stupidity.  Hardly a corporation in America does not create a “strategic plan.”  I have helped formulate and facilitate many a strategic planning session.  The most difficult part of planning is to get companies to think long-term.  Partially, this is due to the extremely volatile nature of business and the competition that companies face.  An even bigger part of the problem is the nature of management thinking.  There are some notable exceptions to this prevalent thinking:

“In Warren Buffett’s 2010 annual letter to shareholders he mentions the advantage Berkshire Hathaway has because it doesn’t focus on short term results”:

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“At GEICO, for example, we enthusiastically spent $900 million last year on advertising to obtain policyholders who deliver us no immediate profits.  If we could spend twice that amount productively, we would happily do so though short-term results would be further penalized. Many large investments at our railroad and utility operations are also made with an eye to payoffs well down the road.  At Berkshire, managers can focus on running their businesses: They are not subjected to meetings at headquarters nor financing worries nor Wall Street harassment. They simply get a letter from me every two years and call me when they wish.”  — Dr. Deming’s 7 deadly diseases by John Hunter

downloadDr. Deming wrote reams about the failure of management to balance what he called the “Problems of Today” with the “Problems of Tomorrow.”  I would typically hear when beginning a consulting engagement numerous reasons why “it could not be done.”  One of the most common excuses was expressed colloquially as “We are up to our ass in alligators.”  Another excuse was “We have too many fires to put out.”  I was fond of reciting Dr. Deming’s comment that, “Putting out fires is not improvement.  Finding a point out of control, finding the special cause and removing it, is only putting the process back to where it was in the first place. It is not improvement of the process.” — Out of the Crisis,  W. E. Deming

I have already mentioned in Part 2 on the Efficiency Myth that most corporations never really understood the idea of continuous improvement.  The focus of management is for the most part, a focus on quick fixes and short-term thinking that can bring quick profits regardless of the hidden costs and externalities.  Thus, the belief that what is good for a corporation is good for its citizens is not just false but dangerous.  To hold this belief is like trusting a rattlesnake not to bite you.  You might think that the rattlesnake is your friend until the day it bites you.  You are no more a friend to an American corporation than you are a friend to a rattlesnake.

41bf5SeawKL._SX331_BO1,204,203,200_I have sat in many boardrooms for many planning meetings, and seldom did I ever hear an executive worrying about the environment or the hidden costs of externalities.  The oft assumed legal mandate of a corporation is to make a profit.  However, corporate law states that a company does not have to pursue profit maximization at all costs.  This is idealistic though since the tendency in the marketplace and short-term thinking push corporations to ignore other considerations and pursue profits at all costs.  It is also much easier to measure profits than it is to measure a “good” to the environment or a “good” to the social system.  Thus, generally profits will trump other considerations in running an effective business.

Conclusion:

What is to be done?  How do we restore the proper balance of power to ensure that Corporations serve the country and not that the country serve the corporations?

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I think it will require the following major actions:

  1. We must overturn the US Supreme Court’s ruling in Citizens United
  2. We must change corporate law to do the following:
    1. Place size limits on corporations
    2. Place limits on the number of companies a corporation may acquire
    3. Regain citizen control by changing the corporate charter
  3. We must place limits on the exercise of lobbying
  4. We must stop corporate donations to political candidates
  5. We must place limits on the hiring of corporate executives to manage and oversee the government agencies that regulate their industry

There are many other things that can be done if we as citizens recognize that we have the power to take control of corporations.  We have the power to insure that they are acting in the public interest and not the other way around.  Madison Avenue has convinced Americans that what is good for Corporate America is good for the USA.  Nothing could be further from the truth.  It is time we take back our power.

“Corporate social responsibility is measured in terms of businesses improving conditions for their employees, shareholders, communities, and environment. But moral responsibility goes further, reflecting the need for corporations to address fundamental ethical issues such as inclusion, dignity, and equality.”Klaus Schwab

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