It’s the Economy Stupid! The Five Myths of Capitalism – Part 4 of 5

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I stated in my three previous blogs 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 been a business educator in higher education and a management consultant to some of the top corporations in the world.  My opinion is not based just on theory or observations.  It is based on the in-depth work that I did with over 32 companies during the time I was actively consulting.  There are many good people working in corporate America but as Dr. Deming once said “You put a good person in a bad system and the system will win every time.  There are Five Myths of Capitalism that are largely responsible for the mistaken policies and laws that have allowed Corporate Capitalism to become a dangerous disease infecting our way of life and causing untold damage to our country.

In my previous blogs, I described the first three myths.  In this blog, I will describe Myth #4 and how it contributes to the destruction of our country.  Myth #4 is:

4.  Corporations are Efficient and Always More Efficient than the Government

In 1986, I was hired by Process Management Institute (PMI) to help merge organization development with statistics.  I had just finished my Ph.D. degree in Training and Organization Development from the University of Minnesota.  Lou Schultz, the CEO of PMI had started the company about three years before I joined.  The company was founded on and sold the methodology and philosophy of Dr. W. Edwards Deming.  Lou had met Dr. W. E. Deming when Lou worked at Control Data (CD).

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Lou was a manager at CD when sometime in the early 80’s Control Data hired Dr. Deming to help them implement his famous quality improvement process.  Lou realized that Dr. Deming had something that America needed, and he decided to leave Control Data and start a consulting firm.  The focus of this firm would be to help bring the Deming Philosophy to businesses in the USA.  Dr. Deming helped Lou in many ways by encouragement and referral of potential clients.  Lou assisted at more than 60 of the 4-day seminars that Dr. Deming had started after he was featured prominently in a TV documentary on quality.  Dr. Deming’s popularity soared after the NBC White Paper TV documentary called “If Japan Can, Why Can’t We” was broadcast.

“If Japan can … Why can’t we? was an American television episode broadcast by NBC News as part of the television show “NBC White Paper” on June 24, 1980, credited with beginning the Quality Revolution and introducing the methods of W. Edwards Deming to American managers that was produced by Clare Crawford-Mason[ and reported on by Lloyd Dobyns.

The report details how the Japanese captured the world automotive and electronics markets by following Deming’s advice to practice continual improvement and think of manufacturing as a system, not as bits or pieces. Crawford-Mason went on to produce; in collaboration with Deming, a 14-hour documentary series detailing his methods through lecture excerpts, interviews, practical demonstrations, and case studies of companies that adopted his methods.”  — Wikipedia

Dr. Deming started a series of four-day seminars to teach his philosophy and methods.  These seminars were a mixture of experiential activities, teaching, discussion, lectures and always Dr. Deming talking about what management did not do right and what they should be doing.  At the time, he had created his famous “14 Points for Management” which together with his statistical philosophy formed the basis for the four days of activities.

IMG_8176-540x405Dr. Deming would do two or three of these a month all over the USA.  He continued these four-day seminars until about six months before he died at the age of 93 in 1993.   Dr. Deming always required help at these seminars since as many as 500 people would usually attend.  I was fortunate enough to help out at four of these seminars.  After getting to know Dr. Deming fairly well, I brought several consulting clients to his home in D.C. to discuss with him personally his ideas on what we were doing right and wrong.  Dr. Deming was always very candid and blunt.  This endeared him to some people, while it turned other people off.

But it is time to get back to the point on corporate efficiency.  I worked with over 32 different clients in my years at PMI and my later independent consulting work.  I worked with clients in government, in military, in non-profit and in for-profit sectors of the economy.  I worked with industries in mining, trucking, healthcare, manufacturing and education.  I published two books on quality and over fifty papers for seminars, journals and presentations.  I did a monthly column for a noted quality journal and did some pro-bono work for various organizations.

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The crux of my client work was to facilitate what we called a quality transformation.  From a system that emphasized production quantity and inspection to a system that emphasized process improvement and quality.  Quality was never a final end state but always a quest for continuous improvement.  Improvement not to meet client expectations but to exceed them.  Deming often pointed out that clients and customers often did not know what they wanted.  “No customer” he would say “was clamoring for a handheld calculator in the seventies.  You must always innovate and delight the customer with new products and new features as well as meeting existing expectations for quality products.”  Dr. Noriaki Kano summarized some of these quality ideas in his famous “Kano Model.”  I had the good fortune to attend one of his seminars in Tokyo while I was on a two-week study mission to Japan in 1993 to visit Japanese companies and study their methods firsthand.  My trip was a joint venture between PM and Komatsu Corporation.  I brought along several clients and we had about 15 participants in all.

“Customer expectations?  Nonsense.  No customer ever asked for the electric light, the pneumatic tire, the VCR, or the CD.  All customer expectations are only what you and your competitor have led him to expect.  He knows nothing else.” — W. Edwards Deming at his Seminars

Later on when I left full-time consulting and went into college teaching, I started using a variety of models to educate my MBA students.  One I was fond of using was a metaphor of a coin to emphasize what a business must do to be successful.  “On one side of the coin is efficiency and on the other side is effectiveness.  An organization must deliver both of these elements to prosper and be successful,” I would preach.   I would then go on to say that traditionally, we think of businesses as being efficient but not necessarily effective.  Efficiency is doing things right while effectiveness is doing the right things.  In other words, business strives to use inputs as efficiently as possible to create a product or service where the value added is greater than the combination of inputs used.  If it does this and has a product or service that is wanted or needed by customers, it will make a profit and stay in business.

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When it comes to “effectiveness” or doing the “right” things, we have a concept here with highly subjective connotations.  “Right” for a business might be doing what they think is best for their customers or their bottom line.  However, doing what is best for a customer, might not meet the needs of other stakeholders.  For instance, customers may desire cigarettes but the negative impact to society as reflected in externalities can be very “un-right” to the rest of the population.  An externality is any difference between the private cost of an action or decision to a business or agency and the social cost.  In simple terms, a negative externality is anything that causes an indirect cost to society.  In the case of cigarettes, this cost is reflected in a number of ways including lost wages, medical costs and insurance costs.

maxresdefaultBy the way, when we think of government organizations it is usually as being much less capable in the efficiency area and much more focused on effectiveness or doing the right things for society.  I suppose that is one of the reasons why it is so easy to ridicule government.  Senator Proxmire was famous for his “Golden Fleece Awards “in which he belittled government agencies for their waste and lack of efficiency.  I have worked or consulted in many government agencies and I have to admit that “efficiency” was often sorely lacking.

Some critics point out that there are negative repercussions from too much emphasis on efficiency.  (HBR, January-February 2019 Issue: Rethinking Efficiency) They argue that organizations need to balance efficiency with resiliency.  One critic noted the problems with Deming’s emphasis on efficiency could lead to sub-optimization of the organization.  It is clear that this critic never read much of Dr. Deming who always emphasized that an organization needed to be looked at as a whole and not piecemeal.  Over emphasis on any one part of an organization could result in a decline in another part.

“Management of a system requires knowledge of the interrelationships between all of the components within the system and of everybody that works in it.” — Dr. W. E. Deming, “The New Economics”

Now you might be agreeing with me that business is not always effective.  However, you may still want to know why (or prove my claim) I say that business efficiency is a myth?  What do I base this assertion on?  I am going to provide three reasons for my claim and explain each of them.

  1. Most corporations do not understand or pursue continuous improvement

For a business to be truly efficient it must focus on the continuous improvement of all operations including people, materials, methods, equipment and information.  The cost of all inputs continually rises and when costs go up and other factors of production stay the same then efficiency declines.  The core of the Deming Philosophy was “Continuous Improvement.”

“Improve constantly and forever the system of production and service, to improve quality and productivity, and thus constantly decrease costs.”  — W. Edwards Deming, “Out of the Crisis”

Many of my clients understood this basic message of the need for continuous improvement, but as I was told by one Japanese management consultant, “You Americans are short-term thinkers.  You worry about the quarterly dividend, the daily stock price and your quarterly financial reports.  In Japan, we do not think quarterly, we think centuries.”  Thus, it was easy for US companies to embrace this message in the late eighties and early nineties when it seemed that everywhere you looked, they were losing market share to the Japanese.  The “Japanese Miracle” was eroding the economic competitive of US business and companies in the US flocked to Dr. Deming to tell them how to emulate the Japanese.

“The pay and privilege of the captains of industry are now so closely linked to the quarterly dividend that they may find it personally unrewarding to do what is right for the company.”  ― W. Edwards Deming, “Out of the Crisis”

The Japanese had assimilated the continuous improvement message of Dr. Deming since it was not really that foreign to their basic worldview.  So what if it took a few years or even decades, the Japanese could be patient.  Unfortunately, American management did not have the same patience.  Quality went gung-ho throughout the US in the nineties.  American corporations bragged about reaching or nearly reaching parity with the Japanese on many measures of the exalted Six Sigma standard of quality.  But Americans have always adored technology and the quick fix over labor inputs and long-term improvements.  The steam engine, the assembly line, the computer and robotically automated processes were all technological advances that have helped the United States become the major economic power in the world.  There is no doubting the positive advances that technology has made in terms of productivity and efficiency in the US.

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The trouble with only relying on technological advances for the next leap forward is similar to a ball team that only relies on home runs rather than base hits.  The base hits may not be as grand as hitting a home run, but they are the key to winning the game.  When computers, automated processes, robots and the Internet started to really proliferate in the US business world, you could start to see the fascination with continuous improvement wane in the eyes of many managers.

In its 2018 Human Capital Trends report, Deloitte found that 47% of business and HR leaders were concerned that modern collaboration tools weren’t actually helping businesses achieve their goals. Between chat windows, project management tools, meeting alerts, and emails, workers find themselves in a constant state of reactive busyness—rather than proactively focusing on meaningful work.” — The Productivity Myth by Ben Taylor, March 19, 2019

O, they still have their quality departments and their six-sigma training but too many companies have gone back to the old standard of “Its good enough” or “Well, we are meeting expectations.”  The drive for continuous improvement has slowly but inexorably dissipated since the early nineties.   US Corporations have once again gone back to the idea of looking for the home run.  Too many hope to find this home run in mergers and acquisitions with new companies that display the dynamism lacking in their older established corporations.

“Since 2000, more than 790,000 transactions have been announced worldwide with a known value of over 57 trillion USD.  In 2018, the number of deals decreased by 8% to about 49’000 transactions, while their value has increased by 4% to 3.8 trillion USD.”  — Institute of Mergers and Acquisitions.

You may well ask then, “How successful are these mergers and acquisitions in terms of adding value for the corporation or even more so for the customers?”  One study done by the Harvard Business School in 2015 found that between seventy to ninety percent of all M&A’s failed.  In my opinion, too many companies want to grow quickly hoping either for an increased economy of scale or to obtain the creativity that has been weaned out of their now bloated bureaucracy.  Too many US companies have abandoned the idea of continuous improvement as too time consuming or too slow.  Hoping to hit more home runs, they would rather focus on a spectacular breakthrough rather than on a slow incremental improvement strategy.  It is strange and sad, that US companies feel it is an either-or trade off.  Either we work on continuous improvement or we work on hitting home runs.  The best strategy is to focus on both.  Few games are ever won by simply using a single strategy.

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2. Goals of short-term profits often lead to long-term losses

For the sake of so-called efficiency, employees are laid-off, training budgets are cut, salaries are frozen, pensions are renegotiated, employee perks are downsized, key processes are outsourced, and supplies are purchased on the basis of low bidder.  My sister always says, “Buy cheap and weep.”  Too much of American industry assumes that cutting costs in the short-term will lead to long-term profits.  Nothing could be further from the truth or more short-sighted in thinking.

Minimizing costs in one place can often lead to maximizing costs in another. Only management is responsible, and I mean top management, for looking at the company as a whole, to minimize total cost and not the cost here or there or there… must get departments to work together. That is difficult in the face of the annual rating… because they get rated on their own performance. — Dr. W. E. Deming

One of Dr. Deming’s 14 Points called for eliminating performance measures for employees and MBOs for management.  I have seen little evidence since Dr. Deming died that companies have made much effort in either area.  Admittedly, you can go on line and find dozens of companies that claim to have streamlined or improved their performance management/appraisal systems but they are still useless since they measure the wrong thing.  Dr. Deming taught that 90 percent or more of the problems in a system or variation in any process are caused by the system and not by the individuals.  Managers work on the system and are thus responsible for making changes and taking out barriers to efficiency that prohibit work from being more productive.  Unless these changes to the system are made, any attempt at measuring or encouraging worker performance or goal setting are ludicrous.  Goals should be set for the system based on realistic measures of its capability but not on individual employees.

 “People with targets and jobs dependent upon meeting them will probably meet the targets – even if they have to destroy the enterprise to do it.”  — W. Edwards Deming

3. Inefficient business practices are epidemic in most organizations

When I started consulting in 1986, it was not unusual to find corporations with 10 or more levels of management.  The chain of command was epidemic in most US companies.  The old idea of “span of control” was imbued in the management practices that guided most businesses.  This large bureaucracy of span of control and chain of command rivaled the inefficiency found in most government organizations.  I could go into dozens of other examples of inefficient business practices, but one will suffice.

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In 1998, I was hired by the Metropolitan Council in Minnesota as a Principal Strategic Planner.  The Metropolitan Council was a regional government agency and planning organization in Minnesota serving the Twin Cities seven-county metropolitan area.  This area accounted for over 55 percent of the state’s population.  My job was to help streamline processes at the Metropolitan Council Division of Environmental Services (MCES) and to help the division improve its delivery of key services.  The MCES was responsible for the management of eight wastewater treatment plants in the seven-county metropolitan area.

Over the years, various teams that I established undertook many processes and successfully improved them.  Always looking for new ideas and areas to improve, I struck upon the idea of doing more on-line meetings and also allowing more employees to work from home.  Both of these ideas were fully supported by existing technology in 2000, but I made little headway in establishing these ideas.  These two ideas ran counter to traditional management philosophies of command and control.  We had entered the 21st Century, but our work processes were still dictated by 20th Century ideas and beliefs.

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When I left the Met Council in 2001, I joined the American Express Technology Division (AET) of American Express Corporation.  I literally jumped out of the frying pan and into the fire.  I had wrongly assumed that they would be more progressive than the Met Council and much to my dismay they were even less progressive.  It was difficult to get my manager to allow either myself or co-workers to work from home since “How would I know what you are doing” was a prevalent theme.  I gave notice only six months after joining American Express.

So now we are in the middle of a world-wide crisis caused by a virus.  The internet has allowed millions of workers to “work from home.”  Many of these Gig workers had been allowed some latitude in working from home but for many of the new Internet workers it was a new and pleasant experience.  However, it took a Pandemic catastrophe to free up the thinking of too many managers in terms of “How will I know what they are doing.”  Such a thought seems ludicrous in the extreme to anyone with a half grain of common sense.

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Unfortunately, many work processes in organizations are still mired in 20th and even 19th century beliefs of how work should be done.  These inefficient and archaic ideas stop many corporations from being nearly as efficient and productive as they could be.  The bottom line is that the vaunted supremacy of private for-profit corporations over government entities is vastly exaggerated and overrated.

I want to end this long blog with a stern reminder.  Few companies have demonstrated any ability to take on the “effectiveness” dimension of government agencies with better results than the government has shown.  Private for-profit charter schools and colleges have been disasters.  Private run prisons are not fairing much better.  They have continued to show a propensity for a lack of cost-effectiveness, security and safety concerns, poor health conditions, and the potential for corruption (see “The Problem with Private Prisons”).  In terms of the privatization of wastewater and water treatment plants, one study of household water expenditures in cities under private and public management in the U.S., came to the following conclusion, “Whether water systems are owned by private firms or governments may, on average, simply not matter much.” — Wikipedia

It hardly seems likely that many people in the US would like to see fire departments, police departments, the military and many regulatory agencies turned into for-profit entities regardless of how efficient they may claim to be.

 

It’s the Economy Stupid! The Five Myths of Capitalism – Part 1 of 5

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There are many theories about what drives progress and change in the world.  Some say Ideology changes the world.  Some say Technology is the main driver of change.  Karl Marx, one of the most famous or infamous men in history, (depending on your beliefs) argued that Economics is the main driver of change in the world.  Much of Marx’s theory is summed up by the term Historical Materialism which can be defined as:

“A theory of history which states that a society’s economic organization fundamentally determines its social institutions and the way that people live and benefit from the means of production in that society.”

marxism-capitalism-1-638Most of what people learn about Marx is far removed from his actual ideas.  Given that Capitalism has been diametrically opposed to the very name of Karl Marx, it is not surprising that he is routinely disparaged.  Even at the University level, it is rare to find anyone studying Marx very deeply.   Many educators and instructors describe Marx’s economic theories as “Totally Discredited.”  Few people in America have any good words for Karl Marx.  Any politician in the USA who might suggest that Marx ever said one good thing or had one good idea would court instant political death.  Marx is the devil in our Capitalistic system.

the economyMarx did of course hate capitalism.  He saw Capitalism as a system that exploited workers and allowed the greedy to benefit at the expense of those less fortunate or less aggressive.

“Capitalism: Teach a man to fish, but the fish he catches aren’t his. They belong to the person paying him to fish, and if he’s lucky, he might get paid enough to buy a few fish for himself.”  — Karl Marx

10665231_470379489743928_2447670465163187643_nThe antipathy directed towards Marx and his critique of Capitalism has discouraged any real in-depth understanding of the limits and myths of Capitalism by most Americans.  Capitalism resides in America on the same level as Mom, God, and Apple Pie.  Woe to anyone who would dare to attack Capitalism.  In the United States, Capitalism is as hallowed an institution as Christianity.  In fact, most Christians think that Capitalism and religion go hand in hand, which to a large extent they sadly do.  Unfortunately, not all Capitalism is the same.  In America, we have a home-grown version that is more appropriately called Corporate Capitalism.  What is the difference you might ask?  Well it gets even more complicated since economists define four types of Capitalism.  These are:  oligarchic capitalism, state-guided capitalism, big-firm capitalism, entrepreneurial capitalism.  The type of Capitalism that I am going to talk about is known as Big Firm Capitalism or Corporate Capitalism.  It has been defined as:

“Corporate capitalism is characterized by the dominance of hierarchical and bureaucratic corporations… A large proportion of the economy of the United States and its labor market falls within corporate control.  In the developed world, corporations dominate the marketplace, comprising 50% or more of all businesses.  Those businesses which are not corporations contain the same bureaucratic structure of corporations, but there is usually a sole owner or group of owners who are liable to bankruptcy and criminal charges relating to their business. Corporations have limited liability and remain less regulated and accountable than sole proprietorships.” — Wikipedia

Before we proceed further, you need to understand one thing.  I am not against corporations per se.  We gain many benefits from corporations.  Corporations are a large part of the foundation of our economy which from strictly a monetary perspective has been phenomenally successful.  The USA has perhaps the most successful economy in history.  I have no problems with the monetary contributions of corporations.

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The problems arise however, in that there are Myths of Corporate Capitalism which serve to hide the negative impacts that corporations have on our country and the rest of the world.  Today, corporations are global entities and their excesses are felt not just in this country but all over the globe.  I believe that unless these excesses are reined in by intelligent oversight and a rewriting of corporate law, they will destroy this country.  Each of these excesses is a Deadly Disease that by itself could do the destruction.  Together these five excesses are leading America away from the vision of our founding fathers.  Life, liberty, and the pursuit of happiness were based on the belief in a democratic system of government that was of the people, by the people and for the people.  We are increasingly standing by while our country becomes a government of the corporation, by the corporation and for the corporation.

The Five Myths of Corporate Capitalism that are destroying America:

  1. Corporations are people

supreme court decisionOver the past 40 years, the Supreme Court has radically expanded constitutional rights for corporations.  The original charters for corporations written in the late 19th century, allowed corporations powers never before seen in companies.  The abuse of these powers soon led to a considerable amount of legislation designed to reign in some of the most egregious of these abuses.  Laws such as the Sherman Anti-Trust Act passed in 1890 to stop monopoly practices and the Clayton Antitrust Act passed in 1914 to stop unethical business practices were somewhat successful at ameliorating corporate abuses.  Unfortunately, corporations were still left with considerable power to thwart the goals of democracy and good government.

From the early 20th Century onwards, corporations continued to use their power to bribe, cajole, and persuade policy makers to give them privileges that once again extended their power. They have since more than made up for the power that they lost in the early part of the 20th century.

“Today, the biggest companies have upwards of 100 lobbyists representing them, allowing them to be everywhere, all the time.  For every dollar spent on lobbying by labor unions and public-interest groups together, large corporations and their associations now spend $34.  Of the 100 organizations that spend the most on lobbying, 95 consistently represent business.”  — “How Corporate Lobbyists Conquered American Democracy” — The Atlantic, Lee Drutman, April 20, 2015.  

corporate powerCorporate interests easily dominate the interests of the common person.  The common person has nowhere near the financial clout of corporations.  In 2010, the Supreme Court passed the Citizens United Decision which gave corporations unlimited power to finance and support political candidates running for office as well as to lobby on behalf of any laws that they wanted.  This decision basically upheld the idea that corporations had a right to free speech much like any citizen of the USA and that campaign spending was simply a manifestation of free speech.  Corporations are now being treated as living breathing people despite the fact that corporations can live forever, and corporations are not organic entities.  They are not born, and they do not die like any other creature on the face of the earth.

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Corporations already had almost unlimited power to influence and coerce politicians to do their will.  The Citizens United Decision took all the brakes out of the system.  You have often heard the parody of the Golden Rule “He who has the gold makes the rules.”  This trope is now a fact of life in America.  Many people no longer bother voting because they believe that voting is a waste of time.  Everyone knows that politicians need an exorbitant amount of money to support their campaign and that once elected they immediately start building their money up for their reelection.   They get the lion’s share of this money from big business interests and associations that support big business interests such as the National Rifle Association (NRA).

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According to campaign finance reports filed with the Federal Election Commission that cover activity from January 1, 2019 through June 30, 2019, congressional candidates collected $389 million and disbursed $172.2 million, political parties received $353.7 million and spent $279.9 million, and political action committees (PACs) raised $958.2 million and spent $818.7 million in the six-month period.  If you total these figures up for money raised in just the first six months of 2019, it equals $1.701 billion dollars.  If there were 100 people in the US Senate and 435 people in the US House of Representatives, this equals approximately $3,179,400 dollars for every one of those politicians in office.  Of course, some will get more, and some will get less, but the majority of this money will be spent helping to support the reelection of each and every one of these honorable men and women.

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Here is a little experiment to show you what this campaign funding could buy.  Consider that the Federal Minimum Wage in the United States as of 2020 is $10 dollars per hour.  A person on minimum wage working full time earns approximately $21,000 dollars a year.  According to the Bureau of Labor Statistics, 1. 8 million Americans work full-time at or below the minimum wage.  If you double the average election campaign fund to equal a full year of collecting money you will get approximately $6.2 million dollars.  Now divide this campaign fund by the average yearly minimum wage of $21 thousand dollars and you get 295.  In other words, one year of campaign funding (an average) would fund a person now working on minimum wage for 295 years.   If you earn the national average of $86,000 dollars a year, it could support you for 72 years.

To say that something is wrong here is an understatement.  We have a sort of self-perpetuating money machine here.  Every year corporations get greedier and seek more profits.  According to Corporate Law that is their primary reason for existence.  Numerous pundits and corporate sympathizers extol the virtue of greed.

Workers Should Be Very Thankful That Corporations Are So Greedy” by Jeffrey Dorfman

greed is goodOne of the most popular movies in the eighties was Wall Street.  In the movie, Michael Douglas gave a “Greed is Good” speech which was actually applauded by audiences all over the United States.  Some corporations have been sued by stockholders for not being greedy enough.

Every year budding politicians need more and more money to get elected.  Corporations are money banks for anyone desiring to run for office.  Corporations provide the funds that politicians need to wage a successful election campaign.  Once elected, elected officials are then beholden to the major corporations and lobbyists whose help they will need to raise the money to get reelected.

Corporations are more than happy to support candidates who will pass bills that help them to make more profits.  Other bills they like are designed to ensure that they can pay less taxes, have fewer environmental regulations, fewer safety and health regulations, pay lower wages, decrease employee pensions and benefits, defeat unions and avoid onerous consumer liability claims.  Any politician who is willing to support the former goals can find numerous corporate lobbyists willing to donate money to help them get elected.  The Citizens United Decision guarantees that corporations can give as much money as they want without breaking any laws.  After all, it is free speech.

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“Warren Buffett worth nearly $80 billion dollars points to the Forbes 400, which lists the wealthiest Americans.  ‘Between the first computation in 1982 and today, the wealth of the 400 increased 29-fold — from $93 billion to $2.7 trillion — while many millions of hardworking citizens remained stuck on an economic treadmill.  During this period, the tsunami of wealth didn’t trickle down.  It surged upward’.”  — Entrepreneurs, January 24th, 2018

In Part 2, I am going to cover the second myth of Corporate Capitalism.  The Myth that laissez faire will somehow result in corporations being self-regulating entities for the common good.

“According to a survey from the Pew Research Center last year, 60 percent of American adults think that three decades from now, the U.S. will be less powerful than it is today. Almost two-thirds say it will be even more divided politically. Fifty-nine percent think the environment will be degraded. Nearly three-quarters say that the gap between the haves and have-nots will be wider. A plurality expects the average family’s standard of living to have declined. Most of us, presumably, have recently become acutely aware of the danger of global plagues.”  — The Atlantic, Kate Julian, April 17, 2020

Why Do We Need “Free Enterprise”?

free-enterprise_logoLast week we looked at the problems of government.  This week, I want to look at the issues both pro and con with “Free Enterprise”.  First of all, let’s start with the obvious:  “Free Enterprise” does not exist.  It is like the Holy Grail, a wonderful concept but a myth.  There are no free lunches and there are no free businesses.  The purpose of a business is as follows:

To provide goods or services that people want or need at a price they can afford and that allows the business enterprise to make a profit. 

Businesses provide value.  If they do not provide value, they become extinct but much faster than dinosaurs.  Businesses exist in an extraordinarily dynamic environment where rapid change and obsolescence creates a life span for most companies that is less than fifty years.  It is a rare organization that makes it to one hundred years or more.

Why we need enterprise is an easy question to answer.  It is clear that people have myriad wants and needs that must be provided for.  However, why not let the Government do it?  Why should enterprise be free?  Why not have planned economies as in socialism?

Both theory and experience can show us the reason why enterprise should be free.   But first, what do we really mean by free.  We certainly do not mean that products, services, land, capital and human resources are free.  Each of these elements is required for a successful business but they must be bought and paid for.  So what do we mean by free?  What are most people talking about when they equate “Free Enterprise” with mom, God, baseball and apple pie?  

Most people talking about “Free Enterprise” have no clue where the term originated or what it really means.  However, these same people take great umbrage at anyone who questions the role of “Free Enterprise” in the USA.  It is interesting how people will defend things they know very little about.  President U. S. Grant questioned how the average Confederate soldier could support the Southern plantation system when the majority of soldiers were about as poor as most slaves and saw little or no benefit from the system they were giving their lives for.  The same is true for many Americans.  Most people in this country are not entrepreneurs nor are they owners.  In fact, most people own little or no stock in any company.   Yet the average American thumps their chest and cries out with great pride that “I support “Free Enterprise”.

“New data from Pew Research suggests that more than half (53 percent) of Americans have absolutely no money in the stock market, including retirement accounts.  The Pew data show that just 15 percent of people with a family income of less than $30,000 per year are invested in the stock market; as families earn more, their participation in the stock market increases.  Fifty-five percent of those who earn between $30,000 and $75,000 per year are invested in the market, while 80 percent of those who earn $75,000 or more are.”

Investopedia explains “Free Enterprise” “The “Free Enterprise” movement started in the 1700s, when many individuals were restricted from starting and owning their own business without the permission of the government.  The movement looked to reduce ownership and other related restrictions, such as how one should operate their business and who they were allowed to trade with.”  In other words, “Free Enterprise” is about being able to run your own business without the government telling you what to do.  A government that probably could not manage a paper bag factory efficiently.

A number of years ago there was a brilliant economic thinker by the name of Adam Smith (1723-1790).  Smith theorized that the most efficient markets would be laissez faire.  Basically, without knowing the terminology of self-organizing systems which we now speak of today, Smith recognized that the laws of pricing and its attendant mechanisms would best provide for a rationale distribution of goods and services that people wanted.  Today, we talk about Complex Adaptive Systems with elements of sensitive dependency and strange attractors and we understand that the Free Market is best described by such terms.  Pricing may be a strange attractor and value one of many conditions that are described as sensitive dependency to initial conditions.   No human being or government can possibly have the capacity or information to efficiently regulate a complex adaptive system.

Nevertheless, today we realize that rules, policies and regulations are essential to a “Free” market.  Think of a sporting event without rules, referees, penalties or umpires.  What you would have these control mechanisms would be chaos and not a game.  You cannot have an Efficient Market (A more appropriate term than Free Market) without rules.  You would have anything but efficiency and no one would benefit.  So some structure and planning is needed.  The problem becomes one when too much structure and too much planning intrude on the operation of the market. This is what you had in the Soviet system and it ultimately led to the collapse of the Soviet Union.

Centralized government planning can be invaluable in helping a nation’s economy.  Countries like Japan and Taiwan which have had a close collaboration between government and private enterprise have done quite well in terms of productivity and economic success.  Even in the USA, there is a great deal of unseen and seen collaboration between government and private enterprise.  However, it is the extremes which create the dangers.  Seldom has government planning been taken to the extremes that it was in the Soviet Union or China before the uprisings in 1989.  Consider the comments of David Elton Trueblood from the Ludwig von Mises Institute:

“It is easy to see, then, that the Soviet system represents a far more radical innovation than it would if it were concerned merely with ownership. The nationalization of the means of production involves a radical shift in the power structure, especially in the eminence accorded to the central planning bodies. The system enables the party machine to have a monopoly of power, for they have all but the legal attributes of ownership. Above all, it allows a few who are the new elite to seek to control the total lives of the masses.” 

EcoPillars for free enterpriseWhat most people despise about communism and centralized government planning is not just the inability to allocate resources effectively and efficiently, but more importantly, the attempt to control the economic choices of citizens and the destruction of entrepreneurial spirit.  Soviet communism went well beyond simple economic planning when it decided that all enterprise would be run by the government.  The profit incentive would be eliminated and the proletariat would control the means of production.  Everyone would be free from being a “wage slave.”  However, this so called freedom actually meant that no one would have any freedom over their economic decisions.  Whether or not the odds favor any of us becoming a billionaire, we all enjoy the hope and dream that we someday might be another Bill Gates or Warren Buffett.  Communism kills that hope and dream.  However, it was the Communist policies towards individual initiative which destroyed the dream and not any single model of centralized government planning.  There are many advantages to some centralized government planning and to throw out all such planning is to throw the baby out with the bathwater.

Free Markets left to their own accord can be monstrously inefficient and ineffective.  Here are some typical examples of market failure:  (Source:  Economics Online)

Productive and allocative inefficiency

Markets may fail to produce and allocate scarce resources in the most efficient way.

Monopoly power

Markets may fail to control the abuses of monopoly power.

Missing markets

Markets may fail to form, resulting in a failure to meet a need or want, such as the need for public goods, such as defense, street lighting, and highways.

Incomplete markets

Markets may fail to produce enough merit goods, such as education and healthcare.

De-merit goods

Markets may also fail to control the manufacture and sale of goods like cigarettes and alcohol, which have less merit than consumers perceive.

Negative externalities

Consumers and producers may fail to take into account the effects of their actions on third-parties, such as car drivers, who may fail to take into account the traffic congestion they create for others. Third-parties are individuals, organizations, or communities indirectly benefiting or suffering as a result of the actions of consumers and producers attempting to pursue their own self-interest.

Property rights

Markets work most effectively when consumers and producers are granted the right to own property, but in many cases property rights cannot easily be allocated to certain resources. Failure to assign property rights may limit the ability of markets to form.

Information failure

Markets may not provide enough information because, during a market transaction, it may not be in the interests of one party to provide full information to the other party.

Unstable markets

Sometimes markets become highly unstable, and a stable equilibrium may not be established, such as with certain agricultural markets, foreign exchange, and credit markets. Such volatility may require intervention.

Inequality

Markets may also fail to limit the size of the gap between income earners, the so-called income gap.  Market transactions reward consumers and producers with incomes and profits, but these rewards may be concentrated in the hands of a few.

I hope you are impressed by the large number and substance of possible market failures.  No doubt there are other examples of “Free Market” failure.   What can be done about these failures?  The answer is simple.  It is the government’s job is to try to rectify these failures but with as light a hand as possible.  Too heavy a hand and it actually ends up stifling and distorting the “Free Market.”  It is apparent from the current animosity towards the government that it is either failing in these tasks or exerting too heavy a hand in the administration of these tasks.  For instance, government critics might point out:

It is hard to imagine any small business or large business having to sort through this many regulations.  Either the business is inundated with red tape and cannot prosper or any prospective business person is discouraged from even trying to start a business.  Both are not conducive to a productive and prosperous economy.

Conclusion: 

We need ““Free Enterprise” or a “Free Market” because it nurtures the human soul.  It is also generally more efficient and effective than any centralized government planning.  We need “Free Enterprise” as the cornerstone of a dynamic democratic government wherein citizens have the liberty to choose their economic endeavors.  No economic system has yet proven to be as resilient and productive as a “Free Market.”  However, there are no perfect systems.  The “Free Market” must have oversight mechanisms.  Like it or not, without government regulations (just like the rules needed in any game), the economic system would devolve into chaos, confusion and a distorted disequilibrium that would quickly have citizens clamoring for a dictator like Hitler and Mussolini who would promise to restore order.  Unfortunately, people would be buying order at the expense of their freedom.  Hitler and Mussolini both made the markets efficient again but at the price of liberty, justice and equality.  If we do not want to pay that price, we must rely on our government to provide the rules, policies and regulations that will keep our economic system viable and FREE.  See my blog “Why do we need government” for an explanation of what citizens must do to insure that government does its job. 

Time for Questions:

What does “Free Enterprise” mean to you?  Have you ever started or run your own business?  Have you ever thought about running your own business?  What is stopping you?  Can you think of any other country where it would be better or easier to start a business than the USA?  Where?  Why?  Do you think that any business has a responsibility to society? Why or why not?

Life is just beginning. 

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