On Capitalism and Greed
M. Orhan Tarhan
July 06, 2008
I have the habit of defining first what I will be talking about. But in this case, I will make an exception for capitalism, because it is the system we are using. My readers don´t need to read a definition of capitalism. But I think, I need to define greed: "it is an excessive desire for more of something (such as money) than is needed."[Merriam-Webster´s Collegiate Dictionary, 11th Edition.]
The popular mind all over the world usually associates capitalism with greed, because they do not quite understand the concept of profit. There is no greed in the normal operation of a corporation. A business may buy some wares from the manufacturer and sells them in retail at a little profit. Or a corporation may manufacture a widget. It pays its raw materials, its labor, its engineers, its clerks and its management and sells its widgets at a little profit. We can talk about greed, only if that business wants to sell its widgets with a 30 , 40, or 50 % profit.
Any business in the theoretical American capitalist system must maintain a three way balance: (1) it must compete for labor (That includes all the employees) in the labor market, (2) it must compete in the market of its products by producing the best products at the lowest prices, in other words, it competes for its customers.
(3) it competes for its share holders by providing big dividends to them which results in the increasing of its stock price. If this balance is not maintained, all sorts of degenerations occur. There is one important condition for this balance to work properly. There must be full competition between several similar businesses. If any single business buys its competition and becomes a monopoly, then the balance is destroyed . The company can ask any price and most likely will get it. The U.S. has laws to maintain the competition in the market.
The competition for labor is complicated by the existence of labor unions. Labor unions pressure companies to provide safe working conditions for its members, a higher pay, a good pension, and long vacations.
Unions have a legal compulsive method to force the businesses to give them what they want. They can strike and shot down the business. In some businesses such as coke plants, sudden shut downs shorten the life of the brick ovens. Thus strike is a very powerful (and some times very dangerous) weapon in the hands of the unions. Here the government usually interferes, because it is the public that suffers (Such as in transportation strikes). During the last 50 years Republicans supported the businesses while the Democrats were on the side of the Unions.
Engineers and scientists do not like to form unions, and engineering and scientific societies do not try to protect the interest of their members. They just help them to find jobs when they are out of work. When labor unions get a raise for their members, most American companies give the same percentage of raise to their non unionized engineers and clerks.
The payment of company management in this country has been highly degenerated. Theoretically, the board of directors is supposed to determine their own salaries and the salary of the CEO. Here the composition of the board of directors is very important. The directors must come from diverse industries. They should have only the interest of the company in mind. But, the CEO may pack the board with his own people and can get for himself astronomical salaries and other incomes. That is of course pure greed and is very destructive to the corporation. Theoretically these salaries are subject to the approval of the share-holders. If the share-holders would do their job right, such huge salaries should be stopped at the yearly share-holders´ meeting. But the American share holder seldom says "no" and rather buys another stock. Actually, share-holders should form share-holder associations and discuss the Board´s salaries critically as well as other problems of the corporation. The worst kind of unpopular behavior is to give bonuses and other income to the CEO, in periods when the corporation is not doing so well, and some employees are laid off. That is a sure way for a CEO to lose the loyalty of the employees. It is a very greedy mistake. Later, when the company is in serious trouble, and the company needs the help of its employees, the employees may find not worthwhile to save a greedy CEO.
When a corporation operates successfully, it is expected to make a lot of profit and to have its stock go up. That is legitimate and has nothing to do with greed. That is how capitalism works. Obviously, a big corporation makes a big profit. Most of the time all of that profit does not go to share-holders. A certain part is reserved for new investments or expanding the business. Another part might be distributed to employees as a bonus for creating that profit.
In LETTER No. 129, Robert Dickie was mentioning a case of greed in Banking: "When the Federal Reserve lowered the prime interest rate (several times) for money borrowed by the banks and financial institutions throughout the country, to ease the pain of their losses from greedy behavior, a comparable lowering of interest rates/financial charges on credit card purchases was not passed along to the consumers. The banks kept the high interest rates on the credit cards to help recover the monies they lost on their bad loans. The people….continue to be taken advantage of because of the greed of the financial institutions (with the tacit approval of the Administration and Congress)"
The popular mind all over the world usually associates capitalism with greed, because they do not quite understand the concept of profit. There is no greed in the normal operation of a corporation. A business may buy some wares from the manufacturer and sells them in retail at a little profit. Or a corporation may manufacture a widget. It pays its raw materials, its labor, its engineers, its clerks and its management and sells its widgets at a little profit. We can talk about greed, only if that business wants to sell its widgets with a 30 , 40, or 50 % profit.
Any business in the theoretical American capitalist system must maintain a three way balance: (1) it must compete for labor (That includes all the employees) in the labor market, (2) it must compete in the market of its products by producing the best products at the lowest prices, in other words, it competes for its customers.
(3) it competes for its share holders by providing big dividends to them which results in the increasing of its stock price. If this balance is not maintained, all sorts of degenerations occur. There is one important condition for this balance to work properly. There must be full competition between several similar businesses. If any single business buys its competition and becomes a monopoly, then the balance is destroyed . The company can ask any price and most likely will get it. The U.S. has laws to maintain the competition in the market.
The competition for labor is complicated by the existence of labor unions. Labor unions pressure companies to provide safe working conditions for its members, a higher pay, a good pension, and long vacations.
Unions have a legal compulsive method to force the businesses to give them what they want. They can strike and shot down the business. In some businesses such as coke plants, sudden shut downs shorten the life of the brick ovens. Thus strike is a very powerful (and some times very dangerous) weapon in the hands of the unions. Here the government usually interferes, because it is the public that suffers (Such as in transportation strikes). During the last 50 years Republicans supported the businesses while the Democrats were on the side of the Unions.
Engineers and scientists do not like to form unions, and engineering and scientific societies do not try to protect the interest of their members. They just help them to find jobs when they are out of work. When labor unions get a raise for their members, most American companies give the same percentage of raise to their non unionized engineers and clerks.
The payment of company management in this country has been highly degenerated. Theoretically, the board of directors is supposed to determine their own salaries and the salary of the CEO. Here the composition of the board of directors is very important. The directors must come from diverse industries. They should have only the interest of the company in mind. But, the CEO may pack the board with his own people and can get for himself astronomical salaries and other incomes. That is of course pure greed and is very destructive to the corporation. Theoretically these salaries are subject to the approval of the share-holders. If the share-holders would do their job right, such huge salaries should be stopped at the yearly share-holders´ meeting. But the American share holder seldom says "no" and rather buys another stock. Actually, share-holders should form share-holder associations and discuss the Board´s salaries critically as well as other problems of the corporation. The worst kind of unpopular behavior is to give bonuses and other income to the CEO, in periods when the corporation is not doing so well, and some employees are laid off. That is a sure way for a CEO to lose the loyalty of the employees. It is a very greedy mistake. Later, when the company is in serious trouble, and the company needs the help of its employees, the employees may find not worthwhile to save a greedy CEO.
When a corporation operates successfully, it is expected to make a lot of profit and to have its stock go up. That is legitimate and has nothing to do with greed. That is how capitalism works. Obviously, a big corporation makes a big profit. Most of the time all of that profit does not go to share-holders. A certain part is reserved for new investments or expanding the business. Another part might be distributed to employees as a bonus for creating that profit.
In LETTER No. 129, Robert Dickie was mentioning a case of greed in Banking: "When the Federal Reserve lowered the prime interest rate (several times) for money borrowed by the banks and financial institutions throughout the country, to ease the pain of their losses from greedy behavior, a comparable lowering of interest rates/financial charges on credit card purchases was not passed along to the consumers. The banks kept the high interest rates on the credit cards to help recover the monies they lost on their bad loans. The people….continue to be taken advantage of because of the greed of the financial institutions (with the tacit approval of the Administration and Congress)"
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