The Capitalist Catch (2)
Roger J. Burke
February 26, 2009
"G.M. has become a giant wealth-destruction machine — possibly the biggest in history" (Thomas Freidman, NY Times)
"Brother, can you spare a billion?"(Rosa Brooks, L.A. Times)
"…the Dow dropped 215.76, or 2.93 percent, to 7,149.91, after earlier falling to its lowest level since Oct. 28, 1997." (Yahoo News)
*
As those quotes above strongly indicate, the global financial mess is getting worse. To put it in crystal clear perspective, on July 19, 2007, the Dow Jones Index went over 14000 for the first time. Since then, the value of stocks has dropped by almost fifty per cent. How many trillions of dollars is that, all gone?
No surprises if the index drops below 6000 this year.
Hence, seeing as how this situation is fast approaching that other mess called The Great Depression of the 1930s and the even more prolonged debacle between 1873 and 1898 (which wasn't called a depression), I think it's time to look at a fundamental tenet of free market capitalism – business ownership – and suggest how it can be… improved for better sustainability, at the very least. (Before reading any further, my prior article here sets out the background to this; so you may want to read that first.)
Most would have the basic idea about capitalism, but for the average person (like me) it comes down to this: the rich get richer, the poor get poorer.
Like it or not however, capitalism is with us to stay, like an unwelcome house guest: it brings many sweeteners, benefits and goodies, but it's divisive, aggressive and competitive. And it always wants more – more of anything and everything. So, why do we tolerate it? Because command economies (such as the old Soviet Union) that mask themselves as socialist simply practice a form of state capitalism which purports to provide broad equality of wealth but results in the same, or worse, conditions as "free market" capitalism. Need I mention the current situation in The People's Republic of China, with manufacturing now nearly halved and fifty million plus out of work?
Many economists argue that recessions are good: bad companies stop wasting resources and go bankrupt, good companies pick up the slack and grow, and market expectations are readjusted. The incidence of casualties is just one of those unfortunate side effects. It's been that way for a long time and, with good regulation and oversight, it works – more or less. That mode of thinking, of course, is entrenched.
But it's what goes wacko when controls are relaxed that causes the catastrophe we are now experiencing. In a sign of worsening conditions, it's sobering to read "U.S. Pressed to Add Billions to Bailouts" in the NY Times of February 24th. After reading that article, I glanced through a random sample of Comments from readers, thus:
"...the anger in America is palpable and rising. Is that we were sold a bill a goods -- deregulation, free market forces, individual accountability -- only to see now that these rules only apply to, and the consequences suffered by, the lower classes and what remains of the middle class?" (Joann, Charlotte)
"It's time to accept the truth: for a long time, the US economy has been living a lie - operating at an unsustainable scale - bloated by short-sighted greed, irresponsible credit, and ineffective regulation." (Paragon, Calif.)
A few weeks back, I highlighted that growing anger here, all of which clearly indicates that something must change. It's a realization that's gaining acceptance in U.S.A and around the world.
Equally clearly, despite the advances of the last thirty years, the capitalist wealth has been squandered by gross corruption, beginning within the guardians of the wealth, viz. the financial institutions and stock traders. That tiny minority has had the audacity to play with other people's money and make billions – even trillions – while the large majority gradually sinks into a sea of debt (USA, UK, Europe etc) or, in less fortunate countries (China, Asia), becomes reduced to slaves who live from hand-to-mouth 24/7.
But corruption doesn't end with the high-flyers of finance. At the street level, the trouble with the housing collapse was exacerbated with shoddy lending practices by sellers, while buyers mostly looked away with a wink-wink, nudge-nudge, say-no-more, say-no-more. Or, as President Obama put it, in his recent address: "Regulations were gutted for the sake of a quick profit at the expense of a healthy market. People bought homes they knew they couldn't afford from banks and lenders who pushed those bad loans anyway".
Curious, isn't it? It's an attitude that is condemned by many, as much as it is extolled as a measure of success. Witness the Madoffs and Stanfords of the world…
Quite insane, when you think about it.
But it's not enough to simply hope that people in general will change because it's the right thing to do, or because someone even as famous and revered as Gandhi castigated the world about the "seven deadly social sins", as quoted in a recent academic commentary about the financial crisis.
For the most part, people change only when it's in their own interest to do so.
So, how can we restructure such an entrenched economic system to curb its excesses while providing a greater measure of employee ownership and control?
Not easy, but the structure for doing just that already exists in U.S.A. and other countries and it's existed for a few centuries: loosely termed Cooperatives, but now more often referred to as Employee Stock Option (ESOP). You may have heard about it already, but you can gain more information about employee-owned corporations here. And, at this link, there's a short list of over 150 companies in U.S.A. that now operate as employee-owner corporations. Many are very large corporations, clearly putting to rest any objections that employee ownership is for small companies only.
In fact, the largest such corporation is a group of manufacturing, financial and retail companies called The Mondragón Corporation in the Basque region of Spain. It's been operating successfully since 1956. And U.S.A. is no stranger to ESOP companies: according to this news report from 2006, there are something like 11,000 small businesses in U.S.A. that follow the employee-ownership business model. United Airlines, for example, was a larger ESOP company before it went bankrupt a few years ago.
Hence, large and small, any business can operate as an employee-owned corporation.
So, why not convert all incorporated businesses to that model – including banks, insurance companies, and so on? Seeing as how, in the first place, it's well established that when employees own a corporation, they work smarter, "boosting productivity and speeding company growth."
Obviously, I don't have all the answers, but some reservations may be related to: (1) ESOP companies keep employee shares in trust until an owner-employee retires or leaves the company; and (2), ESOP companies are generally private, but some do trade on the stock exchange (although I don't know the numbers). To understand more about how an ESOP company operates in U.S.A., the ESOP Association provides the answers online.
No doubt there are other reasons, one of which I think has a lot to do with entrenched thinking brought on by vague fears about the whole idea of employee ownership. To me, though, that's just ignorance of the facts; and perhaps rebellious greed rearing its ugly head again.
Conceptually, however, I think it's unequivocal that the laws concerning public corporations could be changed to enforce employee ownership as a choice for each person who is hired. In other words, when a person comes on board, s/he is given a choice: accept ESOP or accept salary only. People who don't like being tied down to location and time constraints would choose salary only; all others would take up the ESOP provision. Those who take the ESOP route have a vote in how the company operates; those on salary only do not.
I can hear the screams: 'That infringes my personal freedom, Goddammit!' I can understand such a reaction from the lunatic fringe who caused the problem, and who want to maintain the status quo. Well, the dinosaurs had it their way for millions of years until that killer asteroid changed everything 65 million years ago.
So, for all the T-Rex tyros out there: welcome to Financial Crash Asteroid 2008…
Not being a tax, finance or ESOP expert, I can't foresee all of the challenges (not problems) that would arise as a result of such a change. But, there's no doubt that it can be done, given the will. Indeed, the ESOP association advocates "A national policy on employee ownership [that] would help develop employee ownership policies that are best for the changing nature of work, and economic policies of the 21st century."
Hence – and not just in my opinion – it makes good economic and social sense to change the capitalist structure so that the bulk of the population, as employee-owner, assumes more responsibility – other than simply consuming – for a more effective functioning of the economic system. From the bottom to the top, from smallest to biggest, companies would improve productivity and reap higher profits for employees and shareholders.
Such massive change won't stop bankruptcies (unless you're too big, of course); that's part of the self-correcting territory. And rightly so.
So, regardless of what happens in the short term - that is, until this second depression (that word is now appearing more in print) ends - this global mess categorically points to a fundamental issue: this self-destructive capitalism must change for better sustainability, among other things. Or we must find a new, and very different, economic model. That latter choice is unlikely, however; nobody in liberal democracies would be prepared to take up a wholly socialist (so called) economic model, for example.
Therefore, fundamental ideology about business ownership of public companies should be reviewed and debated at the highest levels of economic theory and political economy. The debate must begin; it must be opened up. And changes, as suggested, must be considered.
Because, after the dust of this debacle has settled – who knows when? – the world will be even more integrated and more interdependent. And more vulnerable. So there's the terrible catch: trusting to business as usual will eventually produce similar, or perhaps worse, results in another generation or two.
Nobody in their right mind would want that.
Copyright © Roger Burke, 2009. All rights reserved.
"Brother, can you spare a billion?"(Rosa Brooks, L.A. Times)
"…the Dow dropped 215.76, or 2.93 percent, to 7,149.91, after earlier falling to its lowest level since Oct. 28, 1997." (Yahoo News)
*
As those quotes above strongly indicate, the global financial mess is getting worse. To put it in crystal clear perspective, on July 19, 2007, the Dow Jones Index went over 14000 for the first time. Since then, the value of stocks has dropped by almost fifty per cent. How many trillions of dollars is that, all gone?
No surprises if the index drops below 6000 this year.
Hence, seeing as how this situation is fast approaching that other mess called The Great Depression of the 1930s and the even more prolonged debacle between 1873 and 1898 (which wasn't called a depression), I think it's time to look at a fundamental tenet of free market capitalism – business ownership – and suggest how it can be… improved for better sustainability, at the very least. (Before reading any further, my prior article here sets out the background to this; so you may want to read that first.)
Most would have the basic idea about capitalism, but for the average person (like me) it comes down to this: the rich get richer, the poor get poorer.
Like it or not however, capitalism is with us to stay, like an unwelcome house guest: it brings many sweeteners, benefits and goodies, but it's divisive, aggressive and competitive. And it always wants more – more of anything and everything. So, why do we tolerate it? Because command economies (such as the old Soviet Union) that mask themselves as socialist simply practice a form of state capitalism which purports to provide broad equality of wealth but results in the same, or worse, conditions as "free market" capitalism. Need I mention the current situation in The People's Republic of China, with manufacturing now nearly halved and fifty million plus out of work?
Many economists argue that recessions are good: bad companies stop wasting resources and go bankrupt, good companies pick up the slack and grow, and market expectations are readjusted. The incidence of casualties is just one of those unfortunate side effects. It's been that way for a long time and, with good regulation and oversight, it works – more or less. That mode of thinking, of course, is entrenched.
But it's what goes wacko when controls are relaxed that causes the catastrophe we are now experiencing. In a sign of worsening conditions, it's sobering to read "U.S. Pressed to Add Billions to Bailouts" in the NY Times of February 24th. After reading that article, I glanced through a random sample of Comments from readers, thus:
"...the anger in America is palpable and rising. Is that we were sold a bill a goods -- deregulation, free market forces, individual accountability -- only to see now that these rules only apply to, and the consequences suffered by, the lower classes and what remains of the middle class?" (Joann, Charlotte)
"It's time to accept the truth: for a long time, the US economy has been living a lie - operating at an unsustainable scale - bloated by short-sighted greed, irresponsible credit, and ineffective regulation." (Paragon, Calif.)
A few weeks back, I highlighted that growing anger here, all of which clearly indicates that something must change. It's a realization that's gaining acceptance in U.S.A and around the world.
Equally clearly, despite the advances of the last thirty years, the capitalist wealth has been squandered by gross corruption, beginning within the guardians of the wealth, viz. the financial institutions and stock traders. That tiny minority has had the audacity to play with other people's money and make billions – even trillions – while the large majority gradually sinks into a sea of debt (USA, UK, Europe etc) or, in less fortunate countries (China, Asia), becomes reduced to slaves who live from hand-to-mouth 24/7.
But corruption doesn't end with the high-flyers of finance. At the street level, the trouble with the housing collapse was exacerbated with shoddy lending practices by sellers, while buyers mostly looked away with a wink-wink, nudge-nudge, say-no-more, say-no-more. Or, as President Obama put it, in his recent address: "Regulations were gutted for the sake of a quick profit at the expense of a healthy market. People bought homes they knew they couldn't afford from banks and lenders who pushed those bad loans anyway".
Curious, isn't it? It's an attitude that is condemned by many, as much as it is extolled as a measure of success. Witness the Madoffs and Stanfords of the world…
Quite insane, when you think about it.
But it's not enough to simply hope that people in general will change because it's the right thing to do, or because someone even as famous and revered as Gandhi castigated the world about the "seven deadly social sins", as quoted in a recent academic commentary about the financial crisis.
For the most part, people change only when it's in their own interest to do so.
So, how can we restructure such an entrenched economic system to curb its excesses while providing a greater measure of employee ownership and control?
Not easy, but the structure for doing just that already exists in U.S.A. and other countries and it's existed for a few centuries: loosely termed Cooperatives, but now more often referred to as Employee Stock Option (ESOP). You may have heard about it already, but you can gain more information about employee-owned corporations here. And, at this link, there's a short list of over 150 companies in U.S.A. that now operate as employee-owner corporations. Many are very large corporations, clearly putting to rest any objections that employee ownership is for small companies only.
In fact, the largest such corporation is a group of manufacturing, financial and retail companies called The Mondragón Corporation in the Basque region of Spain. It's been operating successfully since 1956. And U.S.A. is no stranger to ESOP companies: according to this news report from 2006, there are something like 11,000 small businesses in U.S.A. that follow the employee-ownership business model. United Airlines, for example, was a larger ESOP company before it went bankrupt a few years ago.
Hence, large and small, any business can operate as an employee-owned corporation.
So, why not convert all incorporated businesses to that model – including banks, insurance companies, and so on? Seeing as how, in the first place, it's well established that when employees own a corporation, they work smarter, "boosting productivity and speeding company growth."
Obviously, I don't have all the answers, but some reservations may be related to: (1) ESOP companies keep employee shares in trust until an owner-employee retires or leaves the company; and (2), ESOP companies are generally private, but some do trade on the stock exchange (although I don't know the numbers). To understand more about how an ESOP company operates in U.S.A., the ESOP Association provides the answers online.
No doubt there are other reasons, one of which I think has a lot to do with entrenched thinking brought on by vague fears about the whole idea of employee ownership. To me, though, that's just ignorance of the facts; and perhaps rebellious greed rearing its ugly head again.
Conceptually, however, I think it's unequivocal that the laws concerning public corporations could be changed to enforce employee ownership as a choice for each person who is hired. In other words, when a person comes on board, s/he is given a choice: accept ESOP or accept salary only. People who don't like being tied down to location and time constraints would choose salary only; all others would take up the ESOP provision. Those who take the ESOP route have a vote in how the company operates; those on salary only do not.
I can hear the screams: 'That infringes my personal freedom, Goddammit!' I can understand such a reaction from the lunatic fringe who caused the problem, and who want to maintain the status quo. Well, the dinosaurs had it their way for millions of years until that killer asteroid changed everything 65 million years ago.
So, for all the T-Rex tyros out there: welcome to Financial Crash Asteroid 2008…
Not being a tax, finance or ESOP expert, I can't foresee all of the challenges (not problems) that would arise as a result of such a change. But, there's no doubt that it can be done, given the will. Indeed, the ESOP association advocates "A national policy on employee ownership [that] would help develop employee ownership policies that are best for the changing nature of work, and economic policies of the 21st century."
Hence – and not just in my opinion – it makes good economic and social sense to change the capitalist structure so that the bulk of the population, as employee-owner, assumes more responsibility – other than simply consuming – for a more effective functioning of the economic system. From the bottom to the top, from smallest to biggest, companies would improve productivity and reap higher profits for employees and shareholders.
Such massive change won't stop bankruptcies (unless you're too big, of course); that's part of the self-correcting territory. And rightly so.
So, regardless of what happens in the short term - that is, until this second depression (that word is now appearing more in print) ends - this global mess categorically points to a fundamental issue: this self-destructive capitalism must change for better sustainability, among other things. Or we must find a new, and very different, economic model. That latter choice is unlikely, however; nobody in liberal democracies would be prepared to take up a wholly socialist (so called) economic model, for example.
Therefore, fundamental ideology about business ownership of public companies should be reviewed and debated at the highest levels of economic theory and political economy. The debate must begin; it must be opened up. And changes, as suggested, must be considered.
Because, after the dust of this debacle has settled – who knows when? – the world will be even more integrated and more interdependent. And more vulnerable. So there's the terrible catch: trusting to business as usual will eventually produce similar, or perhaps worse, results in another generation or two.
Nobody in their right mind would want that.
Copyright © Roger Burke, 2009. All rights reserved.
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