Sharing the benefits and costs of capitalism

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Peter Gumpert says "...there is widespread misunderstanding in our nation about the critically important contributions that many people – customers, managers, non-managerial workers, other businesses and the broader community – make to any business enterprise."

The Current State of Affairs

Our national, political discourse is full of slogans and other attempts to simplify our extraordinarily complex relationships with each other. Here are some examples, mostly taken from conservative political perspectives. "Government is too big" — we must dramatically reduce its size and cost and allow people and businesses to pursue their own interests with much less interference from government agencies. Similarly, "the free market solves problems better." "Competition and self-interest work best, efficiently separating the wheat from the chaff." "Government is a costly, inefficient, ineffective, interfering and self-perpetuating device." "Collective bargaining is a form of wasteful socialism and should be done away with because it interferes with free choice." "Greed is good" because it creates and encourages innovation. Although these slogans are, for the most part, caricatures, it is true that the enormous complexity of our daily lives and relationships is difficult for us to understand fully. Many people do long for and prefer simpler ways of making sense of what we must cope with every day. It is easier, for example, to insist that innovative ideas are always the product of the individual mind than to recognize the value and the complexity of creative collaboration and teamwork, or even to recognize that innovation virtually always builds on prior work and thinking done by others not directly connected with the innovator.

Thus, there is widespread misunderstanding in our nation about the critically important contributions that many people – customers, managers, non-managerial workers, other businesses and the broader community – make to any business enterprise. It is often assumed that the shareholders of a business enterprise and their top-management implementers have – and should have – full economic "sovereignty" over the enterprise they own, and that the enterprise should be subject to only minimal regulation and taxation by governmental agencies. Shareholders and the senior managers they employ are currently able, for example, to move large portions of their enterprises to other nations without taking into account the broader consequences of the action (for workers, the community and the economy). Many people assert that business and the processes involved in maximizing profit, should not be interfered with — because interference reduces incentive and innovation and adds unnecessary burden and cost. Likewise, many people are comfortable with senior managers' decisions to maximize profit by using cheaper materials or manufacturing processes, even if their choices may endanger customers or the community; government "regulation" is seen not as necessary for the welfare of all, but as simply burdensome to business enterprises, which are thought of as central to the broad public good. The decisions made by investment banks and other businesses to buy and sell complex financial instruments backed by highly questionable residential mortgages has had a disastrous effect for many people throughout the world, but the right of these business to engage in such practices is generally not questioned.

So, what's the problem?

What's the problem with the oversimplifications and slogans quoted above? They fail to take account of our complex dependence on each other — including our dependence on people we don't know and who are not recognizably like us. The problems created by this ignorance are actually very profound. The political and economic system as it stands today leads inexorably to the continuing aggregation of wealth into the coffers of a small proportion of our people, gradually pushing the rest into deprived living conditions. We are seeing all this develop in the present.

An assumption about interdependence

The complexity of living in a large, diverse nation requires that interdependence among people be recognized, understood and used effectively. We depend on each other in a variety of direct and indirect ways - for our safety, well-being and longevity and for the preservation of our communities and our nation. We are all part of a kind of human ecology in which most people's choices and activities affect others as well as themselves. If, while driving my car, I drink alcohol or refuse to wear a seat belt, I endanger people in other vehicles as well as myself. So "liberty" must have limits. As the medieval poet John Donne has written, "No man is an island, unto himself alone ..."

The assumption about interdependence can be seen to underlie many discussions about business ethics. If we accept it, it seems evident that our economic policies must take full account of the complexity of our relationships with each other.

Given our dependence on one another, who deserves what rewards?

  • Certainly shareholders and other investors in a business enterprise, who have taken risks to launch or grow an enterprise, deserve some level of return as the enterprise succeeds and continues (as well as some protection from harm, e.g. from fraud);

  • Founders and senior managers, who have invested in and dedicated their time, effort and thought to the enterprise, also deserve some level of return – and security – as the enterprise succeeds (as well as some protection from harm, e.g. arbitrary and adverse actions by shareholders);

  • Middle managers and non-managerial workers, who have also dedicated their time, effort and thought to the enterprise, deserve some level of return and security as the enterprise succeeds and continues. They, too, deserve some protection from harm, e.g. from arbitrary actions by shareholders and senior managers;

  • Direct customers, who are certainly integral to the success of the business enterprise, deserve some value (and protection from harm) in exchange for their investment in the products and/or services made available by the enterprise;

  • Citizens and their government, who have provided the context, infrastructure and protection that make the success and maintenance of the enterprise possible, deserve some level of return (and, in the case of citizens, protection from harm) as the enterprise succeeds (e.g. the enterprise paying taxes and following environmental, interpersonal, and other guidelines).

  • The interesting and difficult questions, then, are these:

    • What and how much does each group deserve?

    • What responsibilities does each group have to the others?

    • What's a fair and sensible distribution of these benefits and responsibilities?

    • Detailed answers to these questions are hard to arrive at, but some basic principles can be stated fairly simply.

      Returns for each group

      Shareholder/investor returns can be primarily financial. It is reasonable to assume that shareholders should be entitled to a percentage of the net profits of the enterprise that are not reinvested in its future viability. At the same time, however, business enterprises depend on managers and workers to make the enterprise successful, on customers to sustain the enterprise and on citizens and the government for protection from harm, as well as for useful infrastructure, education of future managers and workers and fair and useful adjudication of disputes.

      The returns of managers and workers should be both financial and contractual. Their employment contributes both to shareholders and the broader community. Thus they should be able to depend on a fair salary, some degree of employment security and perhaps even some additional financial return, depending on how well the enterprise does. They depend on the government to establish basic ground rules for their employment and to provide infrastructure and safety.

      Because managers and workers are entitled to some level of security and because the broader citizenry has made an indirect investment in every business enterprise, "outsourcing" of business activities to another nation can present an ethical problem. An enterprise might decide to negotiate beyond our borders to have its products or services manufactured or delivered more cheaply, but questions should be raised about the effects of such a move on managers, workers, customers and the broader community and economy. It is possible that an independent group of knowledgeable people can help decide whether an outsourcing decision has indirect benefits for the other important stakeholders as well as the shareholders - benefits that balance or outweigh the cost that would be borne by enterprise employees, the local community and the broader economy.

      Direct customers' returns come primarily from the value to them of the product or service they buy, utilize or rent. But they, too, are dependent on directors and others in the business to maintain the value they pay for and expect, and on the community and the government to help ensure they don't suffer harm because of the actions and choices of the business enterprise.

      Citizens' returns come from the contributions of the enterprise (and the people involved in it) to the general welfare and longevity of the community and the economy - at the local, regional and national level. In order to sustain its activities on behalf of citizens and their enterprises, government must tax business enterprises at some percentage of the net profits that are not reinvested in the future of the enterprise.

      But what about responsibilities?

      Because we are interdependent, we have responsibilities to one another. In the case of business enterprises, those responsibilities are easy to state:

      Shareholders (through a board of directors) and senior managers have a variety of responsibilities to their customers, their employees, the community and the broader economy. These responsibilities cannot simply be handed off to government agencies, though government agencies may also be involved. They are responsible to customers, for example, to provide a safe, effective product or service that lives up to the claims made for it.

      Managers and workers have a variety of responsibilities to their senior managers and the shareholders of the enterprise. These responsibilities are specified in the implied or express employment contract they enter into with the employer: they must work effectively and consistently and do their best to invent ways to improve the efficiency and effectiveness of the services they provide.

      Customers also have some responsibilities to the enterprise and the broader citizenry — mostly involving responsibility to keep agreements they make with the enterprise and responsibility to report honestly about the products and services they purchase or which they otherwise make use.

      Governmental agencies have responsibilities as well: to provide essential services in an efficient as well as effective way, to help prepare for the future, to contribute to constant improvement in their effectiveness and efficiency — and, of course, to help keep business enterprises, personnel and customers safe from harm.

      Implications of all this

      If the basic assumption about interdependence is accepted and the suggested rights and responsibilities of people and their enterprises do follow from it, then the quarrels between the political "left" and "right" are easier to manage. They are not deadly quarrels of principle, but problems to be solved about "how much return," "how much responsibility" and how these should be allocated and implemented. In other words, we can solve these problems together.

      But this is the easier part. Much more is actually implied in the preceding discussion. One implication is that since government has important responsibilities to its citizens and citizens' groups at large, it should not be "owned" or covertly controlled by particular groups, such as businesses, industries, unions, religious groups etc. Covert influence makes it difficult or impossible for the government to meet its responsibility to the broader citizenry. Thus, covert influence on the part of such particular interest groups should be eliminated. Open dialogue is perfectly acceptable and very useful, but covert, non-transparent influence — including lobbying and secret and/or unlimited political contributions - is not.

      In the same way, shareholders and the boards of directors and managers that work on their behalf have responsibilities not just to the maximization of profit, but to the businesses' workers and to citizens at large. Thus, their range of responsibilities is far broader than the accepted norms of the day would suggest.

      The Rights of Citizens - e.g., Should Health Care Be Considered a "Right"?

      Protection from harm to citizens is an appropriate function of government. Certainly, government has the responsibility to maintain the means to protect citizens from invasion and other destructive activities initiated by other nations and groups. The government should also provide safe drinking water, police and fire protection, protection from fraud and other destructive acts, protection from epidemics and other public health threats etc. Assigning such responsibilities to a public agency is a sensible and reasonably effective way of getting the job done for the citizenry. The government is in a position to provide such services efficiently and effectively and has the responsibility to do its job well and without wasting the nation's resources. If the government fails to protect public health, for example, everyone suffers. I would argue that health care in general – especially the financing of health care – is properly a public function and should almost certainly be removed from the category of activities that are conducted most efficiently by profit-oriented business enterprises. Health care systems affect all citizens, and the health of individual citizens has direct or indirect consequences for others. If an insurance industry profits from paying (or not paying) for health care, a portion of the resources invested in health care are necessarily drained from the central task of providing health services, making them less efficient and less effective for at least some and probably most citizens. This last assertion is not simply opinion; it has been well documented.

      The questions of which activities should be undertaken by government representing citizens at large and which are handled more effectively and efficiently by business enterprises has few self-evident answers. But it is a set of questions that can be answered through careful thought; civil, open dialogue; and experimentation. Oversimplification, sound bites, slogans, deadly political quarrels and covert political influence will not do the job.

       (This story was originally published in Truthout on 26 December 2011 and has been republished under a Creative Commons licence.)  
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