People’s Republic of China – 70th Anniversary

Today marks 70 years since the end of a civil war among the Chinese. The nationalists, mostly politically organized by Chiang Kai-shek and his Kuomintang party and army, collapsed before a relentless mobilization of other Chinese by Mao Zedong and his Communist Party.

During the last 70 years of the Communist organized People’s Republic of China, China has lived under two different forms of Communism. The first was Mao’s experiment in radical reconstruction of persons and the social order. The second began after Mao’s death under the leadership of Deng Xiaoping, who opened China up economically to markets and culturally to more acceptance of commonplace human nature.

Where Mao insisted on everyone thinking in ideological terms, with the certainty and passion of religious converts living righteously and bringing down evil, Deng was far more open-minded, famously asking who cares if a cat is black or white as long as it catches mice. Deng also proposed that it is glorious to get rich.

Mao was spiritual in the Western sense of having a Kantian insistence of us only acting from the purist of universal motives without any concern for self, while Deng was utilitarian.

By following Deng’s moral philosophy, China has become a wonder in human history for economic growth. The Chinese people are now well on their way to becoming the world’s leading nation state, with more wealth and global power than ever before in history.

In a way, both Mao and Deng nationalized socialism. Deng’s formula for the Chinese state was to build socialism with “Chinese characteristics.” In his time, Mao was not a follower of Stalin and the Soviet version of Marxism. He was too Chinese to do that. Mao split with the Soviet leadership after the death of Stalin.

To me, Mao, too, sought to build a socialism with Chinese characteristics. His selection of Chinese values and behaviors to guide his party, which would use the state to mold the people, favored the millennialism of the White Lotus religious sect. The White Lotus sect had given birth to the Ming Dynasty of imperial control of thought and culture. White Lotus beliefs are Manichean, where people must choose between good and evil, between the light and the dark. There can be no compromise between these realms and each person must incorporate in his or her mind and heart only the tenets of the good and repress all contrary thoughts and actions.

Deng, on the other hand, was more practical and took his sense of what “good” Chinese characteristics were from ancient thinkers like MoZi, GuanZi and Shang Yang. These thinkers were influenced by the realism of Yin and Yang, where life results from natural forces. But they proposed ways of manipulating human nature to subordinate the individual to the state. The role of the state is to channel what is natural to the people – like getting rich – in order that the state could grow stronger. Deng released the latent psycho-social energies of the Chinese people and the rest is history.

Both Mao and Deng adopted the Chinese imperial order for the country under which the state set the agenda and made sure individual egoism would never have the power to drive any political agenda. This central premise of Chinese socialism dictated Deng’s response to the 1989 Tiananmen demonstrations. He allegedly said, “Comrades, don’t you understand? When Chinese blood starts to flow, the South China Sea will turn red.” And so, the popular movement was repressed with relentless determination.

Today, Xi Jinping follows this imperial Chinese pattern of rule with great devotion and attention to detail, creating the world’s first surveillance state.

Thus, China under the Communists has created an effective form of state capitalism or nationalized socialism, where private economic interests are coordinated by the party for the good of the state.

The moral capitalism of Confucius, Mencius, the Yin/Yang school and the Taoists only exists in the ancient texts and, maybe, in the hearts of the Chinese people.

Restraint and Moral Capitalism

A premise of our thinking about prospects for a moral capitalism is restraint on power – restraints suggested by the moral sense, restraints from market preferences and restraints from law. As in most things moral, personal character and good leadership values are indispensable drivers of responsible behaviors. Comfort with restraint is a disposition of character most conducive to moral outcomes.

Accordingly, restraint of market power is a necessary check and balance in the constitutional arrangement of capitalism. In the U.S., thinking more favorably about more rigorous enforcement of antitrust laws is on the rise.

From 1981 to 2017, antitrust cases filed by the U.S. Department of Justice decreased 61%, while mergers and acquisitions, a key means of consolidating private market power, increased by 750%.

I also just read of the drugmaker AbbVie buying its rival Allergan for $63 billion. As a business strategy of growth by merger, AbbVie had bought Pharmacyclics for $21 billion in 2015 and Stemcentrx for $10 billion a year later.

Previously, Bristol-Myers Squibb bought Celgene for $90 billion, Pfizer bought Array BioPharma for $11.4 billion and Eli Lilly bought Loxo Oncology for $8 billion. How is declining competition in drugs good for consumers?

In many industries, a handful of firms now dominate sales.

I have read several academic articles concluding that increased concentration explains recent trends in wage stagnation, rising economic inequality and sluggish productivity.

In step with 1980s economic theory that made a firm primarily responsible for making short-term profits for shareholders, thinking about having too much or too little market power gave priority to making money from consumers. If a merger had advantages for consumers and the market approved of its prospects for enhanced share value, it was held to be a good merger beyond the reach of antitrust laws.

Just as we are now moving on from the theory of the firm as a cooperative enterprise funded to make profits, we are on the cusp of moving away from the theory that bigger firms are better for society.

Why Might We Need Good Constitutional Orders?

This past Tuesday, September 17th, was Constitution Day here in the U.S. While I am hesitant as an American to write about my country in the abstract, the idea of a written constitution providing for citizen sovereignty, checks and balances and rights for individuals against the state has universal ethical implications.

Today, we see great commotions over these issues around our world: a test of an unwritten constitution in the U.K., the evolution of a constitutional order in the European Union as a federation, the unconstitutional order in Venezuela and autocracy in Turkey, theological supervision of the state in Iran, protests against the state apparatus in Hong Kong and Moscow and progressive American presidential candidates such as Bernie Sanders and Elizabeth Warren suggesting that checks and balances are oppressive and should be abandoned or bypassed so that a majority can enjoy its will to power.

The points to contemplate, I suggest, are two: one is the purpose of a state as set forth in our Constitution. This is an ethical statement about the use of public power in trust. The preamble sets forth the legitimate business of government:

“We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.”

(I am, I hope, not unduly immodest in these days of political discord in my country to acknowledge my pride that one of my mother’s forebearers, Gouverneur Morris, wrote these words.)

The legal form of the U.S. Constitution, I suggest, is a deed of trust. The sovereign people, acting through state conventions, entrust limited powers to a government for all of them. The powers are to be used in trust so the Constitution provided the text of an oath which qualifies a person to become president. That person must swear to rise above party, religion, self-interest and all personal prejudices in order that he or she may “faithfully execute the office” of president.

Constitutional government is one of office, not of will. Constitutional government rejects the will-to-power ethics of Herbert Spencer’s social Darwinism and of Nietzsche’s nihilism.

The reason for this constraint lies in keen and truthful conclusions about our human nature. In Federalist Paper No.55, written by James Madison, it holds that:

“As there is a degree of depravity in mankind which requires a certain degree of circumspection and distrust, so there are other qualities in human nature which justify a certain portion of esteem and confidence. Republican government presupposes the existence of these qualities in a higher degree than any other form. Were the pictures which have been drawn by the political jealousy of some among us faithful likenesses of the human character, the inference would be, that there is not sufficient virtue among men for self-government; and that nothing less than the chains of despotism can restrain them from destroying and devouring one another.”

Economic Inequality Isn’t Unique to U.S.

I recently saw a report on real income growth in Russia. American capitalism is not alone in favoring the top over the middle and bottom of the socioeconomic order. In Russia, from 1989 to 2018, income for the top 1% grew 429% and for the top 10% by 171%, but for the bottom 50%, income shrank 20%.

Overall growth in income was 41%.

Political power everywhere is fungible with money and power. One breeds the other.

In Honor of Labor

Last Monday, September 2, marked the 125th anniversary of the adoption of Labor Day as a federal holiday in the U.S. The event was the culmination of the adoption of Labor Day, which had union backing, as an official holiday by 30 states. Today, Labor Day falls on the first Monday of September in both the U.S. and Canada.

Labor Day was perceived as a less radical alternative to May 1, which is International Workers Day in every other country in the world. Ironically, that date was chosen to commemorate the Haymarket affair in Chicago on May 4, 1886.

On that day, several hundred workers demonstrated for the adoption of an eight-hour day. As darkness fell, Chicago police ordered the demonstrators to disperse. A bomb exploded, killing several police and demonstrators.

More demonstrators were shot or wounded by police fire. No one knows who planted the bomb or whether it had perhaps been the work of an agent provocateur trying to create a crisis. A number of labor leaders were arrested despite a lack of evidence that any had a hand in the bombing. Four leaders were hanged and others sentenced to lengthy prison terms.

The violence of the Haymarket affair seems to have summarized the 19th century understanding of industrial capitalism – capital on one side, labor on the other – with the state aligned with capital. Socialism, labor unions and later the welfare state or social democracy sought to level the playing field with a balance of economic power between the two essential factors of production.

But what if the conviction of a zero-sum conflict between capital and labor was a misunderstanding of economic reality? What if labor was too a capital asset, albeit a different kind of asset from money, plant or equipment? Then, the issue for owners and managers would have been how to get the optimum result from a partnership between capital and labor. That alternative is recommended by our Principles for Business.

On a related note, our colleague Richard Broderick composed a poem about Labor Day we wanted to share with you:

World of Our Fathers

The world of ill-fitting suits,
of baggy knees and elbows
and hand-me-down shoes.

The world of corns and bunions,
lame men, missing fingers.

The world of bad haircuts
and barber shop chatter,
nicks and cuts from straight-razors,
bay rum and styptic pencils.

The world of beer in cardboard buckets.

And the world of lunch buckets.

The world of stone fences,
brickyards and the foundry,
the rough and the thicket,
the six-day workweek
and the company picnic.

And the world of day trips
to the country where the sun
burned their pale skin,
and they gathered us like wild honey,
like the blackberries that wept
in the baskets beside them
on the train ride home.

Digital Currencies: A Moral Good?

The foundation of global financialization of capitalism in government created fiat currencies and bank credit may face disruption. Facebook seeks to use computers and the internet to provide private money.

The analogy comes to mind of “gold,” which was once the atlas supporting paper money and national credit. The modern administrative state has moved beyond gold to fiat currencies and central banking.

Facebook proposes to issue a digital currency called Libra. Facebook has 27 partners in this innovation in finance. Facebook will provide a government-free currency and a payment system through which to use it in the settlement of buy/sell transactions.

But the significant question is: how many Libras will be created?

The prudence associated with gold as support for money was that there was not so much of the ore available and more gold could not be made and disbursed on command by those prone to excessive consumption in the short run. If the amount of Libra in circulation can be gamed for short-term advantage, the currency will encourage boom/bust cycles and periodic collapses of financial markets as in the tulip mania, the South Sea Company, the Mississippi Company, 19th century bank crises in the U.S., one after another, the stock market crash of 1929, the dot-com bubble and the subprime mortgage crisis of 2008.

Government regulators, to date, are not opposed to the Libra. They just want it regulated in the public interest.

I have mixed feelings about the innovation. Competition with government fiat currencies may provide new opportunities for ordinary people to access goods and services or receive as wages. But the history of money and credit is one of many false hopes and manipulation of amounts in circulation contrary to the common good.

Comparison of Business Roundtable Statement with CRT Principles for Business

In the last day or so, several people have asked to see just where the new and very significant Business Roundtable “Statement on the Purpose of the Corporation” does indeed track the Caux Round Table for Moral Capitalism’s (CRT) Principles for Business of 1994. So, I made this document (PDF) putting provisions of the CRT Principles below the associated provision of the Business Roundtable Statement.

Frankly, I am impressed with how well and how extensively the CRT Principles anticipated the Business Roundtable’s statement.

I’m sharing this in large part to honor the forethought of those CRT leaders from Japan, Europe and the U.S. who articulated this new theory of the firm 25 years ago.

Thoughtful Comments from former Dutch PM Balkenende

I have received a particularly thoughtful email from former Dutch Prime Minister Jan Peter Balkenende, now Chairman of the Dutch Sustainable Growth Coalition. I have his permission to share his observations with you.

He wrote:

Dear Steve,

The statement of the Business Roundtable attracts a lot of attention. It is important to hear about your observations. In your email to Herman, you have explained that the declaration is a kind of tactical maneuver. A statement to avoid tougher policy steps. But … at the same moment, the statement is there and people, also from politics, the business sector, NGOs, universities and media, will start asking questions about the real meaning and significance of the statement and practical consequences.

I think three elements are key regarding this statement.

1. The discussion about capitalism. In the Dutch newspaper Financial Daily, a reference was made to the Rhinelandic model which is more focused on long-term thinking and solidarity than the Anglo Saxon, neo-classical economic model. I would like to know how the subscribers of the statement really think about the future of capitalism. You cannot deliver such a statement and leaving capitalism for what it is now. The Dutch newspaper I mentioned published an article today saying that at this moment, in practice, the shareholder still clearly is number one. Buying own shares is only one example. You recently wrote about this issue.

Regarding capitalism, there are in fact three routes. The first is the liberal, neo-classical capitalism. More and more, you can feel this capitalism is under attack. The second variant is the government-oriented type of capitalism. Joseph Stiglitz’s recently released book Progressive Capitalism is an example of this approach. The third version is moral capitalism, of which you are one of the clearest advocates. There are also connections with conscious capitalism, inclusive capitalism, etc. In my opinion, it is essential to choose for the last variant: moral capitalism.

2. A new view on business models. Traditional capitalist views are connected with the views of Milton Friedman: The business of business is business. In fact, the supremacy of the shareholder. Today and tomorrow, it should be about creating shared value, about the full integration of sustainability into business models, about making the Sustainable Development Goals of the United Nations a reality, also in the business sector. I would like to know what the subscribers of the statement will do in this regard. It is possible to change business models. You know about my role as Chairman of the Dutch Sustainable Growth Coalition, a coalition of eight Dutch multinationals.

3. The essence of metrics and valuation. When the discussion about new, sustainable business models started, frontrunners were convinced that this should not be a story of good intentions but a matter of clarity and honesty. Therefore, companies have to redefine their KPIs, have to choose for life cycle analysis and must have the willingness to be transparent about the real results: integrated reporting. You are playing a fantastic role in the debate about valuation. It is necessary to invest in these measurement tools. If the subscribers of the statement take their intentions seriously, they also have to choose for new valuation techniques. I hope we will get clarity about this issue.

I am happy with the statement. It’s an important document that offers inspiration and a new view on the role of the corporation. But the success of the declaration only depends on its implementation: practicing moral capitalism, sustainable business models and valuation.

Wishing you all the best.

Warm regards,
Jan Peter