Profit Really is Material to Capitalism

Two recent news stories brought me back to basics:

In New York City, the renown men’s store Barneys is filing for bankruptcy. It’s not making enough money. Rent on its flagship store went up to $27.9 million. Buyers use the internet more and more. In short, the company is not meeting consumer demand in a way that produces a profit.

Secondly, America’s two largest chains of print newspapers are merging. Ad revenue is no longer enough to sustain them as separately profitable businesses. The rise of the internet with “free” news and entertainment articles for many customers has cut readership for newspapers. If the old print newspapers can’t make money, they too will go out of business, like Barneys.

More than 2,100 newspapers have closed since 2004 and now Google and Facebook are expected to take in 51% of all digital advertising revenue in the U.S.

So, no matter how much we should be concerned with ethics, responsible stakeholder relationships and the social and environmental footprints of companies, if they can’t make a profit, they have no claim on our charity for keeping them going with subsidies.

That is a hard but necessary reality of capitalism – every tub on its own bottom.

Save the Date! CRT 2019 Global Dialogue – November 21 – 23, Minneapolis, Minnesota

Please mark your calendars! The Caux Round Table for Moral Capitalism’s 2019 Global Dialogue has been scheduled for Thursday, November 21st through Saturday, November 23rd in Minneapolis, Minnesota.

Of special note, Paul Polman, Chairman of the International Chamber of Commerce and former CEO of Unilever, will be joining us for lunch on November 22nd. We’re working on a number of other distinguished guests, as well.

An official invitation, along with registration information, will be available shortly.

I do hope you can join us!

Public Office Public Trust Workshop – Thursday, September 26th

Last fall, we held an election in which the American people put what we are more and more calling “tribalism” on the front burner of our politics. While it is important to understand the passions and fears of our fellow citizens, our constitutional republic was not established to foster tribalism of any kind.

The Preamble to our Constitution holds that: “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.”

Beating at the heart of our constitutional democracy is the ethical proposition that “Public Office is a Public Trust.” But what does this mean? Where did the idea come from? Is it still true? How can we tell a good public servant from an unworthy one?

Those who were elected to office back on November 6th were chosen to hold public office. Before assuming such offices, they will be asked to take an oath to be faithful in the execution of that trust responsibility, faithful not just to those who voted for them but to all of us, our state and our country.

How can they more fully understand the law and the tradition setting forth the duties of office that will soon be theirs in service of our citizens? Through study and discussion as always since our founding as a nation.

We’re delighted to invite you to participate in the Caux Round Table for Moral Capitalism’s (CRT) workshop on Public Office as a Public Trust scheduled for 8:30 am on Thursday, September 26th, at the Humphrey School of Public Affairs.

The workshop is a new initiative to encourage and professionalize elected and appointed public officials at all levels, as well as those who aspire to elective or appointive office, to live up to the highest standards of stewardship responsibility.

The mission of the workshop is to promote good stewardship in office, thoughtful trusteeship and enlightened fiduciary practices using the CRT’s Principles for Government as best practices. The commitment of the workshop is taken from George Washington’s remarks to the delegates at the 1787 Constitutional Convention that “Let us raise a standard to which the wise and the honest may repair.”

For some time now and to the great detriment of our state and country, a narrowness in serving the common good has dominated our politics, resulting in a system of government that is polarized, fractured and unable to effectively address even its most basic challenges. The workshop will train you in the tried and tested ideals of public service.

The workshop will present historic, intellectual and moral foundations for the ethics of public stewardship, including the Bible, John Locke, Adam Smith, Max Weber and the Federalist Papers, among others.

The agenda will include:

1. Pew Research Center findings on political polarization

2. Movie High Noon: public trust and personal courage

3. The Moral Sense: human nature and natural justice

4. CRT Principles for Government

5. History of trust responsibilities

The two main presenters will be Steve Young, Global Executive Director of the CRT and Doran Hunter, Emeritus Professor of political science at Minnesota State University, Mankato.

Tuition is $50 per person and $20 for current students who present a valid student I.D. at the door (neither fee includes the cost of lunch).

Space is limited.

For more information or to register, please click here.

The session will adjourn at 4:30 pm.

Trade Wars Round Table – Monday, September 23rd

Not at all far away and in real time, President Trump’s trade wars continue apace.

A renegotiated treaty of commerce with Mexico and Canada are stalled in the Congress. China is waiting President Trump out. He is gambling that they will cry “ouch” before he does. But he is facing re-election and Xi Jinping is not. Furthermore, Xi commands a liquidity making machine which can turn out as much money as needed to support domestic economic activity in China.

Trade wars violate the norms of free market capitalism. They favor some over others and permit rent extractions. But free markets favor a “race to the bottom” by privileging lower cost producers.

In the current edition of Foreign Affairs, Dani Rodrik argues for protectionism to shield a nation from competition with countries which have lower wages and weaker social safety nets and less protection for their natural environments. That implies an unnecessary transfer of wealth from domestic consumers to domestic owners and workers.

Has globalization really gone too far? Is China’s self-referential mercantilism acceptable or abnormal? Is China playing by the rules of high-minded globalism, seeking prosperity fairly for all? If not, what can we do about it?

What about the trade consequences of a hard Brexit? If the English want to act from prideful spite, should anyone care?

Please join us for a discussion about trade wars at 9:00 am on Monday, September 23rd at the University Club of St. Paul.

Registration and a light breakfast will begin at 8:30 am and the event at 9:00 am.

To make registration easier and more convenient, we’ve decided to use Eventbrite going forward. To register, please click here. Both members and non-members can register there.

The University Club is located at 420 Summit Ave in St. Paul.

Parking will be available along Summit Ave.

The event will conclude at 11:00 am.

Monopoly Power and High Tech – Wither the Upper Hand?

Giant, high tech firms with vast earnings and even greater stock market valuations are the cutting edge of evolving capitalism. I have suggested in previous commentaries that market power can lead a company to be placed under obligations to seek the common good. In the U.S., long after anti-trust officials in the E.U. looked askance on the market power of Google and Facebook, the U.S. Department of Justice has opened a broad review of whether dominant technology firms are unlawfully stifling competition.

The review will examine on-line platforms as gateways to commerce in internet searches, social media and retail services.

One point of worry for me is the ability of internet firms to suck in advertising revenues and so drive older forms of media – print media – into economic failure and closure, directing our politics towards demagoguery, delusions and dumbing down our people.

I have noted before that the opinion of the U.S. Supreme Court in the 1876 case of Munn v. Illinois, a case of cartel monopoly power over grain storage elevators in Chicago, provides an ethically based reason for restraining companies which stand at the gateway of commerce and take a toll to permit passage of goods. The Court asserted that a willing assumption of monopoly power brought upon a company acquiescence to the right of society to assert a license over the company to take care that the good of the public was not harmed.

The Court held by imputation that if a company did not want to operate under such a restricting license from public authority, then it need only not seek monopoly power. Instead, the company was free to choose to do business facing the hazard of competition.

The policy of the Court was to ensure that lawful commercial arrangements would not be misused and lead to inequitable outcomes in practice; that financial and economic power would be diffused widely and decentralized. This policy was the natural corollary to the principle of constitutional democracy that government power must be disbursed across institutions where one would check another from aggrandizement and tyranny.

I am reminded of the admonition of James Madison in commenting on the provisions of our U.S. Constitution: “If men were angels, no government would be necessary.”

Where there are no ethics, law must safeguard our wellbeing. Or to put it slightly differently: where there is no virtue, power assumes control and must be disciplined by law – even in capitalism.

Landing on the Moon

Fifty years ago when the American Neil Armstrong first walked on the surface of the moon, I was in South Vietnam. I was actually in a car driving myself from the District of Tam Binh in the Mekong River delta Province of Vinh Long up to Saigon along National Route 1. I had been reassigned from serving as a civilian Deputy District Advisor to the position of Chief, Village Government Branch in the Saigon headquarters of our advisory effort to assist all South Vietnamese nationalists from hamlets and villages to urban centers in fighting back against unwanted conquest.

I had placed a transistor radio on top of the dashboard leaning against the front window of my International Scout to hear news of the moon landing in real time as I drove north. Just as Neil Armstrong spoke – “That’s one small step for a man, one giant leap for mankind.” – a U.S. Army truck passed me going south. One young GI sitting in the back of the truck threw his half-eaten ration can to the side of the road. Three young Vietnamese boys, about 10 years old each with delighted smiles on their faces, ran up from the shacks where they lived next to the highway and took the can, a trophy perhaps to them.

I still remember the stunning moral contrast that came to my mind between the two events – one so remarkable and the other so ordinary, even tawdry; one so magnificent as a marker of human achievement, the other so profane for its celebration of the timeless human condition – war and poverty.

As we reflect on humanity’s power over nature, the gaining on our own without help from God or the spirits the ability to reach the moon, what might we learn that would help elevate us away from more wars and move poverty?

I offer only one suggestion: human achievement depends on intangibles. We tend to pridefully rest our self-confidence on things – great buildings, pyramids and walls, cathedrals and bridges, money and machines, houses, cars, jewels and other owned possessions. But is it not our ideas, our ideals, our sense of purpose, our psyches, our cultures, our interpersonal relationships, our courage, our aspirations, our fears and our desirings which lie at the origin of all our achievements – good and bad?

I am reminded of Kipling’s warning to us all, a bit of wisdom from an imperialist who nevertheless worried that we humans too often lose a sense for the transcendental:

For heathen heart that puts her trust
In reeking tube and iron shard,
All valiant dust that builds on dust,
And guarding, calls not Thee to guard,
For frantic boast and foolish word—
Thy mercy on Thy People, Lord!

The then unsurpassed technical achievements which put Neil Armstrong on the moon – science, math, design brilliance, computers, manufacturing perfection and organizational harmony – all rested on social and human capital. The money, metallurgy, guidance mechanisms and flag planted by Armstrong were second order goods derived from human genius which can be neither touched nor boxed and shipped anywhere, much less to the moon.

As we seek to engineer a more optimal economic ecology for our global human family, let us have more respect for the moral factors in our civilizations.

What Happens When There is No Leadership?

A new colleague, Hans Reus of The Netherlands, just sent me an article he wrote titled “Call to Action: Accelerating Sustainable Business Leadership” on a vital topic: encouraging leadership.

As I ended my 2004 book Moral Capitalism, Hans agrees that leadership, not systems, is a key variable in human wellbeing, for better and for worse. Leaders make systems and sustain them. Systems sustain themselves by grooming leaders who align with status quo values and interests.

So if we want to make global capitalism more responsive to the demands of sustainability or fairness, we need to cultivate the right kind of leaders.

I put it: moral capitalism does not happen by itself; it must be made to happen.

The selection of leaders is paramount.

I believe his article is an excellent statement on how to improve corporate leadership.

Please read it and let me know your thoughts.

Who Benefits When Money is too Cheap?

It seems to me that there is a non-trivial dependency of increasing concentration of wealth in the top 10% and the expansion of tradable contract rights such as stocks, bonds, derivatives, ETFs, futures contracts, options. Parallel with the expansion of financial opportunity in the buying and selling of such contracts has been government generated expansion in money and credit. Central banks have become expert in using fiat currencies and the provision of credit to pump liquidity into national economies. Qualitative easing has kept the OECD economies growing; China has funded much of its remarkable growth with government provided loans. There is so much liquidity in the E.U. that some instruments have negative interest rates.

Thus, when I read last Friday that the Dow Jones Industrial Average hit a record by closing above 27,000 for the first time, I was not overjoyed.

That day, the S&P 500 index climbed above 3,000 for the first time.

And this happened when, as Corrie Driebusch reported for the Wall Street Journal that “Second-quarter earnings are shaping up to be a challenge, but the stock trajectories of some companies that have already reported show that investors are forgiving. A handful of companies that reported disappointing earnings in June are now in a surprising place—their shares are near or above their levels prior to reporting results.”

My first questions was: what is driving stock prices up? Low interest rates making money cheap for those who have it?

My second question was: cui bono? – “For whose benefit?”

This was Cicero’s insight into explaining human behavior: finding out who benefits from an action will lead us to understand the cause of what happened.

Then, on Saturday, the Wall Street Journal ran a story that “prospects of a Fed rate cut propel stocks, oil prices.” So those with the means to speculate are made more wealthy by government policy.

And with low interest rates, savings – most important to the middle classes and even the poor – are discouraged. Asset accumulation is titled towards the rich.

As has long been said of financial capital: “Those that have, get.”