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OPTIMIST ORIGINAL ARTICLE

Rising inequality, how to rescue good ideas, and the need to change one rule

SUMMARY:

By JURRIAAN KAMP

I recently finished the third part of Robert Harris’ trilogy on the life of the great Roman orator Marcus Tullius Cicero. Cicero was a contemporary of Julius Caesar whose works have also been saved; as a result, many facts of that era of Roman history are known. Harris has succeeded in weaving these facts with his fiction into a compelling story. What stands out is that Cicero with his oratory talents tried to save the Roman Republic at a time when the power of Caesar rose and dictatorship and empire emerged. Cicero lost and so did the Roman Republic. Today, we mostly talk about the Roman Empire that was ruled by one man, the emperor. However, the preceding republic was a great attempt to distribute power. The highest positions in the government were held by two consuls, who were elected by a senate composed of patricians. There was no place for lower class citizens, women or slaves. Yet, patriarchal power could not get concentrated: The two consuls had to rule jointly and were elected for only one year.

It was a successful structure that allowed for the rapid rise of ancient Rome. In hindsight, it is easy to see how that success bred the ultimate failure of the republic. Rome became very wealthy through successful conquests around the Mediterranean and into Germanic Europe. The generals bringing home these riches—Caesar first and foremost—became too wealthy and too powerful. They could “buy” all the power they wanted and Cicero’s fine words did not stop them.

There are remarkable comparisons between the great ideas behind the early Roman Republic and what America’s Founding Fathers had in mind when they structured their republic. And, as in the days of Rome, the brilliant concept of distribution of power in the United States is threatened by too much wealth. The dominant influence today may not be with America’s generals. But the country’s corporations can buy any political influence they want to pursue their goals. I don’t know who today’s Cicero is—Bernie Sanders?—who keeps reminding us that if the structure of power distribution loses, ultimately all of us are losing? I do know that America’s fine foundations are in urgent need of protection.

I thought about Cicero’s quest when I looked at “Our broken economy, in one simple chart” on the website of The New York Times. This interactive statistic clearly shows how wealth in the U.S. has been increasingly concentrated with a happy few since 1980—when Ronald Reagan began lowering taxes and attacking government “as the problem”. It’s disconcerting to see how the economic life for most people has been at a standstill at best for almost 40 years.

 

 (Graphic: The New York Times)

As we have seen in recent weeks, there are almost enough lawmakers in Washington D.C.—who all enjoy comfortable health care insurance—who are willing to take away such basic rights of other people under the pretext of all kinds of flawed arguments. Invariably, when power concentrates, risks get pushed down. In the days of Rome, “barbarians” at the fringes of the empire paid for the good life of a few. There was no hunger in Rome, but everywhere in the colonies people were starving. Similarly, the extreme riches of that modern infamous 1% has been concentrated at the great expense of the 99%. Just look one more time at that statistic. Society’s negative impacts—of disease, economic upheaval, bad diets, pollution—are carried by a vast majority of people who cannot defend themselves and who can easily be misled by populist politicians until, at some point, the fabric of life breaks.

Rome could continue for centuries before it finally collapsed in decadence and the “barbarians” took over. I sometimes wonder how much time America has left to reorganize itself and to re-create a more compassionate and inclusive society. Yes, America is the land of the free market but until 1980 that market did work for most people, not just for a few. When, led by Reagan, America began embracing Milton Friedman’s adage that the only function of corporations is to maximize returns for shareholders, society began to break down. People started being—and feeling—left behind, while corporate profits began maximizing and the stock exchange began hitting record after record, funneling the profits to the very wealthy.

Now we have reached the situation in which it is hard to be elected as a politician without the support of corporate money. The fossil fuel industry is one of the biggest political donors. That same industry—the driving force behind climate climate change, major environmental degradation and widespread air pollution that kills millions of people every year—also annually gets $5 trillion in subsidies. These subsidies are not in the public interest and if they would have been cancelled, clean, healthy, renewable energy would have been competitive a few decades ago; many lives, as well as the climate, would have been saved. Observers have pointed at the dangerous collusion between corporate money and political power—and this is not a new problem. As far back as 1864, Abraham Lincoln warned in a letter that “corporations have been enthroned and an era of corruption in high places will follow …until all wealth is aggregated in a few hands, and the Republic is destroyed.”

Lincoln’s words show extraordinary foresight.
So what do we do?
First: not all sanity is lost in the western world. Many argue that the leadership of the West has now passed to Germany’s Angela Merkel. Germany’s strong economy is built on stakeholders—not just shareholders. The country takes in refugees and its citizens overwhelmingly embrace renewable energy, even if they have to pay an additional fee for it. France under its new young president is also on an inclusive course. Together France and Germany could lead a renaissance of joint economic and social values in Europe and that inspiration may even cross back over the Atlantic Ocean.

Strangely enough, technology can help as well. The sharing economy shows how citizens can work together even if government fails. Granted, Uber and Airbnb are hardly perfect examples of a citizen economy, as they are still machines that drive most profits to a few. But the sharing system shows major potential and the innovation of the blockchain opens opportunities for civic collaboration on a large scale—without corporate brands. Brands—from McDonalds to Uber—indicate to people they can trust a product or service. The blockchain brings a guarantee of trust between total strangers without the need for any corporate intervention—and thus without the result of consolidated corporate power. So far, most talk is about the possibilities that the blockchain brings for digital cryptocurrencies such as Bitcoin. However, the blockchain concept reaches much further and deeper and it can be at the core of any organization or structure of services. We recently reported on a blockchain-driven initiative to bring Internet users and advertisers together in a way that empowers the user.

Finally, we need Cicero. We need a sharp orator like him to analyze, unravel and dissolve the corporate structures that are undermining society. Economic activity and the free market are and will remain the drivers of change. Business is the most powerful force to create the world we would like to live in. But we have to set the right rules for corporations to play by. Few realize that—once upon a time—a corporation was a privilege granted by society to serve society. It was a privilege that needed to be renewed and that could be revoked. Milton Friedman lost his understanding of history when he argued that a corporation had no social responsibility other than serve its shareholders. As the essay below argues, changing just one rule can restore the humanity and justice that is so clearly lacking in capitalism today. Cicero would have made it into a powerful declamation.

Changing just one rule can restore the humanity and justice that is so clearly lacking in capitalism

By JURRIAAN KAMP

People’s priorities at home are far different than those at work. You’d almost think their house was in a separate world from their office. This may be one of the most remarkable things about modern society. There’s not a father on the planet that would consider pouring poison in the backyard where his own children play every day. But at the office this same man—yes, it’s mainly men involved—expresses little concern about dumping polluted waste water from a factory he manages into a river that flows alongside the yards of his children’s friends. Another father creates an ad campaign encouraging children to drink coffee—a new market, higher sales. It is unlikely that at home this same father would push caffeine on his kids in the interest of making a few bucks. Outside the house, businesspeople do things they would consider absurd at home.

Somehow a moral breach has emerged between home and work. You can get away with more at work; the boundaries are less strict. And this moral gray area ultimately leads to excesses so vast that’s its frontpage news—Enron, Bhopal, BP and the Exxon Valdez. Why does this happen so frequently with people who otherwise are law-abiding citizens? It is the legal structure of corporations that spawns such abuses. Companies profit from an historical privilege: limited liability. That means that the responsibility of a company’s owners—the shareholders—never goes beyond the money they invested. And this set-up incites many corporations to dump the responsibility—and expense— of their action on other parts of society.

An example. In 1979 General Motors launched a new model of car on the market, the Chevrolet Malibu. The car’s fuel tank was placed way in the back, which was unusual. In the prototype phase it became clear that this significantly increased the risk of fire in the event of a collision. General Motors was aware of this, as later became apparent from an internal memo. The memo included a calculation that it would cost two dollars and forty cents (U.S.) to make the fuel tank safer, but that it would be cheaper to pay any damage claims from potential victims. General Motors did nothing. The judge, who in 1999 awarded a large sum of money to a woman and her children who suffered serious burn injuries following an accident with a Chevrolet Malibu, noted the placement of the fuel tank was meant to “maximize profits at the expense of public safety.” In other words, General Motors’ limited liability meant that the company could transfer the costs of its serious mistake to society as a whole. Current laws allow a company—which is ultimately a group of people who jointly work to get something done—to carry out an absurd, inhuman decision that each of those involved would never get away with in his or her private life.

An individual who consciously does harm to another runs the risk of landing in jail. But if a corporation causes the same damage, the consequences are minimal. The company may be forced to pay a fine. The fine may even be substantial but it is often—note the paradox—tax deductible. It could face a boycott by consumers. Shareholders may see the price of their stocks fall and might sell their stake. And even though supervisory board members and management can be prosecuted for mismanagement, in practice such cases are rare. After a disaster, the company’s senior executives usually leave and go to work for another company. Society, the general public, is left with the damages and the company simply continues with its activities under new management.

Enlightened businesspeople hope that “corporate social responsibility” will help root out the causes of such disasters. They hope a moral revival will remove this ugly outgrowth of modern capitalism. Even though every initiative encouraging the business community to take a greater degree of responsibility deserves all our support, this new trend will never be completely successful. That’s because—as Milton Friedman, who won the Nobel Prize for Economics, once said very succinctly—the only social responsibility for a company is to make a profit for its shareholders. In other words, as long as limited liability for shareholders remains the law, corporations will never fully embrace social responsibility. Corporate social responsibility or even the laudable initiative for “B-corps” does little to change the principle aim of a corporation: protecting its shareholders from the consequences of the company’s dealings.

The vast majority of corporations will become responsible players in society only if the rules of economic trade are changed. The transformation of the business community can begin only if the rules of business law are changed to include responsibilities for companies that go beyond ensuring profits for shareholders.

It’s a remarkable turn of history that turned business ventures into institutions that carry less responsibility to society than ordinary people do. Up to the sixteenth century the Chinese and Arabs were the most successful traders in the world. They were wealthier and had better ships than their European counterparts. When the first European, Vasco de Gama, rounded the Cape of Good Hope in 1497 his African hosts—who were accustomed to visits from large Chinese trading ships—wondered where he had found the nerve to set out to sea with such pathetic ships. But in the decades that followed, the Chinese lost their advantage. Why? Because in Europe discovered an extremely effective system of generating income: the corporation.

The corporation, a business firm with shareholders, is without a doubt the engine of modern capitalism. Nearly all economic progress of recent centuries, most wealth and prosperity, almost all inventions have been realized with the help of the corporate structure for business. Without these corporations there would be no planes, no cars and no fuelling stations to fill them up with gas. The foundation for this success was established in the sixteenth and seventeenth centuries. The world’s first multinational was Holland’s Vereenigde Oostindische Compagnie (VOC, or Dutch East Indies Company), founded in 1602.

Dutch merchants back then had discovered they needed more investments to finance risky trade expeditions to Asia. Up to that time, companies were partnerships. The people involved in a firm made joint investments and ran their company together. Managers and owners were one and the same. That concept constrained the size of investments: there was a limit to the number of partners who could successfully work together. The new model created by Dutch tradesmen involved detaching the company’s ownership and management. There were shareholders, who invested money but didn’t go to sea and weren’t involved in other company dealings. Thanks to this structure, the Dutch VOC was able to raise a lot more money from a greater number of people to pursue its plans.

But there was one obstacle. The expeditions the company and its counterparts in England and other countries embarked upon were high risk, comparable in our era to space exploration. Ships often sank during the lengthy voyages. In other words, major investments could be easily lost and—even worse—shareholders could be held liable for big losses when a storm in the Pacific or a pirate raid meant suppliers couldn’t be paid or a shipment didn’t make it to buyers. At that time, it was commonplace to transfer debts from one generation to the next until they were settled. This severely curtailed investments. Shareholders weren’t terribly enthusiastic about investing in companies in which they had no influence and that could burden them—and their offspring—with debts. VOC’s solution? Limited liability. Investors and shareholders could never lose more than their investment. And that creative and lucrative system marked by a limited risk of loss and an unlimited opportunity for profit still exists today—with huge consequences for all of society.

Of course in practice, individuals are rarely subject to unlimited liability. Even if you are found liable for some expensive mistake, you don’t have to pay for the damages you incurred if you don’t have the money. Which is why insurance is required for certain activities like driving a car. Nonetheless, individuals generally comply with social and legal rules because they expect others to do the same. People who always cut in line, drive recklessly and take advantage of others’ generosity usually face the social consequences of their selfish behavior. In contrast, however, it appears a selfish company that focuses on maximizing profit and transfers the resulting costs to society is considered quite normal.

In the imperial era, such “corporate egotism” served a general, public interest. Plundering of colonies was considered to be in the general interest of Dutch prosperity—the fact that this was a reprehensible vision is another story. The government granted companies like the Dutch VOC the right to confer limited liability on their shareholders, as long as it was clear the company served the public interest. The worst risk back then was a sunken or seized ship and the limited liability of shareholders involved financial debt. Nowadays there are significant other interests at stake—including environmental and public health. Corporate policies and actions can affect generations to come. Companies dump toxic waste that ends up in the food chain. Pharmaceutical manufacturers introduce powerful medicines on the market that will have consequences 100 years from now. Tanker ships carrying oil or chemicals can destroy natural areas for decades. Dangerous nuclear power and chemical plants are located near densely populated cities, turning mistakes into full-scale disaster.

Today’s company is potentially one of the most dangerous forms of human activity. The list of possible accidents is long, the responsibilities are huge—endlessly greater than in the time of the Dutch VOC—but the legal form of incorporation has remained unchanged since the seventeenth century.

In fact, things have gotten even easier for the business community. Dutch VOC executives had to negotiate with the government to limit the liability of their shareholders, while the modern businessperson simply goes to a lawyer’s office and fills out a form. Anyone can set up a company for a fee. The days are long gone when business owners must negotiate with the authorities regarding what would be done in return for the right to limited liability. More to the point, no one feels they are being granted special privileges when they set up a corporation.
Because all this has become so automatic, companies have become much more than a group of people jointly carrying out an activity. They are a kind of “social technology” with an independent existence. A company can continue when its founders die. Management comes and goes and the same is true for employees. A listing on the stock exchange means ownership of a company becomes diffuse. Parts of a company can be sold. Companies can merge.

Despite all these changes, the company “lives on” as long as enough money is being earned to pay the bills. But that independent company has no soul and feels no pain. When a corporation damages something or someone, it does not express regret or say it’s sorry. Companies have the same rights as a person, but absolutely none of the obligations, moral and otherwise.
Which is why running a company this was not business-as-usual until recently. In the nineteenth century, the concept of limited liability was seen more as a weakness than a strength because the involvement of the owners was not assured.

In the 1820s Sir Robert Peel, then the wealthiest British industrialist said: “It is impossible for a mill at any distance to be managed unless it is under the direction of a partner or superintendent who has an interest in the success of the business.” In the new world of America, companies with limited liability were once viewed with great suspicion. The corporate structure was accepted for particular projects such as building the railways, which was considered in the public interest, but not as a general form. The governor of New Hampshire, Henry Hubbard, stated categorically in 1842: “There is no good reason against this principle. In transactions which occur between man and man there exists a direct responsibility—and when capital is concentrated… beyond the means of single individuals, the liability is continued.”
Nonetheless, in 1830 Massachusetts had decreed that a company was not required to be involved in public works in order to be granted the privilege of limited liability. Connecticut followed in 1837 and then the whole process snowballed.

In a letter written in 1864 Abraham Lincoln warned that “corporations have been enthroned and an era of corruption in high places will follow …until all wealth is aggregated in a few hands, and the Republic is destroyed.”

Strong words, but for those who recognize the painful gap between rich and poor in today’s world and the enormous negative impact of modern business on nature, Lincoln stands as a visionary. Greed unleashed a monster. The corporation became simply too lucrative as a profit and wealth machine. Now, a century and a half later, we can barely imagine how the world would have look without companies with limited liability. It goes without saying that there has also been a lot of positive change thanks to corporations. And yet we must face the facts: the old-fashioned limited liability business structure is no longer tenable in our time. If the influence of companies on society and on people’s daily lives is not curtailed, the liability of their owners cannot remain limited.

What would the world be like if shareholders were once again held liable for the actions of the companies they partly own? Scrapping limited liability is a drastic, but extremely promising measure in the battle against the excesses of modern capitalism. If it were eliminated, shareholders would invest their money more carefully. They wouldn’t only consider a company’s profitability, but also the way it is run. They would choose companies with a good track record in the area of people and nature. And they would also want to know who the other shareholders were, because they would be sharing a joint responsibility.

In addition, shareholders would no longer spread their investments over many different companies, but instead concentrate them so as to be able to focus on the company for which they were responsible. They would be deeply involved in the company and keep an eye on management and company operations. They would want to know if the company was using child labor. They would want to know how waste water was being purified before it is dumped. Getting rid of limited liability would force shareholders to take responsibility for the activities in their company. Once again, people would be responsible for people. And the lack of responsibility that goes hand in hand with the current corporate structure would disappear.

Critics will wonder who would dare make the crucial, large-scale investments needed for economic advancement if there was no shield from large risks. It’s a relevant question but the challenge is less daunting than it would appear. Eliminating limited liability would certainly not have a major impact on major companies, which have the greatest effect on society. Lawrence Mitchell, a law professor at George Washington University in Washington D.C. includes some interesting calculations in his book Corporate Irresponsibility. He takes the example of Microsoft and writes (in 2001) that over five billion shares (5,355,377,000 to be exact) of the company are in circulation. Imagine that Microsoft goes bankrupt and leaves ten billion U.S. dollars in debts. This would mean that the shareholders would have to contribute two dollars each to settle the debts and repair the damage to society. Mitchell writes: “It’s at least worth asking whether this is too high a price to pay for the elimination of limited liability if in fact the result would be more responsible, long-term corporate behavior.”

Microsoft is a company that can incite a great deal of disquiet and create significant financial damage, but software is not directly life threatening. Take another example: Union Carbide, which, due to negligent maintenance and mismanagement, caused a disastrous gas leak in Bhopal, India in 1984, where 22,000 people lost their lives. After a great deal of legal back and forth, Union Carbide finally paid the Indian government $470 million U.S. in damages. A pittance, given the number of people killed. In addition to those killed, at least 100,000 were wounded. At the time there were 155 million Union Carbide shares in circulation. It staggers the imagination to learn that Union Carbide’s shareholders were paid a total of nearly $25 U.S. in dividends per share from 1984 to 2001, when the company was acquired by Dow Chemical. Even if half that amount went to Bhopal, the lives of the wounded and next of kin would be drastically different today.

Might the Bhopal drama have been averted if limited liability for companies had not existed? Yes. Just as the introduction of limited liability has led to irresponsible and inhumane dealings, it is easy to see that it’s elimination would lead to a substantial increase in responsible, humane and attentive behavior in society. Changing just one rule can restore the humanity and justice that is currently so clearly lacking in capitalism. Once again, fathers and managers will be the same people—and all our backyards will be clean.


Past Editions of The Optimist View:

It’s worth paying taxes for a better joint experience (August 6, 2017)

The world is a better place than you think (July 30, 2017)

Two plants that can cure the planet (July 23, 2017)

Let’s stop flushing forests (July 16, 2017)

Autonomous driving: A cure for the deadliest disease (July 9, 2017)

Meeting the methane challenge with an open mind (July 2, 2017)

Never trust predictions: The future will be better than you think (June 25, 2017)

You need to get ready for digital money (June 18, 2017)

Reforesting the Ocean (June 11, 2017)

Pathways to peace through understanding and meditation (June 4, 2017)

Message from the man who brought back a rainforest: trees, trees, trees (May 28, 2017)

Obamacare, Trumpcare… or Self care (May 21, 2017)

Donald Trump has brought respect for truth back into the world (May 14, 2017)

Welcome to Planet Trauma—and what you can do about it (May 7, 2017)

Just one drop: An introduction to homeopathy (April 30, 2017)

Why you should take supplements—and which ones (April 23, 2017)

Every day I make a decision not to give up (April 9, 2017)

We can reverse global warming... and we're doing it (April 2, 2017)

A Supreme Court hearing, today's truths and the bestselling book of all time (March 26, 2017)

Every crisis is also an opportunity (March 19, 2017)

Ubuntu or why we cannot be human alone (March 12, 2017)

We are saving so much oil so quickly... (March 5, 2017)

Cultivating peace and an economy of sharing: toward a more just society (February 26, 2017)

Global warming: The air pollution bypass (February 19, 2017)

Democracy? Let's do it. (February 12, 2017)

Trains, Power, and Trump (February 5, 2017)

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Every time I enter my health-club in California, I’m greeted by a sign: “Change begins within.” We all know the truth of this: non-violence has to start in imagination or vision or conscience. Peaceful action seldom arises from a scattered or troubled mind.

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2 Comments Sort by

  • Serena Wills.Central Park East Secondary School

    Vine launched in 2012, and it was an important part of the Internet's evolution into a place where creativity could be unleashed in extremely short bursts. A six-second maximum per video sounded like a very short time at the launch of the service

  • Serena Wills.Central Park East Secondary School

    Vine launched in 2012, and it was an important part of the Internet's evolution into a place where creativity could be unleashed in extremely short bursts. A six-second maximum per video sounded like a very short time at the launch of the service