The Economics of a Truly Different World Order

One of the great questions of my life, handed down to me by the quirk of my place in history, has been how to reconcile capitalism and communism.

There is nothing like capitalism to provide incentive to people. The generally accepted monetary medium (and the systems that make that possible), rather than the favor of the king or the acquisition of trade resources, has proven to be the ticket to change in people’s lives. Capitalism has proven to be the engine that provides this both in terms of providing a means for an idea of money that can provide across the entire range of life, even unto governments and setting a stage upon which individuals can take risks which may result in their success. Nevertheless, capitalism does have an Achilles heel. It tends toward consolidation of wealth into the hands of those who can obtain the power to accumulate that wealth, the successful can become too successful, as it were. The very power of incentive comes with a downside, that there will be losers when the opportunity offered is either turned down or there is a failure to see it through. The successful can insulate themselves to a degree from failure at a certain point, while all those who don’t attain to that level of accomplishment can’t.

Marx warned about the consolidation of power that can happen under capitalism. He offered communism as a counter system. He thought that the industrial revolution he was seeing all around him, not unlike how many today are affected by the information revolution around them, had the power to change everything. Around this notion he built a labor theory of value which concentrated the creation of value in that sphere, denying that prices are always arrived at in a market.

Marx seemed to accept the notion that there could be an ‘end to history’. In other words, he seemed to postulate that the same consolidating forces at work under the capitalistic paradigm which had served capitalists unto such great wealth had also altered the labor/opportunity landscape. They had served to identify grand schemes under which people could understand their work, it would seem, such that they no longer needed the vision of capitalists in order to go forward either in a more immediate day to day seeking of betterment or a longer term year on year or decade on decade attempt at the same. He imagined that seeing this the workers could revolt and throw off the chains put upon them by this relationship. That they could use this new easily identified economic landscape in the manner it was wrought, providing opportunity, but that without capitalist class overlords that suddenly there would be so much excess success, if you will, that even those who failed would have enough to get them through as well.

Good luck with that. Maybe in some other reality it would have worked, but in this one it meant the loss of incentive. When the world changed the goals of the workers stayed the same. They became estranged from incentive, except for enough to just get by. They didn’t have much use for vision leading to change in response to the demands of the world. The excess they dreamed of evaporated right before their eyes.

Marx’s solution may have been wildly off the mark, but his criticisms weren’t. The system will tend to give those who have the power to obtain wealth the power also to dictate the level of their acquisition. As those at the top stretch this activity further and further into the economic landscape the markets in which people engage in daily can struggle to accommodate them. When the workers in general make less money they tend to spend less money, and they tend to spend it across a different range of places.

Lest we demonize capitalism at this point it ought to be understood that capitalism does have mechanisms that have risen within it as it has developed that address this problem. The greatest of these is probably oligopolistic competition. An oligopoly develops when there are several key players at the top, none of whom is capable of supplanting the others. Unlike a monopoly an oligopoly can’t just extract whatever prices it desires. Though they may tend to want for as much as they can each company involved in an oligopoly has to play off of what the others are doing, or it could lose. They are less insulated from failure than, say, an ultra-successful robber-baron capitalist who had no such competition to deal with.

Oligopolies are responsive to change when monopolies and communist schemes aren’t. The trouble with oligopolies, however, is that they see their relationships with the people as strictly on a cash basis. They respond to each other, but they don’t necessarily respond to what the people’s wants or needs are. Nine out of ten persons asked might say in reply to the question, ‘Why is a business in business?’, with the answer, ‘To make money!’, but this simply is not true. Businesses are in business to provide goods or services in response to demand. To see it the other way is to place an endeavor in the position of monopolistic or communistic response. As we’ve seen, the world is not that simple.

It is the level of profit that can be derived from providing a needed good or service which tends to determine what kind of business will provide for it. The very lowest margins, or those with negative returns are often given over to charity. Sometimes, big complex conglomerates take these tasks on as well, usually as a means to facilitate other more profitable endeavors. But, across the line, companies tend to take on the risk of making a profit off of fulfilling a perceived need by organizing themselves to do so and then attempting to either create a situation where they can somehow extract more from the people or by controlling costs. This is cash basis thinking at work.

Players involved in oligopolies understand this, but by virtue of their inherent estrangement from the people via their cash basis thinking they have trouble acting upon this understanding. It turns out to be natural for them to try and convince you to join them in their vision than for them to truly understand who you are. After all, you are just another one of the many. They are one of a small group. They barely understand the actions of their own group. How are they to understand you, alone within the context of the many that also are? How much worse is it for businesses which don’t operate in an oligopolistic environment? They understand their competition less, even if they do exist where they could possibly understand you more.

What has developed as a result of this is our modern understanding of the corporation. Stock holders are owners, but they aren’t in a relationship with management in the way that owner-operators are in relationship with themselves when they run a small business. Stock holders, who are people who can theoretically understand the true nature of demand, can only vote their confidence by buying or selling their stake in the corporation. Sure they can vote to elect the members of the board of directors, but that is also indirect in the same distanced manner. Stock holders, therefore, do not communicate anything complex to management. As individuals they may have diverse reasons for buying or selling, but to management it is all the same. It has to be this way or the cash basis way of thinking is violated. When you think about it, this way of owners influencing corporations really does work, but over the long run. It’s simple operant conditioning at work. The rewards for a given action create more of that same action. It’s Pavlov’s dog. This works as modern management is very tied into how a company’s stock price performs.

What about the short-term? Modern information available business now operates at a rate of change where understanding the short-term is becoming increasingly important. Without violating cash basis thinking how can management become even more responsive to an ownership which is theoretically even more in touch with the idea of demand and what structures it? Forget that line about management’s purpose being to maximize return to shareholder’s, by the way. Their truer reason is to recognize demand more properly and more accurately and to organize the business in such a way as to respond to it. Along the way they will want to figure out how to cut costs and the like, so as to maximize return, but that can’t be done unless recognition happens first. Don’t forget that when workers have less money they also spend less money. While it’s great to create demand, it’s a whole lot better to accurately recognize it. It isn’t management, in their small group status that is best equipped to do that. Rather it is ownership, in its broad based every or any man state, that is best equipped to judge whether demand has been recognized. Here is where we see the ethical understanding of ownership being able to influence management, not because they see a violation of that understanding, but rather because they see the impact upon demand that such things bring about. But how are they going to do that when demand is changing at a faster rate than their means of communicating success or failure to management is adequate to keep up?

In response to this I propose a new class of stock, one which is tied not to earnings, but rather to a share in the pool of money available to management for bonuses. In short, a class of stock which derives its only return, or the bulk of its return from what it gets from that pool of money out of which management is rewarded for their short-term performance. What they say goes. How this would work could be quite simple, the shareholders vote on how much of the available pool of money they want for themselves versus how much they are willing to reward management with. The pool should grow from period to period if management is doing the right thing (as long as the pool is consistently judged by the same standard from period to period) so shareholders might want to incentivize them to continue by taking less. If it is working out the other way, though, that ownership perceives that management is not recognizing demand accurately, then they may want to get what they can while they can, thus communicating their perception to management.

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