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It is a truism that Capitalism relies heavily on growth and greed (both good and bad, though, bad greed is only determined in hindsight). [still in progress]
A company is formed and begins to make money. Modest annual gains. The company could continue in this fashion for years, except there’s a problem. Without much-better-than-inflation growth, the company won’t be able to pay its people more each year in terms of salary increases or bonuses or both. It needs to do this to retain its employees. In simpler times, it was easier to live on a few dollars a day for many years at a time for basically several reasons:
- Many folks subsidized their incomes by making many of their basic needs (be it growing food or making clothes or owning a horse for years) [kinda tells you how far back I’m reaching!]
- Technology was not so mature that new “have to have” items were coming out at a break-neck pace requiring more money.
- Consumerism was not as prevalent as it is today. People didn’t spend so much of their leisure time buying discretionary items. What they did buy, they kept for life. What broke got fixed, not replaced.
In addition, the company founder needs to account for inflation: the costs of the parts that go into building his widget will creep up over time. He can buy in bulk but that means risking more money. If his widgets suddenly go out of style, he’d be stuck holding a lot of widget parts. And lastly another component that eats into profits is taxes. Taxes never go down.
So our founder has to worry about making more money each year to cover his expenses and to retain and hire good people. This fuels growth. He needs to sell more widgets to his current clientele or figure out a way to reach out to more new clients. He can also just charge more each year for a widget. At some point you’d think he would price himself out of business or he can keep the number of widgets produced each year artificially low to keep demand up. Or he has two other options: he can grow by buying another company or he can start to work out an exit strategy and sell the company and walk away.
There are other options or methods to growing: the founder can borrow money to build out production lines or purchase another company; he can go public and raise money for similar purposes. In either case he is growing and he has a need to grow.
Greed comes into play when the founder wants to grow even more quickly. I’m not going to try to distinguish between good and bad greed. That’s for another post. But greed can fuel growth. It can be creative in its approach and as long as its not about lying, cheating or stealing it can probably be considered a good thing.
Okay, so growth is a basic ingredient to capitalism: companies want to make more money so they make more widgets or they just charge more each year. But selling is a two way transaction: you need a buyer. If our company is making a consumable product (think: food), it’s easy, if it tastes good, people will be back for more. Growing food, not taking extreme weather conditions into account, is a sustainable business.
Non-consumables are a different story. How many washer dryers can a person own? If our company is building a widget, they need to consider several items:
- Product Life Cycle #1. If the product is expensive and is built to last, do I try to manipulate its life cycle [think: planned obsolescence]. Or do I sell the product on its ability to last?
- Market share. If the product is built to last [even if it’s not], then I need to consider how many people can I reach in a given time period to sell the product to. If I have competition, how do I stand out and make sure I grab a significant -growable- share of the market place.
- Replace/Repair. If I build quality items cheaply, I can still make the parts so expensive that when my widgets break down, people may consider it cheaper to replace than repair.
- Product Life Cycle #2. At some point I will need to build a new and improved widget and convince people to throw away or turn in their old widgets for a new one. Here we need a roadmap for new product releases.
- Expansion/Global markets. Even though my widget may be seen as old hat in my market, I can always try to go global and sell it to other markets where there might be the incremental need.
We’ve discussed some of the fundamentals for why and how companies and by extension economies grow. Technology has become a straw that stirs the drink in our capitalist economy. Since the late 40’s the push has been for consumerism. Conspicuous consumption is consumerism as an addiction. Advertising has pushed several themes upon us over the last 60-70 years. In the 40’s and 50’s and early 60’s it presented the general population with an enviable and seemingly achievable lifestyle: a car in every garage, the white picket fence, etc. In the late 60’s through the late 80’s the theme shifted into celebrity emulation or “live like the rich and famous”: dress like the stars, ride like the stars, go to the same vacation spots and restaurants as the stars. Finally over the last 20 years the message has subtly changed to: “just buy, there is pleasure to be had in just buying anything”.
This message was picked up and it drove us to buy, buy, buy and it helped fuel companies to grow, grow, grow and it made a number of people rich, rich rich.
But several things happened while we grew up, expanded and kept buying.
- The number of people benefiting from all this growth actually shrank. This is not good. It translates into people being convinced to buy things they cannot afford and going into debt. Without going into a laborious discussion here on this matter, it paints anew face on unwitting indentured servitude.
- Technology played its parts well upstaging a number of key players in that Product Life Cycle #2 [see point 4 above] became ridiculously short. Think of computers and iPhones: almost as soon as you walk out the door with your new purchase, it’s out of date.
- We developed a throw-away mentality. As soon as the widget doesn’t please us, we throw it away and get a better one. Things don’t last because we don’t want them to last. We’re continuously being convinced that yesterday’s product line is passe.
This is the part of capitalism that is unsustainable. Making widgets requires resources, whether it’s oil to run the machines or trees to build a product or coal or whatever. There is a finite amount of resources on this earth and we need to take this into account. Is there anything more resource-wasteful than indivdually wrapped slices of American cheese?
People vote for products with their wallets. If you stop buying a product, manufacturers stop making it. To be sustainable requires rethinking the product lines we consider vital or necessary. Yes, materials improve over time and technology can make many widgets small, both of which make widgets cheaper and better, but is it necessary, for instance, to buy a new car every 2-3 years? As cars have been priced out of most people’s budgets, leasing was created to fill the gap. This has led to shorter life ownership spans.
How do we create sustainable products or better sustainable companies. Cars, for example, have longer life spans. They last longer than they used to. It’s not unreasonable to think you can put a couple of hundred thousand miles on a car these days. Large car manaufacturers still need people to buy cars at a heady rate in order to survive. In America the answer has been to move to leasing cars. This almost guarantees that ownership lifecycle remains short. Customer turns in vehicle after a 2 or 3 year lease, company resells car as “pre-owned” [just a money-engaging way of saying “used”] or pushes the product to developing countries.
Manufacturers more than likely either need to consolidate (which would mean less choices) or to get smaller and more responsive to market trends. Getting smaller regrettably means less jobs.
Products need to figure out a way in which they remain viable for longer. [still in progress]
Unapologetic, I stand before you and apologize for my recent spate of cynicism, though, it’s far from over. There were a couple of news items recently, one in particular, that had me reaching back to Avatar as an example of my warped shoot-from-the-hip thinking.
Here’s a movie in which we hail “the hero” for saving a planet and a people different from us. But wait? How did he get to be the hero? By lying, cheating and stealing. Oh, yeah, okay, part way through the movie he was starting to get conflicted over the whole double-agent role he was playing. But the end result? The heart and soul of the planet -this tree- resembled a marshmallow after 10 minutes in the fire, many dead, life sucked out of the peoples and all they believed in. He’s disgraced (rightfully so). But then he leads them into war and they defeat the bad guys ( the very guys he helped in the first place), many more dead bodies.
Isn’t this an entirely American concept? Hero destroys good guys, watching most of them die, thinks the better of his ways, comes back as a humble leader, leads them one more into battle, more die. But because they win, he’s the hero? So American that in order to achieve an heroic stature one must elicit violence and destruction upon others almost to the point of eradication. We must be afraid of getting old or something.
Our culture, our history is so inextricably rooted in violence and one wonders if there’s a way out.
But here’s the enigma for today’s world and today’s American. What happens to the hero? He realizes he likes the other people’s ways. He finds he has a lot in common with “the enemy” and that the enemy actually does good things, smart things, and -dare I say it?- better things. Here is where there actually is a lesson for us: tolerance, possible compassion, understanding and acceptance of that which we don’t understand.
If we understand our differences (be they religious, cultural, whatever), we put ourselves in a better position for resolving them. If we take the time to understand the roots of our differences, we are in a better position for compromise and not pissing each other off so often.
Ok, jumping off my soapbox. This is a little utopian. There will always be small-minded self-interested people. 🙂
Greed. Avarice. Unproductive money. [Note: still a draft but wanted to get this out there anyway]
It’s really that simple. Oh, there are extenuating circumstances and situations that evolved during the several years leading up to the collapse but to put the blame squarely on Wall Street’s shoulders is a mistake. To blame a handful of CEOs is avoiding the real issue.
In a country of 300mm people something like 50mm of us got greedy and enjoyed the feel of “easy money”. It was a sense of power for a guy making $25k a year to be able to buy a $600k home. He definitely felt he was living the good life and achieving the American Dream, but it was a mirage. Mortgage lenders got greedy; homeowners got greedy; many of them got into the “flip-this-house” mentality in which they could put nothing down and sell up and take money out in the bargain. As long as brokers and lenders could show activity, it worked. As long as lenders could package the loans into bonds and move the liabilities off their books, it made sense.
We got greedy. We believed the infomercials. We were headed for the ‘good life”. But the “good life” was and is a sham. There is no such thing as a free lunch. Somebody has to pay. And now we all are.
One of the more frightening aspects to all this -in my mind- is the enigma of unproductive money. All the money that swirled around in these loans and many of the ensuing related derivatives was unproductive. It didn’t contribute to the welfare of the nation. It didn’t improve schools or the education system, it didn’t get us better roads or more cost effective government or life styles. It evolved into a pyramid game in which those at the top of the pyramid made a lot of money in bonuses and those near the bottom houses they couldn’t afford. Cynically, it kept the luxury yacht business going and pushed up entry prices at country clubs as those at the top spent like sailors.
Here is where Wall Street must take a hit. It was all about creating esoteric instruments that gave nothing back. It allowed Wall Street and some investing institutions to achieve a better return on investments but those investments didn’t benefit the many. Wall Street needs to re-think its purpose. The country’s financial engine is critical in its ability to invest in itself, to better our life style; but it has to rededicate itself to that proposition.
In the distant past, it was the community that oversaw itself. When children went bad, the community stepped in and made the child and its parents know in no uncertain terms that the behavior was unacceptable. When leaders went in directions that were considered unacceptable, the community stepped in and replaced the leader or made it known which direction was preferred.
As we have grown to a society of 300mm people and as we have instituted so many layers between us and the institutions we transact with or purchases we make, we’ve gradually surrendered our ability to oversee these layers and the institutions that reside in and own these layers. We rely too heavily on government and agencies to independently oversee and vet what goes on in these layers. And, regrettably, many of those agencies are financed by those very institutions they oversee. This is a sorry state of affairs.
Ratings agencies get paid by the companies they rate or whose bonds they rate. Corporate taxes and/or transactions fees pay for agencies to oversee those very same transactions and/or corporations. Is it any wonder why we have such intensive lobbying today and why huge money pass hands during and around election years? Companies have their well-being at stake. And you can’t fault them for that, because we’ve allowed it to happen.
We got greedy. 30 years ago a CEO’s salary was only a factor of 10 times greater than that of the lowly mail clerk (apologies to all mail clerks). Today it’s a thousand fold greater. And have we gotten a thousand fold improvement in corporate governance and direction? I think not.
We couldn’t stop being greedy. Everybody’s salary shot up (a few much more than others) and as a result prices have shot up so much so that our buying power has been degraded. You can successfully argue that a family pulling down $50k per year today is worse off than an identical family pulling down $20k 25 years ago. It’s not just inflation and cost of money. It’s also all the built in costs we have buried into the things we buy. We became increasingly litigious in the 80’s (I’m stealing this example from an editorial written in The Economist years ago) so much so that if we fell off a ladder, it immediately became the ladder’s fault, not ours. We stopped taking responsibility for our actions. And what happened was that the nearly a third of the cost of a ladder was to cover product liability lawsuits. Again, unproductive money, our fault, not Wall Street’s.
We have to resolve to put that old-style “community thinking” back in action. It does not good to just say no. It does no good to just scream and shout that your opponent is wrong. We need to achieve consensus. We need to understand the benefits of compromise and consensus as they are not necessarily the same.
Capitalism’s core is greed. There is such a thing as good greed. An educated guess as to what constitutes good greed would run along the lines of greed that promotes progress, not for progress’ sake, but for the betterment or improved enjoyment of humanity. Good greed would involve productive money, that is, money that doesn’t just produce wealth or inhibit wealth, but money that produces either tangible goods or promotes some semblance of cultural progress. Rather unfortunate that this definition is so open. Regrettably, it encompasses such things as fast food and taxes. Why? Taxes, for one, though they remain the bane of my existence because they are so poorly spent, do promote better health, better infrastructure and the like.
[Come up with a close]
So while we may be able to agree that there can be good greed,
We need to stop looking for blame, understand that we all are at fault, and begin again with community-style objectives and goals.
So, months ago, I said that we need to change our focus from consumerism to becoming a net exporter, that we need to concentrate on bulding better product and focusing on selling that product worldwide rather than expect American consumers to return to the past and spend over and above their means.
And, guess what? Here’s an article from the Economist voicing the same message.
At the risk of repeating myself, the point here is that one measure of country’s economic health is GDP. GDP is measured by the following formula:
GDP = Consumer Spending + Business Spending + Government Spending + (Exports – Imports)
Up until recently Consumer spending has represented as much as two-thirds of GDP. That implies several things:
- We are relying too heavily on consumers spending all they have (and more).
- Business and Government spending is contributing a lot less than consumers towards GDP. In one sense there’s some good news here. The more Government spends, the more we get taxed. The bad news is that if government isn’t spending -or isn’t spending thoughtfully- infrastructure goes down the tubes. And we see this weekly with bridges and roads and water systems failing.
- Business is a strange piece to this puzzle as some economists argue that the costs of goods sold is not factored into the equation. That is, the purchases Kelloggs made towards cardboard and corn to make a box of corn flakes did not make it into the equation. This is partly due to the fact that it would mean some double counting (since it is factored into the purchase you made to buy the box of Corn flakes). The bad news here is that business is spending less towards its own infrastructure in terms of manufacturing plants and shipping that money overseas where it’s cheaper to build products.
- The biggest issue we have -I think- is that we are net importers. That is, we buy more goods from other countries than we sell. This has to be reversed. We need to build equipment and products that the rest of the world wants. We can make great headway by being more creative in our thinking about products and technology. We could become a mass exporter of certain sustainable technologies: wind power, water turbines, and the like rather than taking a backseat to other countries. A smaller example of this is Apple and its iPhone and iPad. These are desired the world over.
We can only become leaders again by thinking smarter leading ourselves thoughtfully out of this financial morass.
Work with me on this …. the average American watches 37 hours of television per week. If you throw out half the population (babies, the elderly and infirmed) that still leaves 150mm people watching 37 hours of TV per week. That’s 5.5billion hours of passive television viewing a week. Cut that in half and you get 2,775,000,000 hours of sitting around and doing virtually nothing but watching television every week.
Don’t you think we could solve a lot of problem if we cut our television viewing by half and donated that time to solving problems? I’m only asking for a couple of hours a day. Even if it’s one hour a day, that still comes out to a billion hours dedicated to volunteer work or thoughtful solutions. Whether it’s going to school or town board meetings or attending or organizing town halls or going out and dedicating time to raising money or helping with a local project?
Don’t you think this would be a better country if we started getting involved again and spent less time doing nothing? Be it productive dialog on local and federal issues or studying root causes of issues (rather than being told what to think by mindless talking heads).
We spend too much of our time defaulting our thinking and our way of life to the talking heads on television who know no more that you do.
We must demand more of ourselves.
Mankind’s charm is its diversity. Some peoples still live in much the same manner as their ancestors did centuries ago, while others have embraced evolving technology so completely that they live in a manner that leaves their parents astonished and perplexed. Neither is better than the other as long as we maintain control of our lives and in our lives. We speak and, more importantly, think in hundreds of structurally different tongues. We record our languages dissimilarly using distinctively disparate alphabets and varying forms of logography, all recorded and read in incompatible directions. We can’t even find concurrence in something so functionally fundamental as eating utensils. We are wonderfully diverse.
Technology, on the other hand, is adamantly based upon standardization. Technology’s primary purpose is workforce reduction. While some might argue that technology creates jobs, that is a mere by-product, and when it does create jobs, it does not create as many as it would reduce.
It is no accident that we find ourselves here in the second decade of the twenty-first century in a world confused, full of strident obstructionism, mindless terrorism, empty mind-numbing political correctness and the ever-present dangerous 10-second sound-bite. It is no accident that we find more people objecting to ideas than those proffering potential suggestions.
Continue reading 1. Mankind & Technology: An Introduction
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