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Corporate Soulcraft in the Age of Brutal Markets

Published online by Cambridge University Press:  23 January 2015

Elmer W. Johnson
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Extract

The economic and political arguments for the market principle over alternative forms of economic organization are to my mind irrefutable. It is on the moral level that the perplexing concerns about capitalism center, concerns that have been raised from the beginnings of the industrial era down to the present time. This essay focuses on one major aspect of the ongoing moral test of capitalism: the test of whether our major corporations can both succeed in their profit-making efforts and also serve as one of society’s chief mediating structures that stand, like family, church and community, between the individual and the state. Should the corporation serve not simply as a utilitarian arrangement for the efficient production of high quality goods and services, but also as a moral community that shapes human character and behavior? How can it do so in this age of brutal markets?

James Q. Wilson, professor of management at UCLA, has no doubt about the answer. In an article last year, he said: “The problem of imbuing large-scale enterprise with a decent moral life is fundamental.” Corporations “are systems of human action that cannot for long command the loyalty of their members if their standards of collective action are materially lower than those of their individual members.” Capitalists should recognize, he concluded, “that, while free markets will ruthlessly eliminate inefficient firms, the moral sentiments of man will only gradually and uncertainly penalize immoral ones. But, while the quick destruction of inefficient corporations threatens only individual firms, the slow anger at immoral ones threatens capitalism, and thus freedom itself.”

Type
Articles
Information
Business Ethics Quarterly , Volume 7 , Issue 4 , October 1997 , pp. 109 - 124
Copyright
Copyright © Society for Business Ethics 1997

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References

Notes

1 William Blake (1757-1827), the poet, was among the earliest critics of the “dark Satanic mills” of industrial capitalism. From the l790s on, the evils of the factory system, with its child labor and long work days, and the “dismal science” of economics were frequent themes in literature. See, for example, Charles Dickens, Hard Times (1854). While many other critics of industrial capitalism appeared on the British scene during the first half of the nineteenth century, their writings are mere tributaries to the moral indictment of capitalism set forth in the works of Karl Marx (1818-1883).

As to the economic and political case, capitalism has raised the material well-being of the masses of citizens in the advanced societies of the world to levels that were never dreamed possible, despite the population explosion of the last two hundred years. This has been accomplished not by pursuing equality but by harnessing the energy of private, self-interest. Further, as Hayek so forcefully argued, no central authority can garner all the relevant knowledge necessary to inform individuals in what direction their multitudinous efforts must aim so as to maximize the total wealth of a society. History has amply demonstrated that only a spontaneous market order can perform this extraordinary feat. Also, capitalism decentralizes power and responsibility. Utopian forms of economic organization, aimed at achieving equality of result, require centralization of authority. As a result, the powerful and unaccountable managers become corrupt, and the system breaks down. Finally, in planned economies government decides for the consumers which goods shall be produced, whereas in free market systems the consumers are sovereign: voting with their dollars, they are free to choose what goods and services shall be produced, and in what amounts.

True, market systems permit moral weaknesses. For one thing, corporate managers are often tempted to subvert the principles of free competition and fair dealing, entering into cartels, defrauding investors or exploiting workers. Yet, thanks to the vigorous enforcement of anti-trust laws since the 1890s and securities and labor laws since the 1930s, we have greatly alleviated these concerns.

Second, the market often fails to protect important social interests. One of the principal roles of government in a market society is to create and maintain a regulatory framework that prevents enterprises from inflicting social harm as a side effect of their operations. Here again, we have dealt tolerably well with this problem of externalities. Consider the legal reforms of the 1960s and 1970s that basically transformed corporate enterprises into subcontractors of the federal government to protect a wide array of social interests: environmental integrity, energy efficiency, product safety, safety in the workplace, equal employment opportunity, and employee retirement security, to name a few.

Third, a market economy, left to its own devices, would produce intolerable inequalities within a generation or two. Thus, in order to maximize the wealth of the nation as a whole while maintaining social stability, democratic capitalist societies have groped for a balance. On the one hand, they must tolerate substantial wealth and income differences as a condition for achieving adequate long-term capital formation, rewarding managerial training and responsibility, and providing the entrepreneurial incentives for innovation and risk-taking. On the other hand, their governments must continuously strive to maintain a social safety net without creating a permanent underclass. We have fared poorly in this regard, but that is not due to some overwhelming logic of the market. For example, the ancient inequalities in Britain grew out of the property system, not out of some irremediable defect of the market.

In 1989, the wealthiest one percent of U.S. households—with net worth of at least $2.3 million each—owned nearly 40 percent of the nation’s wealth. By contrast, the wealthiest one percent of the British population owned about 18 percent of the wealth there, down from 59 percent in the early 1920s. Further down the scale, the top 20 percent of Americans, households worth $180,000 or more, had more than 80 percent of the country’s wealth, a higher figure than in any other industrial nation. Income statistics were similarly skewed. The top-earning quintile of families accounted for 55 percent of all after-tax income, up from 41.5% in 1977. According to Paul Krugman, in his book, Peddling Prosperity, from 1979 to 1989, average family income rose 11 percent. This sounds like progress until one learns that 70 percent of the increase went to the top one percent. “What we have learned,” he says, “is that when we speak of ‘high-income’ families, we mean really high income: not garden-variety yuppies, but Tom Wolfe’s Masters of the Universe.” Says Edward N. Wolff, an economics professor at New York University, “we are the most unequal industrialized country in terms of income and wealth, and we’re growing more unequal faster than the other industrialized countries.”

The common defense to the charge of growing inequality is that there is income mobility, so that those in the top quintile one year may be in the third quintile some years later. It is true that there is such mobility, but as Krugman points out in his book, not enough to matter very much.

Beyond the three areas of moral concern summarized above are concerns as to human values in the workplace, the focus of this paper, and more generally, concerns as to the debilitating effects of an unconstrained market society on the character of persons and communities.

2 “Capitalism and Morality,” in the Fall 1995 issue of The Public Interest.

3 Encyclical Letter of John Paul II. 1981. Laborem Exercens. Boston: St. Paul Books & Media.

4 For a useful summary of the Toyota production system and its influence in America, see chapter 22, “The HighTrust Workplace” in Trust: The Social Virtues and the Creation of Prosperity, by Francis Fukuyama. 1995. New York: The Free Press.

5 Social Limits to Growth, pp. 117-118. Cambridge: Harvard University Press, 1976.

6 Journal of Democracy, January 1995.

7 For an excellent discussion of this issue, see Charles Taylor. 1991. The Ethics of Authenticity. Cambridge: Harvard University Press. Also see Putnam, op. cit. supra, note 5, and the excellent article by Michael J. Sandel, “America’s Search for a New Public Philosophy,” in The Atlantic Monthly, March 1996. To summarize the point of Sandel’s article, the dominant public philosophy today holds that the purpose of government is to provide a neutral framework of procedural rights within which people can choose their own ends. This public philosophy was spawned by the modern, narcissistic culture of self-realization in which autonomous, private individuals are free to live their own lives by their own values, relatively devoid of any irrevocable ties to others. This liberal vision “lacks the civic resources to sustain self-government” and “cannot inspire the sense of community and civic engagement that liberty requires.” Sandel calls for a new republican soulcraft perspective. He acknowledges that there is a coercive version of soulcraft, such as that advocated by Rousseau, where the aim is to submerge the individual in the general will. But, he says, “successful republican soulcraft involves a gentler kind of tutelage.”

8 Harv. Bus. Rev., September-October 1989.

9 Harv. Bus. Rev., January-February 1985.

10 Article by Graef Crystal in Los Angeles Times, July 23, 1995, Sunday Edition.

11 “The Downsizing of America,” March 3-9, 1996.

12 Co-authored with Perry Fagan. “Capitalism Isn’t Broken” in The Wall Street Journal, Friday, March 29, 1996.

13 In the 1980s, many companies began to adopt supplemental retirement plans for their top executives, building into the executive’s base for determining his level of retirement income, not only his average salary over, say, the best five of his last fifteen years of service, but also the extraordinary bonuses that he received in those five best years. Consequently, given the exponential increase in bonus pay over the last decade, a top executive can now retire with an annual income of two or three times his base pay while he was working! Some companies are even taking stock option gains into account for this purpose. Pension funds and other large institutional holders are only now beginning to focus on this latest subversion of the principle of pay for performance and its likely effects on worker morale and the larger society, once the full implications of this practice are more widely understood.

In addition, with all the focus on the CEO pay explosion, there has been very little attention paid to the explosion in retainers, meeting fees, stock options, and retirement plans for outside directors. This phenomenon makes it even more unlikely that directors will speak up against excesses in CEO pay. Some of the observations in this endnote stem from telephone conversations, in the course of preparing for this lecture, with John Biggs, chief executive officer of TIAA/CREFF, and Graef Crystal, the well-known compensation expert.

14 Capitalism, Socialism and Democracy (Harper Colophon Books, 3d ed., 1950), pp. 137-138. According to Ibn Khaldun, the great fourteenth century Moslem historian and philosopher, civilization arises out of social cooperation which in turn requires both group feeling and the ordering and restraining influence of the leader. The leader’s power to bring about a high level of social cooperation depends on his force of personality for inspiring and sustaining this group feeling or solidarity. The Muqadimah (Princeton Univ. Press, 1969). If Khaldun is correct, then surely the self-interest approach to executive motivation, by itself, presents serious obstacles to the cultivation of true leadership and thus to highly productive levels of worker cooperation in the corporation.

15 Harv. Law Rev., Vol. 109, No. 2, pp. 458-86, December 1995. I am indebted to Harvey Brooks for bringing this article to my attention. Harvey Brooks is Professor of Technology and Public Policy, emeritus, at Harvard’s Kennedy School of Government.

16 The role of a profession can also be defined narrowly by the law, but this is not the problem today. Consider the stakeholder provisions that have been incorporated into the corporation laws of most states and that generally permit or require directors to take into account the interests of the corporation’s several constituencies. Or consider the lawyers’ codes of professional responsibility that require truthfulness and fairness in dealings with opposing parties and their counsel and that prohibit a lawyer from engaging in conduct that is prejudicial to the administration of justice.

17 The Costs of Living: How Market Freedom Erodes the Best Things in Life. New York: W. W. Norton & Company, 1994, p. 81.

18 Over the last two years, there have been dozens of articles on the “Generation X” phenomenon in the major periodicals. See, for example, the cover article in the May 8, 1995 issue of Forbes.

19 Book I, chapter 9, paraphrased.