Wednesday, August 18, 2010

System Failure

Early in his term during the dark heart of the meltdown, President Obama said he didn't categorically blame business or even banks for America's woes. These are good people, he said, caught in a system that rewards them for doing things that end up harming the economy. Change the system, change the incentive, and you change the outcome.

I'm not sure everyone heard the message beyond not blaming banks, but as a business consultant who used systems to change behavior, and as a student of law and investing, it made perfect sense. It also tied off perfectly with the large systemic reforms we needed in finance, health care, immigration, environmental management, and more.

Public corporations have no moral compass and no soul. Their motivation is short-term profit. Not a lot of nuance there. Show them the money, and they'll do what you want.

At least that's how it ought to work. The trouble is, when you describe the ideal environment for corporate profit, it looks like the opposite of what humans need to thrive. That's a lot to overcome with a few carrots.

For example, unfettered corporations would like to:

--Drive down the worldwide cost of human capital. Indentured servitude would be nice.
--Drive down the value of human capital. Zero value means the elimination of wrongful death as a cause of action. It also means the elimination of most medical care and all but the most basic education for most people.
--Ban unions and anyone else who does not support corporate objectives.
--Make all property private property with no public input on how it is used (up).
--Turn everything possible into a profit center:
----Pay wages in company scrip so that workers are forced to spend with the company.
----Overcharge for everything so that workers are forced to borrow from the company to survive.
----Force children to inherit a parent's debt at death.
----Charge for things like fresh water if the company has contaminated the local supply
--Reduce all expenses possible
----No corp taxes, employee benefits, safety precautions, vacations, leisure time
----Longer work hours (fewer workers reduces training cost)

Think it could never happen? Google: Company Town

Think it could never happen again? Consider what is happening right now in western New York at the Mott's Applesauce plant, as reported in The Nation. Some excerpts:

Until 2008, Mott's was owned by Cadbury Schweppes, and as workers explained, there had been a family atmosphere at the plant for decades. Management gave workers hams at Easter and held an annual Christmas party. If workers exceeded production goals, managers organized hot dog roasts as a reward. And the union and management had an active work-safety committee. Local 220 secured pay increases in good times and made concessions when the company was in a crunch, veteran workers said.

Then Cadbury spun off the Plano, Texas–based Dr Pepper Snapple Group, which took the Mott's brand with it. From then on, everything changed at the Williamson facility. No more company parties, and safety committee meetings ended. Managers over-enforced work rules to the point of absurdity; one worker who had previously been the union local's president said he was fired for keeping a knife in his locker, even though he needed it during his shift to open boxes.
(all emphasis mine)

Then later...
At no point did its representatives say the company was in trouble and needed to cut operational costs to survive. Far from it—DPS posted a $555 million profit last year. So why was the company driving such a hard bargain? The way the union's bargaining committee saw it, the company knew unemployment in western New York was high, so it wanted to cash in on the suffering.

"They said that if we can't meet our finances on the contract they're offering us, then we need to sell our houses," said label operator and union bargaining committee member Bruce Beal, adding that a company official said that workers needed to think of themselves as commodities, like "soybeans or oil," and that as supply rises, the price goes down.
After this, the workers went on their first strike. The company responded that it was just doing what companies are supposed to do.
In a statement, DPS said, "The union contends that a profitable company shouldn't seek concessions from its workers. This argument ignores the fact that, as a public company, Dr Pepper Snapple Group has a fiduciary responsibility to operate in the best interests of all of its constituents, recognizing that a profitable business attracts investment, generates jobs and builds communities."
Though one wonders what kind of communities are built when everyone has to sell their homes because of wage cuts.
But the wage issue is a diversion, workers said, because the union agreed to a wage freeze on the condition that benefits also stayed untouched. It was a reduction in benefits, they said, that would have pushed them out of the middle class.... a country where private-sector union membership has hit historic lows and strikes have become rare, the picketers here in western New York say it's not just their jobs that are on the line. If DPS can get away with this, they believe, all other blue-collar workers in the middle class will be sitting ducks for what the strikers call "corporate greed."...

...Dozens of strikers said that if a profitable company can extract unlivable concessions from workers, it would encourage a new offensive on middle-class workers across the country. "America has just gotten to be where they want us to be like China and come down to these wages, and it's not going to happen."

Any mainstream economic or political system can work in the abstract. Communism, Socialism, Democracy, Monarchy, Capitalism, even Theocracy all sound lovely on paper. It's those darn people that muck it up in practice. It's not systems that implode. It's people, usually greedy people, who push systems to degrade.

It's one thing to create a business system that rewards workers for keeping good records, cleaning the work area, and bringing in potential clients. It's another thing entirely to create a system that can somehow channel the rampage of human greed in socially productive directions.

Here's what I take away from Mott's. Profit may be the corporate manifesto, but corporations are run by people. The management of Cadbury Schweppes chose to run the Mott's factory in a family atmosphere. The management of Dr Pepper Snapple chose to take advantage of its workers.

Corporate managers are not forced by some law of corporate physics to screw people. That's a choice that people make. Yes, corporations make more money when they treat people badly, but some people still choose not to screw over their fellow humans.

So perhaps a public corporation is like other abstract systems that work great on paper and even work fine when humanists are running them but become unsustainable in the hands of greedy people.

Can we create a system that discourages greed? That rewards individuals for group accomplishments? That rewards individuals for creating sustainability? That punishes individuals for creating inequitability and corruption? That can adapt itself to attempts to circumvent it? That's the real challenge.

A few days after I wrote this, Neal Gabler wrote this piece arguing that tax rates are better than regulations to modulate greed.

See also Free Lunch by David Cay Johnston

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