While the government has the role of providing people with
their basic needs, the private sector should drive the economy. We know form examples of communism that if
the public sector tries to drive the economy, the economy doesn’t go very
well. This is because government on its own
doesn’t have strong motivations to succeed in a competitive world. The benefits of a properly elected, expert
government, is that it is unbiased while private sector is entirely biased.
Therefore, government is ideal to ensure citizen’s rights
are respected and that all basic needs are distributed equally. However, it will do so somewhat inefficiently
because it’s human operators do not have personal motivations working within
the public system.
On the other hand, the private sector is filled with highly
motivated individuals and groups that are totally biased towards their very
special ideology, product or service. If
competition is encouraged, different private sector groups, companies and
individuals will compete with their words, actions, services and products to
grab market share according to the simple natural law of offer and demand.[1]
People have an innate need to be creative and to provide
additional value to society. It is part
of what makes us human. We want to
create, invent, innovate and push the limits of what is possible. For some of us it is a drive that we cannot
quell. Most entrepreneurs are bitten by
this bug. The drive has nothing to do with money, influence or power. In most cases, like myself, the drive is to
find solutions to problems we see in the world.
I think in some way every human being has this desire.[2]
Therefore, assuming automation takes hold in our ideal world
and we don’t need to work for a living, most of us will quickly find ways to
contribute positively to society. Some
of our projects will be so complex that we’ll need to partner up with
artificial intelligence and other passionate individuals to achieve goals.
There is a significant issue that must be tackled
though. Most current company structures
have the tendency to produce serious wealth gaps between the rich and the poor.
Most companies in the world today are structured as either
sole proprietorships, partnerships or corporations. Sole proprietorships and partnerships have a
simple structure with the owner(s) having full control of the company’s
activities, and they are the full beneficiaries of company profits.
Under these company structures, if the company does well and
generates lots of profits, the owner or partners can redistribute this wealth
in whatever way they choose to. Most
businessmen will spend some of the profits to grow their business and
expand. This is all fine and good if
what the business produces is in demand.
They are solving problems, fulfilling orders and engaging other
individual in, we hope, work they enjoy.
Some owners will pocket some of the profits for themselves instead
of reinvesting into the company. This is
a choice that can be risky as the business’ competitors that invests more in
the company may be better able to grab more market share or sell products and
services at lower price points. The
company structure allows for dynamic market adjustments based on competition,
offer and demand. It is healthy. May the best company win.
This company structure can still work very well in the ideal
world we’re imagining today for exactly that reason. We want competition to occur to ensure we get
better quality products at a low price.
We want to choose socially and environmentally responsible
products. The entrepreneurs that can
provide these to the population will prevail.
Unfortunately, if things don’t go exactly according to plan,
owners of sole proprietorships and partnerships are entirely liable, which is
why most entrepreneurs that wish to grow a larger firm will register a
corporation instead to benefit from limited liability.[3]
Corporations, on the other hand, are the primary culprits behind
the increasing gap between the wealthy and the poor.
The corporate
structure needs change
You see, corporate structures have multiple layers of
responsibilities needed by law to be properly recognized by the government. They are more complex to maintain and to set
up compared to any other form of for-profit organization. Essentially though a corporation is its own
legal moral entity in the eyes of the law and thus if something goes wrong with
the corporation’s products, services or operation, or if the corporation goes
bankrupt, the corporation itself is liable instead of the owners. This makes it a very appealing structure for
investors, wealthy individuals looking to make more money from what they
already have. They can risk their money
but cannot be liable for the corporation’s issues when it comes to it’s
operations, unless very special conditions apply.
When we start separating responsibility from positions of
power, like owning a company, that’s when we start seeing troubling patterns.
The top layer of a corporation structure is the
shareholders. These are typically the
founders and investors in the company.
They are the owners and the ultimate beneficiaries of the corporation’s profitability
through ownership of shares. That’s
where the term share comes from. If the
corporation decides to give a portion of its revenues to the shareholders, each
one of them receives it’s “share” based on the percentage of the total amount
of shares owned. More complicated
structures are possible in different classes of shares and so on, but these
differences don’t matter for this argument.
The second layer is composed of directors structured as a
board that are selected by the shareholders by vote. The board’s legal responsibility is to act as
the brain for the legal moral entity that is the corporation. They make decisions on behalf of the
corporation for its best interest, not their own. If they do not act for the best interest of
the corporation, then the shareholders can bring them to court of law. Now, remember who the shareholders are: they are the owners that are not liable for
the corporation’s actions. Shareholders
will sue the board of directors if they feel the company is not run properly
and there is legal reason to make proper accusations. Normally board members are selected on an
annual basis, so even if the shareholders don’t agree with board members’
decisions and there is no possible legal recourse, they can still change the
board for one that will move in the direction they want the corporation to go.
Suddenly, you see the obvious pattern of control. The board really must act according to what
the shareholders want. On paper, it
seems like the board of directors are the custodians of a moral entity and thus
will act to grow the corporation, hence grow profitability and ensure the
corporation has a good social image. But
really, all they do must translate into sales, whether through social responsibility,
revenue generation and other means. They
need to ensure the shareholders are happy all the way through, within the
limits of the law.
The third layer is composed of the corporation’s officers,
chosen by the board of directors, to run the company itself. The officers staff the corporation, make sure
the products or services are made and sold to customers and so on.
While there doesn’t seem to be any issue with this structure
at first glance. Corporate shareholders
can be private investors or the original owners that started it all, but they
can also be stock market investors. Only
a very small number of corporations are traded on the New York stock market
(2,800 out of 1.7 million in the US in 2014), the corporations that are traded
on the stock market are typically the largest ones and those that have the highest
growth ratio. It is expensive and
complicated to get traded on the stock exchanges, however, powered by stock
market investors who speculate on corporate success, the clear majority of the
top 500 revenue companies in the world are publicly traded corporations.
Here lies the issue:
investors in stock market trades are people or companies that already
have money to invest. They invest to
grow their money. They risk their money
but have no personal care whether the company they have invested in treats
their employees well or has strong social or environmental responsibility
codes. A totally valid endeavor on the
surface. However, the objective is
strictly to “play the market” and grow funds no matter what. If a corporation pays their employees lower
costs, or outsources to South-East Asia to increase profitability, all the
better. Whatever the corporation does to
increase profits will make public company shareholders happy. Remember, these are people with money to
invest already. In fact, according to
the Federal Reserve reports, barely one third of the bottom 50% American earners own stocks and
nearly 94% of the top income group owned stocks in 2016.[4]
Lower-income Americans don’t have extra money to put into stocks
and in the case of America, a third of workers don’t have access to a 401(k) or
another retirement plan either.[5]
The board of directors of public corporations will therefore
try to keep funds within the corporation to accomplish their duty. Directors of publicly traded corporations is
thus solely focused on increasing the value of the corporation at all costs.
They cannot negotiate with their shareholders.
They are an emotional bunch that only care for the numbers and will sell
their shares driving the value of the corporation down if the corporation isn’t
careful.
A company that may have started with good intentions becomes
a machine whose purpose is exclusively to increase the value of its
shares. Even if on the surface they spin
great social responsibility stories, the purpose of the stories is to keep
share values up by fooling shareholders in some way or another that the company
is gaining strength and thus economic value.
Since public corporation shareholders are disconnected from
the operations, motivations and social responsibility aspects of these
companies, it often leads to questionable decision-making that is not in the
best interest of the environment or society in the long run. In addition, public relations and
communications staff can very adeptly spin a story that makes something that
they want to do factually terrible seem like a social service.
One of my favorite examples from history is how from the
1930s to the 1950s, the tobacco industry was able to fool millions into
thinking cigarettes were good for people’s health.[6]
Thankfully, with information flowing freely through the web,
consumers do have the ability to direct some of these large corporation’s
decisions through their shopping patterns.
It helps if large enough amounts of consumers take part of the
discussion because, again, corporations will go where the money is. If enough people choose to boycott some
companies’ products, the company changes their tune very quickly to keep share
values up.
Corporation structures were originally designed to allow
crowdsourcing of funds to grow companies, but the practical result of their
existence is to make wealthy individuals wealthier without care for what
happens to those that don’t have lots of resources.
This structure is unacceptable in our ideal world we’re
trying to create. We do want private
companies to compete, but we need company structures to be legally programmed
to satisfy the fundamental needs of a citizenry: provide additional social value to
society.
The government needs to step in and create regulation and
programs that motivate and direct the development of corporation towards
building economic strength and social good.
Eliminating the absurdity
of the stock market
The stock markets themselves are corporations that control
all stock market trades. They are the
only boys in town that enable investments into companies where the goal of the
public investor is strictly to increase its holdings. Stock markets even allow all manner of stock
derivatives that increase investor choices and their gamble on how stock prices
change over time. It is strictly a game
of educated guesses. Very few stock
market investors invest to ensure the company has sufficient funds to operate
and make great product they enjoy.
Though the system looks innocent enough, and the idea of
having more money is a good one, making money strictly from buying and selling
instruments worth cash causes all manner of socio-economic problems we are aware
of today, including the huge gap between the wealthy and the poor.
Banks offer some investment services that are connected to
stock markets too, like mutual funds and retirement funds, but they also offer
their own services that play only on money:
savings accounts are a good example. They’ll take the money you deposit in an
account and reinvest it in… the stock market.
They’d to this for profit and then provide you with a small percentage
gain every year, and have you pay service charges for the service of “keeping”
your money.
Anything that creates money out of thin air, like interest,
will help increasing the gap between rich and poor simply because rich people
have more to gain.
There are many new ways to invest in businesses these days,
like the very popular, modern and accessible crowdsourcing platforms like
Kickstarter, Patreon, IndieGogo and others.
These systems are much healthier means of investing money and much more
accessible to average people since the investments are for actual products and
services with intrinsic value to the people investing. Investors in an artist on Patreon will receive
pieces of art. Investors on Kickstarter
will receive goods and services promised by the company listed. These are fair trade systems that are
increasing in popularity because it is people risking money out of the belief
in the company making promises. In
exchange they receive something they personally care about. Not just more money.
In our ideal society government should encourage modern
value-based trading platforms and ensure companies like stock markets become
illegal. Only value trades should be
allowed in the new economy to further encourage offer and demand between individuals,
fair trade, competition and avoiding issues with serious wealth gaps. More on this specific topic in the Economy
Section of this book.
[1]
Adam Hayes, CFA. Economics Basics: Supply and Demand. Investopedia. - https://www.investopedia.com/university/economics/economics3.asp
[2]
Steve Taylor Ph. D. (July 2013) The Power of Purpose. Psychology Today - https://www.psychologytoday.com/blog/out-the-darkness/201307/the-power-purpose
[3]
Limited Liability Company – LLC.
Investopedia. - https://www.investopedia.com/terms/l/llc.asp
[4] Nathaniel
Meyersohn (October 2017). CNN. Millions of Americans are left out of the
stock market boom - http://money.cnn.com/2017/10/20/investing/trump-stock-market-americans/index.html
[5]
Employer-sponsored retirement plan access, uptake and savings. (September 2016). The PEW Charitable Trusts. - http://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2016/09/employer-sponsored-retirement-plan-access-uptake-and-savings
[6]
Leah Lawrence (March 2009). Cigarettes
were once ‘physician’ tested, approved.
- https://www.healio.com/hematology-oncology/news/print/hemonc-today/%7B241d62a7-fe6e-4c5b-9fed-a33cc6e4bd7c%7D/cigarettes-were-once-physician-tested-approved
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