Tuesday, December 01, 2015

Mutualism: A Little Appreciated Alternative to Capitalism and Communism

I wrote the following to help my students to understand an assignment I had given them, the write a paper based on a book. Most in their drafts wrote book "reviews" or even "reports" instead, and even labelled them such. What I want is for them to take a book and develop a thesis from it, as I do below with my own Corporation Nation. I share it because the thesis I came up with is kind of neat imho.
By Robert E. Wright
By all accounts, communism, the complete control of an economy by an autocratic government, is a failure. Whether in Europe (Eastern Bloc), Asia (USSR, North Korea, Vietnam), North America (Cuba), or elsewhere, communist states have all failed, some quite miserably. After a seemingly propitious start, the Soviet Union and its Eastern European satellites fell apart, China became communist in name only, and Cuba and North Korea wallow in poverty under dictatorial rule [A History of Western Society].
Capitalism is more difficult to define and hence dismiss, or, for that matter, defend. Economist Will Baumol has identified several types of capitalism, only one of which leads to both economic growth and widespread respect for human rights. [Will Baumol et al, Good Capitalism, Bad Capitalism] But even Baumol’s “good capitalism” has some ugly aspects, greed [Arthur Pollard, ed., The Representation of Business in English Literature], crises [Peter Garber, Famous First Bubbles; Charles Kindleberger, Manias, Panics, and Crashes; Walter Bagehot, Lombard Street], and wide disparities in income and wealth foremost among them [A History of Western Society].
Democratic socialism is often proffered as a third or middle path between communism and capitalism [A History of Western Society]. The nations of Scandinavia seem to offer the best of both worlds, including growing economies, political democracy, and social justice. The ability to extend the Scandinavian model to nations elsewhere has yet to be demonstrated, however, and may not prove possible given that not all nations have ample energy resources and small, racially and culturally homogenous populations. Moreover, democratic socialist economies may rely on more capitalist economies to spur innovation and technology. Socialist economies may be able to persist in Europe, in other words, only because companies in more capitalist North American and East Asian countries push them to higher levels of productivity through trade and competition. An entire world of socialist economies may prove as economically barren as the communist bloc [A History of Western Society].
Under communism, “the people” nominally owned all the means of production and distribution (banks, farms, factories, transportation systems, wholesalers and retailers, etc.) but in actuality the communist party or the government owned everything and ran it in its own short term interest. Under capitalism and socialism, wealthy elites own the major means of production, either privately or in conjunction with the government. In either case, a select few run matters to suit their own short term interests in order to win the next election or to meet or exceed quarterly profit expectations.
Control by the few is the key feature of capitalism, even “good” capitalism. In some nations, like the U.S.A. and Great Britain, large numbers of people own stocks and bonds through investment vehicles like pension funds, insurance policies, bank accounts, and mutual funds. They exert little or no control over those assets, however, because corporate elites usurped them long ago.
Augustana University professor Robert E. Wright details the process of usurpation in his 2014 book, Corporation Nation. Using a variety of primary sources, including corporate account books, corporate by-laws and charters, legal cases, pamphlets, and statutes, Wright argues on the basis of numerous examples and a dearth of counterexamples that most early U.S. corporations were at first controlled by their stockholders. Those men, and a surprising number of women, exercised control not on a quotidian basis, which would have been time consuming and awkward, but on a strategic basis. In other words, stockholders ensured that hired managers worked hard in the best long-term interests of the company, did not steal the company’s resources, and sought ways of reducing expenses without hurting the quality of the company’s output (which ranged from financial services to manufacturing to transportation).
Using contemporary pamphlets as well as a wide variety of secondary sources, Wright also shows, however, that by the end of the nineteenth century stockholders had lost control of most publicly traded corporations as managerial elites came to control stockholder proxies (votes when the stockholder was not physically present at meetings), to limit stockholder rights (for example to audit the company’s account books), and to reduce stockholders’ voting powers. By the Great Depression, the separation of ownership from control was pronounced at most large joint stock corporations. Rather than owning many shares in a few companies of which they knew quite a bit as they traditionally had (and as “focus investors” like Charlie Munger of Berkshire Hathaway do today), investors responded to the loss of control by owning a few shares in many companies of which they knew little. That diversification of course provided managerial elites with yet more power. By the early Third Millennium, U.S. corporate elites (board chairmen, CEOs, presidents) were able to pay themselves exorbitant sums and even to craft the “heads I win, tails I win” contracts that led directly to the financial crisis of 2008.
Not all corporations, however, are publicly traded. Wright also shows that most mutual corporations weathered the financial troubles of 2008 (as well as previous panics) with little difficulty. Unlike a joint-stock corporation, which sells tradable equity or ownership shares (stocks) in itself to investors (stockholders), mutual corporations are owned by their customers. Profits accrue but they are paid to the customer-owners, not to a separate group of stockholders. Mutuals do not issue shares that trade on exchanges. To participate in a mutual’s profits, one must become its customer, for example a policyholder or depositor. Because mutuals issue no shares, there is no pressure to make quarterly numbers so managers can run the company for the long-term. That generally means slow but steady growth. Unsurprisingly, many mutuals, Wright shows, are life insurers that date from the second half of the nineteenth century and are still going strong. They bear names like Guardian, MassMutual, and Northwestern Life, which long touted itself as “The Quiet Company” because it quietly provided quality life insurance at low cost to millions of policyholders.
Policyholders do not control mutual life insurers, Wright argues. Rather, managers in conjunction with sales agents run mutual insurers. In successful mutuals, the two groups check and balance each other. The sales agents push the managers to keep up with the competition while the managers make sure the agents do not engage in unethical or illegal sales practices. And they both make sure the other group does not pay itself too much. The CEO of Guardian, a Fortune 500 company by assets, earned less than $1 million per year at a time when CEOs of similar sized joint stock companies paid themselves 10 to 100 times that amount.
Credit unions, a type of depository institution like a bank, are also mutuals. Outside of finance, mutual companies often call themselves cooperatives or co-ops. They have flourished when allowed to do so but neither socialists nor capitalists are eager to see them spread because of their potential to render both big (publicly traded) business and big government less, or even un-, necessary. A system of political economy built on mutualism, after all, would encourage competition and innovation, and hence economic growth and development, without unduly enriching or empowering elites. If Karl Marx and Friedrich Engels had been more intelligent and less ideological, they may well have called for mutualism instead of communist.
It is important to point out that the mutual form is not perfect. Sometimes mutuals fail but that can be seen as a good thing because it means that competition is at work, weeding out inferior companies the way that natural selection eliminates individuals (and their genes) that are not sufficiently adapted to the present environment. Competition is a key component of Baumol’s “good capitalism.” So mutualism is not anti-capitalism per se but rather a different, and many think more just, way of organizing and controlling the means of production, a method that does not require elite control of corporate boardrooms and stock exchanges or government economic planning commissions.
Wright’s book has received rave reviews in scholarly journals thus far but it has had no discernible effect on public policy so its importance to date is essentially nil. One implication of the study, for example, is that instead of reforming Social Security’s disability insurance program, the government ought to privatize it by encouraging the development of mutual disability insurers. Recent reform proposals, however, have supported the general status quo instead.

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