.... a few problems for the Pig....

Problems with Profit

The Pig’s Arms welcomes Scott

Recent economic events in Australia and abroad have affected us very powerfully, in different ways. The Global Financial Crisis, GFC, is still headline news all around the world. There are daily updates on exactly how well or how badly things are going on this front. The saga of James Hardy has, in Australia, had as much power to command audiences as the GFC, probably because it is more local and personal to us here. Overseas, Americans have been treated to financial events such as the collapse of Enron, and of course the spectacular exposure of Bernie Madoff’s $US65 billion fraud. Prior to the GFC of course, there were a number of episodes of so-called ‘rogue traders’ in various investment houses. No matter how many of them there were, they were always ‘exceptions.’

And these were just the most spectacular failures.

There seems to be a common theme amongst all of these, a very common motive, mentioned most days in the evening news, but almost never commented upon by any observer. As motives go, it is not only very powerful, but universally praised within business, and considered not only indispensable as a motivation, but usually as necessary for normal civilised society. In fact, it has been recently stated by the scion of the Murdoch family as being necessary for freedom – freedom of the press, in this case. He was talking about profit.

Having seen what damage the motivation to make profit, or protect profit, can do, it seems very odd that the whole idea of profit as a motivation is not coming into question. The brief list of economic disasters made earlier is mostly a list of the damage done by failures driven by profit. What damage has success done? A couple of items on that list, James Hardy, and perhaps Bernie Madoff, are probably examples of the damage done by the success of the profit motive. Success, that is, until it all went wrong. It is important to remember that most of the accepted causes of the GFC were actually being hailed as great successes before that all went wrong.

Other successes of the profit motive are terribly suspect. The long-term targeting of third world countries by tobacco companies is an obvious one; also too the unrestricted logging of forests in undeveloped nations. Both of these endeavours, we are told, are greatly profitable and therefore wonderful successes. In a similar way, the profitability of the mining industry is trumpeted now not just as a success, but the kind of success that must be protected from any interference. And this kind of profit-seeking has a long history: the Opium War waged by the British against China must be one of the clearest examples by the English-speaking world of the success of the profit motive creating abundantly negative outcomes for a very large number of people, the knock-on effects of which continue to affect us today. One is reminded of Buckminster Fuller’s analysis that the modern corporation had its roots in the ‘fortune hunters’ of the old British Empire – people who today would be regarded as pirates.

But this is not a harangue against business, or enterprise. Rather, it is a call to involve enterprise more closely with the community. A broad issue seems to be that although people and profit-making entities live in the same world, they are not sufficiently involved with each other. This means that profit-motivated problems grow until they can only be addressed through legal or community-action means, which are laborious, expensive, and divisive. The James Hardy saga is a prime example of this; the recent history of tobacco companies in Australia and the US is another.

If profit is a problem, what to do about it? Various alternatives have been proposed historically, the most prominent of which is communism in its many forms. This has not worked in general. People do not react well to restriction of freedom; the promise of democracy, however well it is delivered, is freedom, and people like this idea. The profit motive has somehow usurped the position of democracy in making the promise of freedom. It may be that we would like to retain our freedom, but without the severe risk to our well being that the profit motive represents a good deal of the time.

How do we take charge of profit? The strategy used by communism has been to essentially ban it, and the state take complete control of financial and economic activity. This approach, besides being wildly unpopular with most of the people affected, did not work. It seems on the whole a good idea that to let people conduct whatever type of business they like, within the constraints of health, and to generally separate the state from business. This is essentially the model we work with now – some business, like tobacco, are quite constrained, and others, like making soft drink and potato chips are not, most of the constraints being along the lines of public health.

The other constraint we might like to place on business is in the area of extraction of profits. There seem to be some existing models of business in our culture now that might guide us as to how this can be done. To make all businesses into not-for-profit businesses, requiring the retention or reinvestment of surplus income, could be a good start. Businesses could do whatever they want, even pay their executives whatever they want, but the pressure to produce profits, and the tendency to use profitability as an excuse for decisions that adversely affect communities, employees and the environment, would be lessened.

Profits accumulated in each year would need to be reinvested at some point; whether this be in skilling-up a workforce – desperately needed in many sectors of the economy – or in investment in capital – also badly needed – would be up to them.

The structure of business governance also seems odd; it is frequently pointed out that many people on the board of one major corporation are on the boards of a number of others. This seems to make the boards collectively less focussed on their own business, their own affairs, and their own people. We could change this in a number of ways. The suggestion that the number of board appointments held by one person be limited to a small number is an old one, worth trying.

Also, boards can be required to have members representing the specific segments of the company population – professionals, clerks, truck drivers, and contractors. This may have the effect of at least slightly lessening the gap between a company and its own people – often manifested as disputes between management and workers, employers and unions, companies and communities, and so on. There is also some reason to think about including community representation on company boards; after all, any business benefits from being in the community it occupies in a number of ways. Surely the community should have some direct representation on the board of a business using it in this way.

Complaints about all this would come from the stock market. Given that the stocks traded return no capital for the companies except in the case of new stock issues and initial share offers, we are free to change how the stock market works. Perhaps a small proportion of every share transaction needs to return the the business – that way share traders are benefiting the companies they trade in, rather than themselves alone. A large amount of share trading is done by so-called ‘institutional investors’ – who have relatively vast sums of money available to inject into businesses deserving of the investment. The idea the they can accumulate steadily more vast fortunes, influence markets and move on, without ever contributing directly to the businesses involved seems ethically hollow.

No doubt there are some problems with these ideas. Share dividends are one issue: perhaps these can be paid as a proportion of the profits retained each year; that way they would be a predictable cost for the management, and a more predicable income stream for investors. There should not be any issue with the salaries and other compensation paid to company executives, because the boards would still be able to offer anything they see fit, as is the current situation. It might be that there is a greater level of accountability for the compensation on offer due to the slightly different makeup of the boards, however all businesses have been loud in their agreement for the need for accountability lately, so again, no problem. In fact, this should be a more agreeable situation than government regulation of compensation paid to executives, as is proposed by some currently.

In the end, the question that needs to be asked is: who does the striving for profit benefit? As we have seen many times in recent history, it benefits very few, and sometimes does not even benefit the entity that strives for the profit, as graphically illustrated during the GFC. The idea of profit is really a kind of pot of gold at the end of the rainbow – and rainbows always recede into the distance as we chase them.