Maine’s Statehouse Paintings, Conclusion

Maine’s Statehouse Paintings, Conclusion

Entrepreneurship and individualism are ingrained in our culture but corporations are not entrepreneurial. They are bureaucracies managed by administrators. The real entrepreneurs, the small businesses are disappearing. Wal-Mart has displaced the “mom and pop” local shops and you can buy your cigarettes, wine (in some southern states) and milk in the local EXXON gas station. You can get a haircut in a chain barbershop and coffee at Starbucks. This is true capitalism and from the standpoint of the general population not altogether bad and as long as monopolies are prevented, prices will go down and we as consumers benefit. As a society grows and becomes more advanced and complex, the individualism that was a strong cultural asset during our early days may become a liability. With so much interdependence we have to be concerned not only with our selves and our immediate surroundings but with the broader society and environment.

Another problem was the Soviet propensity for central planning. The disadvantage of a planned economy over a free market one is that commercial interactions are too complicated to anticipate and plan. Whereas the free market uses a somewhat free form method devoid of planning and relies on the economy to be driven by “real-time” supply and demand, (though large corporations do utilize central planning) the Soviets established an intricate bureaucracy to create five-year plans. Within these plans was determined how much of what to make and where and for how much to sell it. As societies grow and technologies advance the complexity and number of commercial interactions grows, central planning became less and less effective. Going forward, however, there is no question but that computer science will be able to deal with this complexity. The only question is when? Years ago it was believed that a computer program will never be able to beat a world champ in chess. Well, it has. More recently, Watson, an IBM program, won on Jeopardy. We need to be alert and not fall victim to ideology. I suspect China, since it already has a culture of central planning, as its participation in free markets grows, will not given up on the notion of central planning and is pursuing technologies to improve it as we speak.

Being an optimist, I am confident that we will reform our political system allowing the voices of our citizens to continue to be heard and encourage dialog expressing divergent points of view that is not drowned out by special interest with very deep pockets. The free market will continue, though adjusted to reflect the times and government will be allowed, if not forced, to do its job in the ever more complex future. So if we are going to build statues, paint pictures and sing songs, I would like to see a scene with a group of people some of whom have calluses on their hands while others are working on something scientific and also someone at a financial chart on the wall. The paintings will be bright and the subjects will all be well fed, healthy and strong. The songs will showcase their kindness, courage, tolerance and generosity. As to the Maine statehouse painting, my advice to the governor comes in the form of an anecdote. Sigmund Freud, the father of psychotherapy, was on stage smoking a cigar while addressing a group of students at Clark University in Worcester, MA. He said to the audience, you are looking at me and thinking the cigar is a phallic symbol, but sometimes it is just a cigar. The painting of workers in the Main statehouse was just a painting, no more or less.

Maine’s Statehouse Paintings, Continued

Main’s Statehouse Paintings, Continued

My reaction to the painting and the reason it brought the Soviet Union to mind was that the painting was predominantly gray. Though the population was fed and everyone was employed, I always felt that from a distance at least, life in the Soviet Union looked gray, not bright, colorful and joyous. We need to be careful not to devolve into what on the outside appears to be a two party system but in fact there is only one. I already see some movement in this direction. Politicians are relying on more and more money for the privilege of representing us. There have been two activities in recent times that worry me. First is the all out attack from the right on public sector unions. Currently there are two major groups with divergent interests investing in politicians. They are unions and business. If unions lose their influence, there will only be one major force remaining. The second thing is that the influence of that force has been greatly increased by the Supreme Courts ruling on Citizens United v. F.E.C. which gives corporations the status of citizens, granting them the right to free speech and essentially removing any limits on the amounts they can spend to influence elections. For democracy to survive, the government must represent the interest of all its people and corporations, though owned and operated by people, are not people. Corporations are a means to that end and not an end onto themselves. If our two party system has two parties only nominally, we will not be unlike the former Soviet Union politically. The corporations, through their contributions to political campaigns, will select the politicians we will vote for. The “push and pull” of political dialog will disappear as will the systems ability to self-correct.

The second problem was economic. In the Soviet Union, the government literally owned the means of production and the distribution of labor and with that, the role of government as a mediator between commercial and social interests is nonexistent. I am not sure to what extent the contribution of this absence to the dysfunction is recognized. In the free market systems used in the industrialized west there are three distinct entities. Two are the buyer and seller, at tension in every transaction and the third, a government whose role is to make sure that neither one is unfairly disadvantaged and the transactions, if not serving the common good, at least do not cause damage to the society. What happens in the socialist (by my accepted definition) economic case, with government owning the means of production and distribution, there is only one entity and this important mediator needs not exist. If our two parties dissolve into one listening only to the voice of corporations, the role mediator will also cease to exist and then who will remain to make sure that in the commercial transactions societies interests are advanced? Though in principle we will remain a capitalist state, but the boundaries between corporations and government will melt away and we will start to look and act more like a state whose means of production and distribution are under the control of one entity. We will not call it socialism and to placate the populous, statues will be built, pictures painted and songs sung glorifying individualism, entrepreneurship, and the accumulation of great wealth. Our paintings will look predominantly gray with isolated patches of garish color in the faces of a few. As the worker’s paradise was a myth, so will the entrepreneur’s become one if we continue on the path we have embarked on. It will be ironic if we are pushed into this position not by the left but by the right in their attempt to prevent socialism.

TO BE CONTINUED

Maine's Statehouse Paintings

Recently on the cable news there was a lot of discussion about the paintings that were taken down from one of the rooms in Maine’s statehouse. These were large drab looking murals of workers. At first blush it seemed like a pretty petty thing for the governor of Maine to do but on further reflection, though I disagree with his reasoning, I understood its source. The paintings in the Maine statehouse could well have hung in one of the halls of the Kremlin. The former Soviet Union proclaimed itself as the “workers paradise”. It put workers and peasant farmers on pedestals, glorifying them in statues, literature and paintings. Even the symbol of communism, the hammer and sickle, was deference to the working class. Most of us here do not understand the various economic systems and words or images like “workers”, “social”, “people’s”, “working class” or “welfare” are automatically associated with the now defunct Soviet Union, President Ragan’s “Evil Empire”, the “mother” of all socialist states.

Today the word socialism means many different things to different people as discussed in a previous post. Some believe providing a safety net in the form of welfare, healthcare, food stamps, education assistance etc. for those at the bottom is socialism. Others see in the competition between labor and business, anything favoring labor as socialism. Still others see any attempt by the government to improve the state of a society as socialism. Despite what they are called, these are things that exist to varying degrees in all modern advanced free market capitalist societies. I suspect that among the misinformed there are even more creative concepts that I am totally unaware of. The formal definition of socialism I adhere to is the one that defines it as the government owning the means of production and distribution of goods. That is the system that existed in the Soviet Union and still exists to a great extent in China. The problem with the Communist Party was not its claim to be the party of workers (I doubt whether the powers that be were any more interested in workers than most other governments) but fundamental flaws in Soviet economics and politics.

It had a one party system and though the population voted, they had only candidates put forth by the Communist Party to approve or not. In contrast, one of the strengths of western democratic systems is the fact that there are voices representing different points of view so that even with only two parties, as is the case in the US, the system self corrects making the pendulum swinging from left to right, generally brought back to somewhere around the center. The Soviet system lacked the “push and pull” of the populace and thus had no method of correcting and once on a path it plunged forward, however disastrous the end.

The idea that it was a “worker’s” state was propaganda employed by the bureaucrats in the government to placate the “working class”. So statues were built, pictures painted, songs sung and stories told glorifying the workers all in an attempt to make them feel like they were part of something they were in fact not. Members of the Politburo were selected by and from the ruling elite, with little, if any input from the population at large. This group made all decisions. Unfortunately the propaganda also infected the west and any leaning in favor of workers is connected to socialism. I believe the governor of Main, being old enough to remember the “cod war” and not really understanding socialism, wrongly saw the paintings of workers as an encouragement to socialism.

TO BE CONTINUED

Exorbitant Wages – A Justification

Adam Smith, the most highly respected spokesman for free market capitalism, in “The Wealth of Nations” written in the late 1700s, puts forth his rationale behind the variations in the price of labor. He breaks the causes for these variations into five major parts with each in turn having some detail and further explanations. The five major categories are:
1. “Agreeableness or disagreeableness of the employments”
a. “Ease or hardship”
b. “Cleanliness or dirtyness”
c. “Honourableness or dishonourableness”
i. “Honour makes a great part of the reward of all honouurable professions.”
1. “In point of pecuniary gain, they are generally under-recompensated.”
ii. “Disgrace has the contrary effect.”
1. “The most detestable of all employments, that of a public executioner, is, in proportion to the quantity of work done, better paid than any common trade whatever.”

2. “The easiness or cheapness, or the difficulty and expense of learning them”

3. “The constancy or inconstancy of employment”

4. “The small or great trust which must be reposed in those who exercise them”

a. “We trust our health to the physician; our fortunes and sometimes our life and reputation to the lawyer and attorney.”

5. “The probability or improbability of success in them”
a. In some professions there is a great probability that the training will lead to employment of that skill
b. In others, however, there is a low probability. Adam Smith cites the example where only one in twenty educated in the law wind up working as lawyers and feels that their wages would reflect not only their education, but the education of the twenty that did not make it.

I suspect there are many arguments for variations in wages based on free market principles. I would like to see if and how the principles laid out by Adam Smith can be applied to high pay of professional athletes, Wall Street traders and the huge increase in compensation for CEOs.

One can apply the 5th principal to professional athletes. The probability of making a living at a sport is in the thousands to one range, so the cost of preparing the 1,000 that don’t make it can be added to the salaries of the ones who do. That along with the 3rd principle, where a professional athlete has a limited time he/she can practice their trade, certainly supports a large wage.

How about Wall Street traders, let’s compare them to “rocket scientists”. They both need advanced degrees, the trader an MBA and the rocket scientist a PHD. The education of the scientist is more expensive. Though they may think so, I don’t believe the traders are any smarter. So what is the reason there is about a factor of ten between their wages? The job demands a lot of time and travel and thus a stress on family life but that may account for about a factor of two. Using Adam Smith’s analysis, could it be that the trader’s job lacks honor? The rocket scientist builds rockets and at the end of the day can have the satisfaction of looking up into the sky and seeing his work among the stars. What has the trader accomplished? He has convinced someone to sell something for less than it is worth and someone else to buy something for more than it is worth enriching himself in the process. The larger the spread in values, and the greater the number of transactions, the greater is their personal success reflected in their wages. This may be too harsh a commentary and I know the arguments that they are a critical cog in the free market engine and the creators of wealth etc. but if not training, intelligence or skill that justify the factor of ten difference, than what?

I would like to propose that the same argument applies to the great increase in compensation of CEOs in multinational public companies in recent times. With the increase in institutional investors, the role of the CEO has changed. An ever-growing portion of investors in businesses is comprised of mutual funds, pension funds and endowments. These institutional investors have no interest in anything but short-term gains in value. The enterprise is seen only as a number they want to see grow. They are in and out and look at an enterprise very one-dimensionally. (I heard today on CNBC that 70% of trades on the stock market involve the investor getting in and out in a few seconds. That doesn’t sound right to me but it was on TV so it must be factual. Hmmm!) Private investors, though also interested in the short-term gain, sometimes are willing to take a longer-term view and consider factors beyond just numbers. For example, many sports teams are owned for ego with no real intent on financial gain. The same can be said for investors in movie productions; they want their names to be affiliated with the publicity and to be able to rub elbows with celebrities. Large family holdings in public companies often have the family name tied to the long-term success of the enterprise and some relationships with the workers. Business ownership can also be used to express the political ideology of key investors.

A CEO in these circumstances needs to balance the drive for profit (or in the case of sports teams, minimize loss) with other factors important to the owners. Many of these have underlying noble aspects to them. Their skill often includes balancing the profit with the respectful treatment of employees, vendors and customers. With the short term, one-dimensional task of enriching the institutional stockholders and their traders, most of the noble aspects of the job go away. The main job of the CEO’s becomes their ability to demonstrate short-term gains often at the expense of long time employees, walking a fine ethical line and convincing the market of the great worth of the enterprise. The output of the enterprise becomes irrelevant except to the extent that it many affect the short-term value. They are applauded for being able to make “hard” decisions usually about other peoples lives. In that sense they could be compared somewhat to Adam Smith’s example of the executioner. (Jack Welsh, former CEO of GE was nicknamed Neutron Jack because of his reputation for going into a newly acquired enterprise and decimating their staff.) In this king of setting individuals like Dennis Kazlowsky of Tyco (now in jail) and Ken Lay of Enron become the stars.

The job of CEO requires intelligence and along with intelligence, given a level of experience, comes wisdom. The new CEOs need to leave wisdom at the doorsteps and rearrange their sense of values, and in the process lose much of the sense of “honor” that they might otherwise have gained. I don’t accept the argument that, with globalization and ever changing technologies, the job of the current CEO requires greater skill. Information and the ability to interpret and disseminate it is a key to leading an organization and with today’s computer systems, there is more and better information more readily available. I also have heard discussion that with companies primarily held by institutions, there is no entrepreneurial ownership and the large wages are an attempt to have the CEO “act” as if they were owners. I don’t buy that because they are administrators working on behalf of someone else no matter how much you pay them. The wages do not alter the relationship. I might accept the argument that the job now has taken on a theatrical element and as is the case of movie stars, this justifies a large compensation. Or it may just be the degradation of honor.

If it is honor, there may be some light at the end of the tunnel. I heard Jack Welsh on CNBC last year. He said that the MBA textbook may need to be revised and other stakeholders in an enterprise, the employees and customers may need to be considered not only as a means to maximizing returns to the stockholders but as beneficiaries of the enterprise in their own right. Also there is a new management “buzz word” emerging, “shared value”. Mark Kramer and Michael Porter wrote an article for the Harvard Business Review on the subject and are consulting major corporations on the concept. “Shared value” is a recognition that there are activities an organization can participate in that are not directly aimed at the bottom line but have as a primary focus some social good which actually result in financial advantage to the organization. An example they cite is that of a large candy company that relies heavily on cocoa grown in Africa. By helping the community where it is farmed and thus contributing to its stability, it is ensuring a continuing supply of a commodity that is not only rare, but crucial to their success.

I fundamentally have no issue with very high compensation. My interest in this topic stems from concern about the negative impact on our society of the widening gap between the rich and poor. Being an optimist, I am hopeful that going forward, in time a sense of honor will be restored to the position of CEO and other senior executives and its lack will not need to be compensated for by exorbitant salaries. As to the Wall Street traders, I don’t hold out as much optimism. (In “The Essays of Warren Buffett: Lessons for Corporate America”, Lawrence Cunningham writes that 20% of corporate annual earnings of $700 Billion, goes to various traders who “recently describe themselves variously as hedge fund and private equity firms”). That’s $140B! I don’t see where there ever has been nor can there be much satisfaction in a job of making someone else rich so these jobs will need to be paid well. In fact a primary attribute required of someone entering this profession is a strong drive to amass great personal wealth above all else. From the standpoint of reducing the gap, the answer probably is to take away the great tax advantage they have bought with effective lobbying.

Our Penal System

There is a misconception that the conservatives are pro free market and liberals anti. The reality is that it is not a question of pro or con free market but who should ensure that the market not only functions, but does so for the benefit of society as a whole. I believe both sides (possibly with the exclusion of Libertarians) believe that the market unconstrained will implode. Edmund Burke, an icon of conservatives writing in the 18th century, warns of the dangers of rampant innovation driven by misguided intellectuals and the “new moneyed”. He felt that it was the role of aristocracy and existing institutions to temper this innovation. In fact to this day one can still hear rants from the right about the “elite” intellectuals. Today, though there technically is no “aristocracy” in our country, there is their equivalent in the “old money”.

The conservatives, by definition, want to maintain, if not strengthen, the position of these institutions, businesses and the wealthy. The Republicans, driven by this ideology, are promoting policies that advantage their constituency and in fact have represented them interests effectively over the last several decades shifting an ever larger portion of the national wealth and thus power into the hands of the few wealthiest.

The liberals on the other hand, believe that the tempering of the innovation in the market is a key responsibility of government. And whereas the conservatives believe that the good of society will be served best by ensuring the well-being of the wealthy and institutions, the liberals, represented by Democrats, do not have an intermediary and look to directly serve the benefit of society and in so doing wind up speaking more loudly for the workers and disadvantaged who do not have a voice on the other side. With the added responsibility of ensuring that the markets serve society, the role of government and therefore its cost is greater and both from a liberal perspective are justified.

In the marketplace there is a healthy tension between business and labor with each looking to get the best deal in the transaction and thus the overall good generally is well served. There are occasions when segments of each, business and labor, benefit from the same policies. They lobby, if not together directly, in parallel. In recent years portions of our penal system have been privatized and private enterprises, driven by the profit motive want their businesses to grow. A way to do this is to increase the population of inmates. To that end they lobby for legislation to make imprisonment mandatory for as many crimes as they can, taking away discretionary power from our judiciary. More and more states now have the “three strikes and your out” laws, requiring mandatory long prison sentences for three time offenders for ever lesser crimes. I don’t know this to be a fact but I suspect the prison industry would lobby very hard against legislation decriminalizing drug offenses. In this case business and labor are on the same side. Like the private jails, strong unions representing the prison workers have an interest in not only keeping prison jobs, but increasing them. They lobby for many of the same policies as the penal corporations. Though there are still areas where they compete like wages and benefits, having heard about the contracts won by the California’s prison guards, I would not be surprised if there is, if not an outright deal, then at least an informal quid pro quo understanding between business and labor in this case.

In this type of situation where there is a common goal for competing entities, the probability of the general good being served is very slim. Such is the case with the current penal system in the United States. We rate number one in the world in the number of our people in prison with 753.2 per 100.000. That’s 0.75% of our population in jail. We are ahead of Russia who is second with 660.3, third is Rwanda with 593.4 followed by the Virgin Islands (US) with 593.4 and Cuba with 531.24. Jails harden criminals. Young people incarcerated for petty crimes come out not only more bitter, but more willing and able to commit more serious crimes. For those who may want to go straight, having a record makes it very difficult to get a job. Society is hit with a triple whammy. Not only the inmates but their families, particularly their children suffer. We spend a fortune incarcerating an ever-larger population and grow an ever-increasing number of unemployable individuals who instead of being productive members of our society become a drain.

I know; I know “if you do the crime, you do the time”. The question is how do we as society benefit from access incarcerations? Prisons don’t reduce crime. We are not keeping individuals who are a danger to society off the streets in very many cases. We are not reforming them. So what justifies the great expenditure? It must not be profits for the penal industry or jobs for prison guards. The price is too high not only in dollars but in damages to our society. But I digress. My main point is that in our system everyone is vying for a maximum advantage and competition on an even playing field generally serves society well. But when the field gets tilted the suffering on the part of one or another segment of society increases. As in the case of the penal system, when one of the few powerful lobbies on the left, labor, sides with business, there is not enough clout with the civil and human rights organizations to adequately impact government policy and we suffer a great disservice.