COMMERCE, a book by Michael Phillips

Poverty and billionaires

I face a never ending barrage of attacks on commerce based on the thesis that commerce has created a world with a great disparity of wealth.

In an earlier blog I concluded from hard data that: "For any nation that has industrial commerce, every million people in the workforce will have a 34% chance of producing no billionaires, a 34% chance of producing one billionaire, 22% chance of having two billionaires, 8% chance of three billionaires and 4% chance of 4 or more billionaires."  This is a Poisson distribution.

For any country to have wealth, other than just oil production, which invariably goes to the ruling class, the country must be fairly large and have an active commercial workforce. 

Poverty is the consequence of a country that is too small and that doesn't have a commercial workforce.

Don't blame commerce. Face reality and live with it.

America and commerce are an accident

The combination of 50 separate states under one national Constitution is truly an accident that is great for commerce but could never have happened anywhere else or under any other circumstances.

We are an exceptional nation but entirely an accident.  Our Constitution is the only real constitution in the world.  It was self imposed at a time when the notion of a constitution to limit government was in vogue. That vogue passed away.  No other people ever chose to protect or entangle themselves with such a constitution. And a Bill of Rights.

Yet for us, the Constitution has created a text centered people, just like the Diaspora Jews.  The Jews had the text center of the Torah, the sacred words forever to be debated and reinterpreted.  For 2,000 years the Jews have been without a government, a disconnected but coherent people studying a sacred text from the past and living in the present under a wide range of circumstances always re-interpreting the sacred text. 

The same is true for Americans. Our sacred Constitution holds us together despite having a weak, and at times incompetent, central government, trying to cope with 13-50 separate state governments.

Our separate states slowly conferred power on the central government, but never very much.  To this day we have a weak central government compared to most other industrial governments.  Look at the 2008 financial crisis and the fact that we still have no rational plan to remedy that pathetic national incompetence. We probably never will remedy our incompetence.  Remember that the 1913 Federal Reserve didn't have teeth until the 1950s. It is still ineffective and completely failed our financial structure in 2008.

Had this American socio-political experiment occurred anywhere else, but safely sequestered across two large oceans, the neighboring countries would have taken advantage and swooped in for control.  This would have destroyed America many times as the states and the national government squabbled (1812, 1846, 1863, 1898, 1916, 1939, 1953, 1963, 1973).

Truly an accident but a fortuitous one for those of us who love commerce.

Simple living and consumerism

I am a simple liver and in addition to my main book on the subject, I have written quite a bit over 35 years.  But I don't proselytize. 

I occasionally get questioned about my patriotism and loyalty to commerce as a simple liver.  The logic behind the question is that commerce is driven by consumerism.  Not really true.

Commerce did not originate with consumerism, it originated from the realm of necessity. Industrial commerce grew strong and vital based on providing for necessity.  

Nevertheless, commerce in most of the world long ago out-supplied the realm of necessity and entered the realm of consumerism...satisfying whims and personal goals.

Commerce is currently driven by a large component of consumerism because satisfying customers is the driving force of commerce.  Buying products to enhance personal goals is consumerism.  

In my opinion, the nature of simple living is also the satisfaction of personal goals, it just requires much less in the way of physical objects.  Simple living is more focused on livelihood, friendship and individual authenticity.  Those elements can drive commerce just as well as physical objects.

The effect on GNP growth is not obvious.  If a median income simple liver takes four friends to a wonderful restaurant and hires a string quartet after dinner around a fireplace and conversation, the GNP effect is the same as buying and installing a hot tub.

Simple living is just as relevant to driving commerce as consumerism. Probably more so in the future.

I am a simple liver and in addition to my main book on the subject, I have written quite a bit over 35 years.  But I don't proselytize. 

I occasionally get questioned about my patriotism and loyalty to commerce as a simple liver.  The logic behind the question is that commerce is driven by consumerism.  Not really true.

Commerce did not originate with consumerism, it originated from the realm of necessity. Industrial commerce grew strong and vital based on providing for necessity.  

Nevertheless, commerce in most of the world long ago out-supplied the realm of necessity and entered the realm of consumerism...satisfying whims and personal goals.

Commerce is currently driven by a large component of consumerism because satisfying customers is the driving force of commerce.  Buying products to enhance personal goals is consumerism.  

In my opinion, the nature of simple living is also the satisfaction of personal goals, it just requires much less in the way of physical objects.  Simple living is more focused on livelihood, friendship and individual authenticity.  Those elements can drive commerce just as well as physical objects.

The effect on GNP growth is not obvious.  If a median income simple liver takes four friends to a wonderful restaurant and hires a string quartet after dinner around a fireplace and conversation, the GNP effect is the same as buying and installing a hot tub.

Simple living is just as relevant to driving commerce as consumerism. Probably more so in the future.

Capitalism is the wrong word

You don't see me using the word capitalism.  The reason is simple.  Capitalism has little or nothing to do with commerce.

Surprised?

Think about it.  Commerce is vigorous in publicly identified socialist countries like Sweden, India and Norway.  It is even vigorous in communist countries such as Vietnam and China.

Capitalism is associated with capital and private ownership.

Wrong about commerce. There are many kinds of commerce that do not have private ownership in the United States, ranging from non-profit businesses, to charities, foundations, coops and religious run businesses.

The Capitalist-Socialist-Communist distinction has only to do with form of government.  To talk about a Capitalist country is to talk about an imaginary entity.  There can be no rigor in such a concept because it doesn't exist.  Most countries have commerce, some encourage it (many are called socialist) some suppress it, but the encouragement and suppression has to do with the government form, tyranny, benign dictator, king, democracy, mixed.

In fact, the term capitalist, is a remnant of sloppy, hysterical, anti-commerce, 19th Century thinking that survives to this day. 

While we're looking at sloppy, hysterical, anti-commerce, 19th Century thinking, let's include the concept of imperialism.  The greatest imperial empire in the 20th Century was Communist Russia, which extended its imperialist grasp from East Germany to Mongolia, to Cuba, North Vietnam, the Congo and South Yemen. The largest, most extensive imperialist empire in history was communist.

Sources of economic expansion

I've advised two governments on how to increase commercial growth; Japan and Sweden.

In the case of Japan I focused on the need for a society to draw from a global market of talent. A dynamic economy needs creative immigration.  Japan could only do that by creating a base of operations in Hawaii. Japan, the long stretch of islands, has never been a comfortable place for immigrants. The Japanese government chose not to follow my recommendations, they were politically unfeasible, but several major companies did follow my advice and establish research facilities in Hawaii: Sony, Fujitsu, Mitsui, Matsushita, Epson and Uniden.  Creative foreigners working for Japanese companies are now comfortable living in Hawaii.

In Sweden my work was stunningly successful and my work directly created the major source of Swedish small business exports over two decades starting in 1981.  My approach was copied in France and Germany.  Germany copied my Swedish model and actually exported it back to the United States as part of the German Marshall Fund.

The Swedish model was based on the 1,000 businesses I worked with when I created the Briarpatch Network in the San Francisco Bay Area. The model had new and small businesses learn together cooperatively in a network to overcome the main hurdles of the first two years in business. The survival rate was stunning: 90% survived over five years.

I doubt that Israel could accept the advice I gave to Japan. Tel Aviv is great fun, but could not handle a large 100k non-Jewish global immigrant population.  At present Israeli's start major businesses in America to get the benefit of immigrant workers.  These businesses (400 on the U.S. stock markets) could become sources of Israeli growth with the right Israeli tax policies...that may someday happen.

I don't know how Israel would respond to the advice and training I gave Sweden.

The opposite of pro commerce

In an earlier blog I found a research paper done at Yale Law School that contrasted one group of outcomes in a survey as pro commerce and the other anti- group as egalitarian-communitarian.

While the distinction may have been valid in the particular study, to me the opposite of pro-commerce is not egalitarian or communitarian. One can have egalitarian values and feelings about a wide range of subjects and still be comfortable with the astronomic inequalities in wealth that are produced by commerce.

For example, one can feel that each of one's children and grandchildren should be treated as equally as possible and definitely believe that everyone is equally entitled to emergency health care, education, fire protection, access to travel, free speech, trial by jury, fair trial and much more and still be pro commerce.

Similarly with communitarian values.  One can feel intense comfort when surrounded by loving, caring committed friends and allies...even the same people over a lifetime, and still be pro commerce. A person can want to retire among longtime friends or sympathetic professional peers, one can be intensely involved with their sports team, community or specialized cohort and still be pro commerce.

To me, the anti-thesis of pro commerce is wishful thinking.  Wishful thinking is my polite term for ideology.  People who look at the world and believe it would be better with a revolution, with a return to some older society are doing wishful thinking.

Nothing in the history of human beings has created what commerce has created thus far.  Commerce has vastly extended our lifespan, reduced infant mortality and death at child birth, but more importantly it has create hundreds of thousands of jobs, occupations, professions and life paths to take advantage of the diversity of human beings.  Commerce is the first and only human institution to reward meritocracy as broadly as possible in the population. 

Commerce is bringing into existence the pragmatic messianic age.  To seek some other world is wishful thinking.

The commercial age delivers

The coming of the messiah is a very old focus of human attention in the parts the world that developed around the Mediterranean, including the Arab world.

I argue that the messianic age has been brought t us by commerce.

The prevailing religions of our modern day are based on a messiah (Christianity), the return of a messiah (Mao and Stalin), the end of the world (Global Warming) or a messianic age when all people have the same belief (Islam). There is also a dominant ideology that the messianic age will dawn when all people are under one government (Leftism, Marxism, socialism-communism).

I am here to proclaim that the messianic age not being brought to us by all the false messiahs of the past.  Pro commerce is the messianic message, the one that appreciates that commerce has brought us all the great benefits that humans have wanted from a messiah.

Commerce has brought us modernity.  The commercial world has ended hunger and extended our lives by many decades as well as providing life for many who formerly died at birth, because of birth, in childhood or from disease before the modern era. Health for everyone, with good teeth, strong legs and feet, treatment for most pestilence and a state of physical well being never before imaginable...they are now ours, thanks to commerce.

And those are the least of the elements of the commercial messianic age.  Individuals are free to explore their own humanity, values and meaning. We are working in a world with an infinite myriad of occupations never conceived before. Hereditary classes have been eliminated in America, technological marvels are everywhere, the poorest Americans have cable TV, cell phones, most have cars, refrigerators and a bounty of food and pleasure drugs.

Nobody in Cuba even has the freedom to travel much less enjoy the rest of the bounties of the commercial world.  The Marxist/socialist/communist messiah never came and never will.

The messianic age is the commercial age. When you appreciate this you will hopefully become a pro commerce advocate.

Executive pay as reward

I have long been an opponent, in public testimony, against executive pay that is not responsive to corporate success or failure.  Yesterday's NYTimes had a great suggestion from Raghuram G. Rajan, a professor of finance at the Graduate School of Business at the University of Chicago and former chief economist at the International Monetary Fund:

He has a multifaceted approach that would give banks a choice. Under the first option, the government would strictly regulate compensation formulas. Under the second, banks could pay their executives whatever they like — provided the banks set aside more capital. In other words, banks that cling to their free-wheeling ways would have to pay some sort of price.

For Mr. Rajan, this is an either-or proposition. If banks pursue current compensation policies — what might be described as the “no-responsibility” system, given the trouble we’re in — that’s fine.

But if that happens, “the government should levy more capital requirements against the bank,” he said. Requiring banks to have higher capital requirements would reduce the risk that executives will make stupid decisions that imperil the firm and, possibly, the nation’s financial health.

How much extra capital? That depends. If banks spread out executives’ pay over, say, four years, giving their executives an incentive to make smart decisions for the long haul, the banks would be allowed to set aside a bit less additional capital.

Ditto if they included claw-back provisions and required executives to reinvest a substantial portion of their income in their companies so they had some skin in the game.

“We need to make people a little more worried about the future,” Mr. Rajan said. The way things are now, executives are encouraged to take big risks because they get paid based on the immediate fees generated. They have little incentive to worry about what might happen to the balance sheet later.

Mr. Rajan said he was unimpressed by efforts to pay executives partially in stock. Owning shares in the entire company doesn’t tie bankers’ compensation directly to the decisions they make within their own units. “Stock compensation doesn’t do it because it’s too broad,” he said.

More important, Mr. Rajan wants executives to be paid over a four-year period, receiving a fourth of their bonus income every year. If they make a bad bet, they won’t get paid the remaining amount.

And Mr. Rajan thinks bonuses should be based strictly on what he calls “accounting performance,” rather than stock performance, which he says you can’t control. He also wants chief executive pay to be benchmarked against the performance of rival firms. If a firm’s earnings are worse than their rivals’, “why should they get a bonus?” he asked.

Core issue of our time

The core issue of our time is the relationship between commerce and democracy.

We all look at the thriving economies of many non-democratic countries from Russia and China to traditional Singapore and wonder: 'How long can commerce thrive without democracy'?

Let me answer that question by creating five categories of nations:

1. Driving forces in commerce: U.S., Israel and Japan

2. Actively supporting forces in commerce: Holland, Germany, Sweden, Finland, England, Scotland, Italy, Denmark, Switzerland, the rest of Europe, Taiwan, Australia, New Zealand, Canada and South Korea.

3. Riding along on the wagon of commerce: all other countries that are not completely closed tyrannies listed in 4) and 5) below.

4. Cabooses, being pulled along by the power of commerce:  Russia, Vietnam, Arab oil countries, most of the trash-can-i-stans and China.

5. Hopeless economic losers:North Korea, Burma, Cuba and Venezuela.

I will briefly go over the categories, but the answer to the question of how long a country can thrive on commerce without democracy is answered by these categories: indefinitely. Russia and China are carried along as a caboose on a train by the economic engines of categories 1) and 2).  They can never be engines or supporting forces in commerce, without democracy but they can be cabooses indefinitely.

The reason is best understood by observing the USSR over its seventy year history.  The USSR had no internal commercial market to set price and carry out productive work. Communism is a meaningless economic system unless it is functioning inside a larger commercial system that sets prices by supply and demand and harnesses human genius in productive innovation.

So the USSR used international prices for all its internal products, bought factories and transplanted them to Russia and used espionage to get all of Russia's technology including methods for making ice cream.

To put it another way: communist systems survived only by copying and using models found in the open commercial world.

What makes the engines of commerce?

Three elements put a country in category 1.) Meritocracy, diversity and openness.  Japan is a little weak on diversity but it is so far ahead of every other country on the other two elements that it is a driving force in commerce, constantly innovating and contributing new industries, new technology and new markets.

Those same elements put a country in category 2.) but to a lesser degree.  Most European countries and former members of the United Kingdom have surviving class structures that significantly suppress merit and openness.

Democracy is necessary to be in category 1) and 2).  Democracy stimulates meritocracy, diversity and openness though it can not guarantee it in the forms that it thrives in the U.S. and Israel.

Does that answer the initial question?  Yes.

When a tyrannical form of government opens itself to the world of commerce, as China and Russia have, they ride the positive tides of commerce and raise their national income.  Russia and China can survive as tyrannies much as a cork floating can survive on the surface almost indefinitely.

For a country to become a driving or supporting force in the expansion of commerce it must have meritocracy, diversity and openness, all of which occur only in a functioning democracy.

Healthy commerce needs democracy

Russia and China will probably do well without democracy for a long time, maybe centuries.  They may spend centuries supporting their idea of mixed tyranny and industrial markets.

But they are in fact never going to be robust economies because they are parasites, in the biological meaning of that term.  When democracy and industrial markets are combined you get innovation and new markets. Russia has always, in its former incarnation as the USSR, been forced to buy Western factories, use Western market pricing and copy Western innovations in technology. They can only survive by borrowing. The same is true for China.

That will not change. The combination of tyranny and industrial markets will always trend toward the status quo. The world will stop growing without the democratic free market nations....they (we) are the locomotives of the economic train.

The tyrannies will need us. Just as the socialist economies have needed us for the past fifty years.