CLAL on Culture Archive
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Going Beneath the Surface of Today’s Corporate Scandals
By
Robert Rabinowitz
Review Essay:
The Divine
Right of Capital
by Marjorie Kelly
Berret-Koehler Publishers, 230 pp., $24.95
The Future
of Money
by Bernard Lietaer
Century Press, 382 pp.
L. Dennis Kozlowski's $15,000 dog umbrella
stand. Jack Welch's expenses paid toilet paper. The Rigas family's private golf course.
Gary Winnick's $94 million dollar estate. And, of course, Martha Stewart - mysteriously
the target of an intense collective schadenfreude so uncharacteristic of America. These
are the symbols of the ongoing corporate corruption scandal that erupted with Enron's
declaration of bankruptcy on December 2 last year. We are, however, in danger of repeating
one of the mistakes that actually contributed to the scandal: a focus on celebrities
rather than the broader issues at stake. Just as we once feted Neutron Jack as the
uber-executive who raised GE's market capitalization from a puny $14 billion into a
hulking $500 billion, so we now glory in pillorying greedy robber barons as they descend
into ignominy.
The villains of today's brutal bear market - most of whom were the heroes of yesterday's
magnificent bull market - did not appear out of nowhere. They arose in a specific time and
place, in response to very specific circumstances such as the deregulation of the
financial sector - which helped the banks to indulge in one of their periodic binges of
incompetence and greed - and the increasing focus on a limited range of financial
indicators, such as stock price and quarterly earnings growth as the only measurements of
corporations' financial health. Long-time advocates of improved corporate governance such
as Robert Monks are using the current scandal as an opportunity to bang the drum for more
fundamental reform measures than simply expensing employee stock options. As Monks points
out in his book, The Global Investors, a key problem, long diagnosed, is the separation of
ownership from control. Executives have escaped from the control of shareholders, with
boards of directors becoming more like personal fiefdoms than forceful instruments of
independent shareholder oversight.
Two recent books, Bernard Lietaer's The Future of Money and Marjorie Kelly's The Divine
Right of Capital, raise even more fundamental questions about the nature of our financial
system without lapsing into vindictive personal attacks on particular individuals or
institutions. It is, perhaps, the troubling nature of the questions they raise, especially
for those who benefit from the economic status quo in America, that accounts for the lack
of public discussion of the important issues they discuss.
Unusually for someone who was once a Belgian central bank executive and who was later
identified by Business Week as the world's top currency trader, Lietaer makes some of his
key points through fables, not statistics or mathematical models. Perhaps the most
important fable concerns a small village which has not yet invented money, leading to
prolonged negotiations on market day as villagers attempt to exchange what they need
through complex barter arrangements. One day, a stranger shows up in the village and gives
ten tokens to each of the ten families in the village to use as a means of exchange in
order to do away with the lengthy and inconvenient bartering. The stranger's only
condition was that at the end of the year, each family had to return to him eleven tokens
as payment for the technological improvement he had made to their lives. Lietaer points
out that, assuming that the population and its annual production remain exactly the same
during that next year, one of the ten families will have to lose all its tokens, even if
everybody managed their affairs well, in order to provide the 11th token to the nine other
families. This artificial scarcity would effectively undermine spontaneous cooperation in
the village and generate a systemic undertow of competition among all the families
(Lietaer, pp. 50-51).
The point of this simple fable is to demonstrate the harmful effects on our society of
exclusive reliance on a currency that is based on debt to be repaid with interest.
(Lietaer explains how money is created from debt in his lengthy primer on "How Money
Works," pp. 301-331.) Lietaer argues that, in addition to encouraging systematic
competition among participants in the system, interest continually fuels the need for
endless economic growth, even when actual standards of living remain stagnant. It also
concentrates wealth by creating an ongoing flow of interest and dividends from working
people and their employers to the small minority of people who own the vast majority of
financial instruments (p.50).
Prior to reading this book, I had always regarded the Torah's thrice-repeated injunction
against lending with interest (Exodus 22:24, Leviticus 25:36-37, Deuteronomy 23:20-21) as
a relic of a much earlier period in history in which cash-based transactions were a small
part of economic activity. I made the assumption that the Torah referred only to predatory
lending to the economically vulnerable and not to paying a fair market price for access to
capital. Lietaer's observations about the systemic effects of interest have made me wonder
whether there are deeper spiritual insights underpinning this injunction, which was long
ago effectively neutered by rabbinic legal devices.
Lietaer's point is not that we should abandon debt-based currencies wholesale, although he
does believe that much of the material scarcity we experience is not "out there"
in nature and is created by our money system (p. 116). Instead, he challenges the idea
that we only need one currency. This is because money can serve multiple functions which
can be at odds with one another, as another fable emphasizes.
"Imagine a Martian landing in a poor neighborhood and seeing rundown communities,
people sleeping in the streets, children without mentors or going hungry, trees and rivers
dying from lack of care, ecological breakdowns and all of the other problems we face. He
would also discover that we know exactly what to do about all these things. Finally, he
would see that many people willing to work are either unemployed, or use only a part of
their skills. He would see that many have jobs but are not doing the work they are
passionate about. And they are all waiting for money. Imagine the Martian asking us to
explain what is that strange 'money' thing we seem to be waiting for. Could you tell him
with a straight face that we are waiting for 'an agreement within a community to use
something - really almost anything - as a medium of exchange'? And keep waiting? Our
Martian might leave wondering whether there is intelligent life on this planet" (p.
146).
Lietaer urges his readers to take the initiative and to create their own alternative
currencies which, he claims, would not have such dysfunctional effects. He provides
details of various different types of alternative currency, explaining how they are
structured and what the costs and benefits are to each approach (pp. 213-235).
Marjorie Kelly addresses another part of our society's financial infrastructure that she
believes creates inequity and other social ills. The book, which models itself on the
writings of Thomas Paine, is animated by a single metaphor that likens shareholders to the
landed aristocracy. In economic terms, the aristocracy was that segment of society whose
income did not derive from their own work, but from the "rents" derived from the
hard labor of the tenants of their estates. Kelly, co-founder and publisher of Business
Ethics magazine, argues forcefully that shareholders are in a similar position - their
legal status as owners of corporations allows them to reap what others have grown.
According to standard theory, the goal of financial management is to maximize shareholder
value, i.e., income from dividends and capital gains from growth in a company's value. The
standard economic justification for this view is that these returns on investments are
justified as compensation for the risk taken by shareholders when they provide capital to
companies to finance their growth. Perhaps the most significant empirical evidence that
Kelly cites to undermine the standard justification are the Federal Reserve figures
showing that less than 1% of stock market transactions are related to the issuing of
capital and that, over the last twenty years, companies have bought back $540 billion more
in shares from stockholders than stockholders have provided to companies in new capital
(Kelly, pp. 33-34). Kelly concludes that stockholders are not actually providing any new
net capital in exchange for the dividends and capital growth from the stocks they own.
If shareholders are aristocrats, then their peasant tenants are employees whose
productivity has risen three times more over the last decade than the rise in their
compensation (p. 37). It is they who create the wealth reaped by the stockholders. Kelly
points out that employees are treated as assets of the corporation rather like the
peasants who were in effect owned by the aristocracy. She also emphasizes how job security
has diminished with every passing decade, evoking the plight of peasants who were thrown
off the land at the time of the Enclosures.
Kelly's striking metaphor leads her down some very interesting avenues of thought. One
logical corollary of her argument is that the current arrangements for control of
corporations are highly undemocratic. Stockholders, the landed gentry, have all the voting
rights, while employees who actually create the wealth have little control over their
destiny. Kelly does us a major service by insisting that corporations be brought into the
field of political science. Given the power of corporations - both for-profit and
not-for-profit - in public life, we ought no longer to regard them simply as private
contractual arrangements. They are public or semi-public bodies which only operate with
the permission of the citizenry.
Kelly makes a number of interesting proposals to remedy failures of corporate democracy.
The simplest is that financial statements should include a supplemental line comparing the
income earned by employees with the income earned by stockholders. This stratagem would
transform employee income from a cost on a company's income statement, which as such needs
to be trimmed to increase profitability, into a measure of profitability (pp. 101-102).
Perhaps the most audacious proposal Kelly makes is for the establishment of a bicameral
system of governance for corporations with an employee "House" that must approve
all major corporate decisions (p. 156).
Kelly's metaphor does get a little overworked by the end of her book and some of Lietaer's
speculations about the future give the book a somewhat dated feel now that the dot.com
bubble has burst. In addition, their proposals do seem somewhat puny in comparison to the
vast money system that they portray and dissect so vividly. But the major service rendered
by The Future of Money and The Divine Right of Capital are not to generate new policy.
Rather, both books open their readers to new possibilities for understanding the world.
Reading these books, I was reminded of the Talmudic story of Joseph the son of R. Joshua.
"He had been ill and fell in a trance. [After he recovered], his father said to him:
'What vision did you have?' He replied, 'I saw a world upside down, the upper [classes]
below and the lower [classes] above.' He said to him: 'You [actually] saw the world
clearly' " (Babylonian Talmud, Baba Bathra 10b, Pesachim 50a). R. Joshua, in effect,
urges his son not to accept the current economic reality as the only possible or viable
vision of the world and to view our world instead as a distortion of the world he viewed
in his trance. Lietaer quotes Edgar Cahn, a Washington lawyer who created the "Time
Dollar" alternative currency, who makes a similar point: "The real price we pay
for money is the hold that money has on our sense of what is possible - the prison it
builds for our imagination" (Lietaer, p. 146).
These two books offer particular challenges to the Jewish community. Jewish business
ethics has tended to focus on personal conduct, dealing with issues such as honesty in
business negotiations, fair pricing and ethical treatment of employees. A recent lengthy
article in the Baltimore Jewish Times, for example, leads off with a discussion of whether
the protagonists in recent scandals were Jewish and then focuses on the morality of
particular individuals or actions. There is relatively little consideration of the
individual's responsibility to address what might be called "systemic" ethical
issues, the moral challenges that are inherent in the very way that our economic and
financial system is organized.
There are two reasons for this. The first is that such systemic issues are not explicitly
addressed in rabbinic legal texts. For example, the very concept of a corporation is
unknown in all of the classical Jewish texts (Kelly points out that American law faces a
similar challenge, p. 165). The lack of consideration of systemic issues in rabbinic legal
texts is probably due to the fact that Jews in the Diaspora rarely, if ever, had any
responsibility for the creation of the economic, legal and political systems of the
countries in which they lived. Rabbis therefore focused on creating rules and norms that
addressed the challenges that Jews actually faced. Of course, American Jews play a central
role, as individuals if not as a group, in our nation's civic life. There is therefore a
need for new "Talmudic tractates" that bring together diverse sophisticated
Jewish views on such issues with the freedom to craft new fields of Jewish thought.
A second and more disturbing reason for the lack of consideration in Jewish life of these
issues is the economic success of American Jews. We, as a group, and especially our
communal leadership, have tended to benefit from the very imperfections in the economic
structure of our society that Lietaer and Kelly describe. However, as Kelly notes, it is
not clear that such imperfections continue to serve Jewish self interest. "Physicians
applaud when their portfolios rise in value, yet wonder why insurance companies are
ruthlessly holding down medical payments. Employees cheer when their 401(k) plans post
gains, yet wonder why layoffs are decimating firms. Their own portfolios hold the
answer" (p. 5). If the icons of corporate malfeasance serve no other purpose, they
may at least help to open our eyes to considering new possibilities for achieving both
greater prosperity and economic democracy.
To view other articles by Robert Rabinowitz, click here.
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