By Bill Martin
Capitalism came to the future U.S. with European colonists. It has the power to generate wealth, infrastructure, and competitive economic drive among nations. It depends on money, labor, natural resources and consumers of goods and services. The old phrase “You’ve got to have money to make money” applies.
Capitalism can often be more about self-interest than altruism. However, there are forces I will explain here that can corral it to a certain extent and push back effectively against some of its adherents’ worst acts or policies.
Businesses of all kinds and sizes participate in capitalism. The longest lived and best funded of these are corporations; they are not tied to human lifetimes, preserving legal and regulatory longevity. Short lived citizens can only purchase goods and services with ready cash. If there’s no stockpile of it, they can’t afford to build businesses, buy homes, or purchase vehicles. For that they need loans; proving they can repay.
Businesses large enough to be incorporated under capitalism, can raise money for operations without bank loans if they choose. They can work with investment banks to create and sell shares of stock in their business on a public trading exchange. That would mean their stockholders then own a defined share. They can also sell bonds of varied maturities to investors at set interest rates for each $1,000 bond. Those are “rented” capital. Bonds have a first call on earnings ahead of stocks; they are a set of fixed interest payments unless redeemed early by the issuer.
Common stock is not required to pay out dividends, and if it doesn’t, those shares become worth more unless sold. (A bigger pie divided by a fixed percentage of shares outstanding translates to increased value per share.)
Guardrails and Controls—
Both federal and state governments have a variety of regulations that affect businesses and corporations. You may have noticed how so many corporations are registered (and chartered) in Delaware. Looking further, you might find that the state of Connecticut is particularly attractive to the insurance industry.
The federal SEC (Securities and Exchange Commission) controls are concentrated in banking, investment banking, stock issuance, brokerage sales and trading. These rules carry fiduciary responsibility for participants, meaning (in theory, at least) they have a duty to behave responsibly in treatment of those they do business with. History includes massive violations with prosecutions that followed. Insider trading nabbed Ivan Boesky, and massive investment fraud sent the late Bernie Madoff to prison for life.
After the Federal Trade Commission took tobacco advertising off television screens in 1972, the industry focused on other remaining venues to keep sales up. Though smoking rates in adults had come way down, specialized campaigns by Big Tobacco targeted youth with “Joe Camel” and other characters, while adding a variety of non-tobacco chemicals to hasten addiction. For the first time, the federal government was successful in prosecuting tobacco giants for misinformation campaigns that masked their foreknowledge of nicotine being addictive. Surviving family members also began to successfully sue these companies for the premature death of their smokers.
Regulatory failure was also seen in the 1985 Savings and Loan scandal that crippled the economy and credit markets for some time, and the 2008 mortgage financing meltdown bringing a long recession. Some of the preventive measures against a repeat of these events have yet to be implemented by Congress.
When a corporation (or a single industry group) has behaved in ways not appreciated by some or many, objectors can boycott. This is a concerted effort to avoid buying that corporation’s products as a punishment or corrective influence. Deaths resulting from tampering with ingestible OTC medicines led to boycotts of certain products, which quickly produced safer packaging that would reveal tampering.
There is another purpose for boycotting. It’s public policy related and one famous case was about civil rights. Rosa Parks, a black woman, refused to sit in the rear of a Montgomery, Alabama municipal bus. She was arrested and booked, after which the black population of that city stopped using city bus transportation. This 381-day boycott action hurt city finances and produced a District and Supreme Court ruling that segregation on municipal transportation was illegal.
A more recent financial action to achieve better regulatory or policy goals involves divestment. This is sought when the target’s actions are antithetical to civic interests of citizens. The most recent example are the fossil fuel and related mining and extracting businesses. After years of pro-industry advertising that continues as disinformation, sectors of the public are trying to get major holders of corporate stock in these businesses sold off. Usually, this is sought from large retirement funds or university endowments with major holdings in those industries.
Regardless of where you sit on the global warming issue, divestment is a bit of a conundrum. Investments are made to earn returns, and fossil’s have been good assets to hold. Now you’re going to jettison them from your investment account? Actions like this lower stock prices, and force industries to borrow more at greater expense. This phenomenon was more common years ago against the nuclear power industry. It now dogs the fossil giants and may become more common in the defense industries, as people care less for climate change and perpetual war. There are mutual funds that won’t invest in such stocks. They are referred to as “socially responsible” funds.
Peace is good for business and for investors, and an expansion of non-fossil “green” activities opens up an entirely new field for employment and corporate profits. Ask the auto industry. In a very short time they have come to embrace electric vehicles. Class 8 highway electric trucks powering refrigerated trailers are already supplying southern California supermarkets. There are a number of smaller electric aircraft entering service, and Airbus intends to introduce hydrogen powered jet prototypes by 2025.
Against decades of effort by some corporations to keep things static, other businesses are grabbing for a greener future with both hands, betting they will be able to please the public and profit from it. It’s interesting that these new businesses use the same capitalist system to leave those status quo celebrants in the rear view mirror.