- “We live in it.”
- “It conquered communism.”
- “It’s based on greed and profits.”
- “We need it, but it makes excessive profits off the backs of workers.”
- “It creates winners and losers.”
- “It is designed to make profits for big companies and their shareholders.”
- “Capitalists will do anything to get an unfair advantage.”
- “It caused corporate downsizing.”
- “We need government laws and regulations to protect us against it.”
- “It is free enterprise.”
- “In it, the big guys have all the advantages.”
- “It is a free market economy, but the common man gets the short end of it.”
Capitalism gets a lot of press. Conventional wisdom about capitalism covers everything in the previous list and additional comments even less flattering. What is astonishing about capitalism is not whether it works (it does), or if it is bad (it isn’t), or if the little guy gets beaten up (un-true, only those uneducated about how it works do), but how few people can define it. Recently I asked the executive teams of five companies to answer the following three questions:
- What is capitalism?
- What do you believe capitalism is?
- Do people, groups, or industries need protection against it?
These leaders represented the principals of a bank in a major metropolitan city, a mature technology business, a fast growth communications company, a medical services company, and a very profitable process manufacturing company. All agreed that we live in a capitalist society, yet none could answer any of the questions.
I found this more than a little disconcerting; how can you effectively compete in a capitalist system if you do not know what capitalism is? More astonishing is vividly remembering when I was taught the meaning of capitalism; fourth grade in an elementary school in a suburb of Chicago. Have our school systems forgotten to explain the most fundament element of our economic system? Maybe the media bombardment of political correctness has destroyed the average management level person’s basic understanding of earning a living.
Capitalism is an economic system through the exchange of goods or services in which all parties in the trade believe that the value received is equal to or greater than the value offered.
In the simplest form, capitalism is nothing more than barter. Each party believes they received something that was worth more to them than what they offered. The key word in this statement isbelieve. Very successful capitalist are very effective in persuading their trading partners to hold a high value of their goods and services. My fourth grade teacher understood this, and taught it to us as a part of explaining what money is.
Nearly all transactions that take place in this country are based in barter. What types of groceries you buy, whose brand you buy, even where you buy it, is based on your own view of value. Marketing as a business discipline is based around creating a perception for a product or service, locating the trading partners, and exposing them to its value. The success of your company, the job you hold, and the dreams you hope to capture as part of your career path, are all based on barter.
Your Company And Capitalism
The rules of capitalism are universal. That means they affect everyone. This includes
- Your customers/clients
- The families of your employees
- CPAs and attorneys that help your business
- Sanitation engineers
- The communities you and your company does business in
How are all these people affected by how you understand and adhere to the rules of capitalism? The answer is: very directly.
Your Job and the Jobs of Your Employees Are A Capitalist Transaction
How is holding a job based on barter? A business must regard its employees as assets. Employees are hard assets. Their value is measure by the wages, incentives, and benefits provided to them. This is what they agreed to in the trade.
A business must acquire this asset in order to allow it to contribute to the creation and maintenance of revenue. At the time of someone being hired, you are bartering their work efforts in exchange for a compensation package and other intangibles.
People accept job offers because they believe in what the company offers them. It is not only in the tangibles, that is, wages, bonuses, health care, stock options, and other perks. Some offers many include career growth opportunities, continuing education, and retirement programs.
Though all of these are important parts of the trade, studies of employees have show that these tangibles never appear at the top of surveys which question job satisfaction (value received in trade by the employee). Appearing ahead of the tangibles are comments such as “being appreciated”, “a sense of belonging”, “acknowledged for my contributions”, “the great corporate culture, a sense of security”.
What are these surveys telling us? Though tangible considerations are very important (they always appear in the Top 5), there are other intangible items a good company provides its employees that are of greater importance in the capitalist transaction of being employed.
The key issue is that the employees hold a belief about these intangibles that make their jobs satisfying and personally rewarding. In other words, the capitalist trade with your employees never ends. How well you practice the trade (Good management or bad? Continued investment in your teams or not? Appreciation for their efforts?), will greatly determine how much you get in a “rate of return” on each person as an asset in the company.
The simplest way to understand this is to ask yourself a very simple question: Have you ever had a bad shopping experience? How long do you remember it? That is how long a poor experience in capitalist barter is carried by the persons and organizations that got hurt.
Understanding the Rules of Capitalism: A Major Strike By A Union
A few years ago, union employees struck UPS, the shipping and transportation giant. The employees were dissatisfied with wages, issues concerning the pension fund, commitments to the number of hours worked by part time employees, and the number of part time employees. As with any strike that has a national impact, the news media gave it significant coverage.
The impact was large enough that it was threatening shipments of 70% of items weighing less than 40 pounds in the United States. The response from the media (and their talking heads) was swift. “The slack will be taken up by competitors, including the U.S. Postal Service, Federal Express, and others!” “The contract negotiations center around the number of part-time employees that do not receive full benefits!” “This strike could cripple the company!”
Each of these statements was spoken with intelligence, dignity, and “gravitas”. Each of them was also wrong, and only showed the media’s complete lack of understanding capitalism.
Let us look at the first assumption; “The slack will be taken up by competitors, including the U.S. Postal Service, Federal Express, and others!” This would have been impossible. UPS held a 70% market share. If by the strike it could only deliver services equal to 20% of the market demand, its competitors would have to instantly be able to provide an additional 50% of the market demand.
The only way this could happen would be if the competitors (none of whom could have had a 30% market share, or there would have only been one of them) could collectively nearly double their production. This would mean that their employees and equipment were so seriously under-utilized they were functioning at only 50% of maximum efficiency, or that they had a large number of employees hanging around with nothing to do. Capitalism causes the market to be efficient; within reasonable variances, supply tends to equal demand.
How about the second assumption? “The contract negotiations center around the number of part-time employees that do not receive full benefits!” This also has a “touch of the blarney” to it. UPS is predominately employee owned and faces large variances due to seasonality. Management had chosen to set a certain percentage of its work-force in part-time positions in order to better meet the swelling market demand during peak shipping seasons (e.g., Christmas Holidays) through experienced part-time employees working more hours with a smaller impact on the bottom line; less overtime.
There was no evidence of part-time employees having a groundswell demand to go full time. In fact, market growth and natural attrition provided many opportunities for part-time employees to move up to full time employment. Capitalism had once again raised its conquering head. The value of the trade (employee wage/benefits for service provided to the company) was actually in full operation.
What of the third assumption? “This strike could cripple the company!” It was true that the strike, brought on by a breakdown in contract negotiations, could “cripple the company”, but the statement was a red herring. Employees did not want to destroy the company or lose their jobs, particularly since the company was employee owned. Why was there a red herring? What were the real conflicts in the negotiations?
The major national union (that striking employees belonged to) insisted the contract stipulate that the Union, not UPS, manage (control) employee pension funds. The company’s offer had met Union demands on wage increases, would not change its position on full-time/part-time policies, and was willing to double the value in each employee’s pension fund. It only stipulated that the company managed the pension fund, not the union.
Employees struck for several weeks. They lost wages. Eventually they voted to support the union demand, not the company’s offer. The company accepted. What was the only exception? UPS did not double the size of the pension fund, and the union took control of it. Employees went back to work. The question is who really won, and how did capitalism play in this event?
Doubling the money in an individual’s pension fund would have entered the magical world of interest compounding. At even a modest annual increase in value of 8%, in nine years the value of the fund would double regardless of how much was in the fund. Doubling the fund at the beginning and allowing the company to manage the fund produces a quadrupling of value in that same nine years. This amount is far beyond the lost wages of employees. Did employees understand this? We will never know for sure. Is giving this up something I would have done? No. Was it a fair trade? Great question…
The concept of a fair trade brings us to the heart of the issue. Remember the definition of capitalism:
Capitalism is an exchange of goods or services in which all parties in the trade believe that the value received is equal to or greater than the value offered.
Capitalism contains no rule or law that protects a person from an unfair trade. The key word in our definition is believe. The parties believed the trade worth the price. In this case, the employees believed their union more than the company in the management of its pension fund. Is this belief true? Only time will tell, but capitalism does contain a long-term safety net for traders who are willing to learn from mistakes.
The Long-Term Safety Net:
Fool me once, shame on you, fool me twice, shame on me.
Traders that depend on their persuasiveness alone for making the trade, (particularly if the trade does not have real value), have a number of descriptions we use to refer to them.
Scam Artist. Charlatan. Con Man. Liars. Cheats. Gypsies. Thieves. Enron.
Can this be true of business? Unfortunately, it is consistently true of companies. If a corporation’s advertising and marketing efforts tell you that “Quality is Job-One”, and your Ford is in a constant state of repair both in and out of warranty, chances are you probably won’t buy a Ford next time. It was consumers’ disappointment in the 1980s automobiles from General Motors, Ford, and Chrysler that allowed Toyota, Honda, Nissan, Mitsubishi, Subaru, and Mazda to capture a large share of the American auto market.
What is the lesson to be learned from understanding capitalism? Everything we do in the business world, and everything we do in our personal lives that involves money is engaged in capitalism. We are constantly trading, trusting that what we pay gives us back something of equal or greater value.
This is a critical understanding for a business. A company may make a greater profit short-term by engaging in “unequal” trades (gouging customers, underpaying employees, creating a terrible work environment), but the only way to truly prosper long-term is to engage in trades that are fair to all trading partners. This is the foundation of the Prosperity Principal™.
The definition of the Prosperity Principal™
Long-term prosperity comes from engaging in fair trades with all stakeholders by understanding how your offer in the trade improves their prosperity, and by constantly seeking to increase the value of your offer.
Don’t victimize your company by operating in a way that allows the Rules of Capitalism to come back and bite you. Look at all your trades with ALL your trading partners and make sure that real value, not just a perception or lack of one is there.
The Prosperity Principle is the Zen of the trade; take time to make it part of your every day operations.