Chapter 4 The Corporate Society
A basic model for the structure of organizations has evolved to facilitate the industrial processes of specialization, standardization, and centralization of control. Organizations are separated into specialized units – divisions, sections, departments, etc. – so as to facilitate gains from specialization. The function of each unit then must be specified and standardized so that all units work together effectively to achieve the overall purpose of the organization.
Each organization must have a purpose. Otherwise, there is no logical reason for bringing people, money, and other resources together. If a purpose can be achieved as effectively and efficiently by a collection of unrelated individuals, an organization is unnecessary. The industrial organization is designed so that its specific functions, procedures, and responsibilities, if carried out properly, will ensure that the purpose of the organization is achieved. In a sense, the purpose is designed into the organization.
An industrial organization, like a machine, requires constant maintenance to ensure that each person in the organization performs his or her function in support of the overall organization. Even in the best of organizations, individuals eventually “wear out,” – become disabled, retire, or simply lose their commitment or usefulness to the organization – and will have to be replaced. However, a “new” person can be hired to fulfill the specific responsibilities of the “old” person – the parts are interchangeable – and the organization will again function as before.
If the organization becomes obsolete – is unable to perform its purpose as effectively as some competitive organization – it must be reorganized, restructured, or redesigned so as to make it run more effectively. The ultimate responsibility for redesign lies with those who own the organization, the stockholders in the case of a corporation, but may be delegated to top-level management. Regardless, someone must decide when an organization has become obsolete and thus must be redesigned or discarded.
Corporate managers have little incentive for reorganizing the obsolete companies they control – particularly if reorganization might mean they would have less power, a smaller paycheck, fewer stock options, or no “golden parachute.” It’s easier for top management to use their market power, to discourage or destroy would-be competitors and to extract profits from suppliers of raw materials, from consumers, or from taxpayers, than to reorganize or liquidate the corporation.
Shareholders are far more interested in dividends and growth in the value of their portfolios than in either the true efficiency or ethics of the companies they own. Inefficiency and obsolescence become apparent only if markets are open to new entrants – but this requires competitive markets, which no longer exist because of corporate market power. So, as long as a corporation shows quarterly profits and continues to grow, no one demands that it be reorganized or disbanded -- no matter how inefficient or obsolete it has become.
By John Ikerd, “Alternative Organizational Structures: Implications for Competitiveness of Markets” Published in “A Food and Agriculture Policy for the 21st Century,” edited by Michael C. Stumo, Organization for Competitive Markets, May 2000.
I left Oklahoma in the fall of 1984, somewhat disillusioned by my profession. I had kept a record of my accuracy as a forecaster of livestock prices over a period of seven years. When I analyzed my seven-year record, along with those of other leading economic forecasters, I found that we were all about equally inept in helping farmers anticipate the future. For example, when forecasting quarterly average live cattle prices six months in advance, we had a standard error of our forecasts of about fifteen percent. This meant that if the farmer took one of our forecasted prices, and then added and subtracted fifteen percent, the range would be wide enough to include the actual later average price about two-thirds of the time. In other words, if we forecasted an average cattle price of $70, the plus and minus range would stretch roughly from $60 to $80. Only two times out of three would the actual price be anywhere within that range. About a third of the time, the actual price would be either higher than $80 or lower than $60. Any cattleman can tell you that the difference between $60 and $80 cattle is the difference between going broke and getting rich.
I had studied economic forecasting sufficiently to know that we were about as accurate in our forecasts of cattle prices as other economists are in their forecasts of general economic phenomena such as economic growth, unemployment, or inflation. The fact of the matter is that economists cannot forecast the future. Study after study has shown that you are just about as well off assuming that the future will be exactly like the present as using an economic forecast of the future; and common sense tells you that things are always changing. Occasionally a forecaster will hit a hot streak, possibly through some unique insight into current market forces, but market conditions change and eventually his or her forecasts again will go far astray. I have had those streaks. Successful forecasters become masters of creating an allusion of competence by keeping their forecasts vague, by using hedge words such as likely and possibly, and by revising their forecasting frequently. As I have said before, not a single reputable economist accurately forecasted the booming economy of the 1990s.
In Oklahoma, I was frustrated also because I had not been able to convince farmers to use risk management strategies. Farmers and ranchers could have used futures markets to shift the risks of inaccurate price forecasts to market speculators. They could have taken positions in the futures markets that would have allowed them to make profits in futures markets if cattle prices fell to unexpectedly low levels, but they would have lost money in the futures markets if cattle prices moved to unexpectedly higher levels. Profits in the futures markets would have offset lower cattle prices, but losses in futures also would have offset windfall gains in cattle prices. Speculators can always be found to take market positions opposite to those of hedgers. These are the basic principles of hedging, although the terminology and practice of hedging can seem a bit complicated, at least at first.
Virtually every cattleman I had taught to hedge in the futures markets had ended up losing money. They had ended up speculating instead of hedging. They weren’t willing to settle for making a reasonable profit by raising cattle for a reasonable hedged price. They wanted to make easy money by speculating on whether prices were going to go up or go down. These amateurs were no matches for the professionals. Hopefully, those cattlemen who had been in our classes at least understood they had lost money speculating rather than hedging.
I wanted to find something different to do professionally. I didn’t feel I was really learning or teaching much of anything useful. I was spending most of my time analyzing the same statistics – cows and calves on farms and ranches, cattle in feed lots, slaughter numbers, live prices, wholesale prices, carcass weights, etc. – over and over again. The numbers changed – every quarter, every month, every week, and sometimes every day, but they were always the same basic statistics. I was a college professor, but my work wasn’t that much different from a worker on an assembly line. Each day the assembly line started again with a new batch of numbers that I had to do the same things to as I had done the day before, and the day before that, for as long as I could remember. The assembly line worker at least has a sense that he or she is producing something useful. I didn’t.
In the 1980s, agriculture was in crisis and I, as an economist, was beginning to get the feeling that I was at least partially responsible. We had lured farmers onto the technology treadmill with the promise of profits, knowing that any profits they made would be short-lived. We knew that with each new round of technology they would have to farm more land, feed more cattle, buy more equipment, and hire more workers – just to survive. We knew that with each new round of technology some farmers would be forced to fail, not necessarily because they were inefficient or reluctant to change, but just because some had to fail so others could succeed. Wasn’t there something wrong here? Could anything that was so bad for farmers really be good for society?
My family was also disillusioned by the boom and bust society of Oklahoma. My twin daughters were completely turned off by what instant wealth had done to the kids in their school during the Oklahoma oil boom – and my kids were a long way from poor. Expensive clothes and jewelry became the symbols that separated the elite from the commoners, even in junior high. My daughters were repulsed by the hoity toity attitudes that kids took on just because their parents, all of a sudden, had lots of money. To this day, my daughters have no respect for those who measure status in terms of such things as clothes, cars, jewelry, and money. My wife found that the initially hospitable social environment of Oklahoma was neither durable nor forgiving. We invited people to our house but we were rarely invited to theirs. I was so tied up in my work, traveling almost constantly, that I didn’t take very good care of my family or any other social relationships. I might have been working for a university rather than a corporation, but I had become an organization man, through and through. My work was my life and it was killing me.
We had wanted desperately to move from Oklahoma back to Missouri, but I wasn’t able make it happen. The Department of Agricultural Economics at the University of Missouri wouldn’t hire its own graduates – a common practice that I have never understood. I can understand that a department needs diversity of thought among its faculty members, but refusing to hire your own graduates certainly doesn’t ensure diversity. I did manage an interview for an administrative position at Missouri, but I didn’t get an offer. I found out later that it had already been promised to someone else, and my interview was just part of the common charade of most so-called national searches.
I had been on the short list for several other administrative positions, and had actually interviewed for a department head position at the University of Florida. Finally, desperate for a change, I arranged for a yearlong sabbatical at Oregon State University. Two months before we were to leave for Corvallis, I got a call from Si Trieb, an old friend at the University of Georgia. UGA had reorganized their extension program and had an Extension Agricultural Economics Department Head position open. He said he thought I could have it if I wanted it, which I did. I interviewed, and I was hired. In the fall of 1985, instead of heading northwest to Oregon, we headed southeast to Georgia. My long economic reformation process was to begin during my short tenure in Georgia.
The farm financial crisis was the top priority for my new department. Georgia farmers were going broke in record numbers and we were expected to do something to address the crisis. Georgia had become the leading state in farm bankruptcies during the 1980s – because Georgia farmers had led the nation in securing federal farm loans during the 1970s. The Farm and Home Administration (FmHA) was a government agency established to provide loans to farmers who couldn’t get loans from any other source. The interest rates were low and the pay back conditions quite liberal, so FmHA loans were attractive loans, if you could qualify. It just so happened that during the late ‘70s a lot of Georgia farmers qualified, with Jimmy Carter, a Georgian, in the White House.
Not only had lots of farmers qualified for government loans, but many found they qualified for a lot more money than they really wanted to borrow. The get big or get out mentality permeated all government farm-lending programs during the 1970s. A farmer found it difficult to borrow a little money just to stay in business or to finance a modest expansion of the existing operation. It was far easier to borrow a lot of money to make a major change in the farming operation, to build new buildings, buy new equipment, or buy more land. The government didn’t want to finance small scale, diversified, subsistence, or part-time operations. They wanted to finance real farmers. The agricultural economy was booming. Farmers were encouraged to plant “fence row to fence row,” as USDA Secretary Earl Butz put it, in order to supply growing world markets. To produce more, they needed to borrow more. As a result, many farmers in Georgia and elsewhere ended up with far larger loans than they could possible repay.
Ronald Reagan defeated Carter in the 1980 election, Reaganomics clamped down on the money supply, real interest rates rose, and the U.S. economy plunged into recession. Export markets dried up as high interest rates caused the foreign exchange value of the dollar to soar, and prices of agricultural commodities to plummet. The boom of the ‘70s became the bust of the ‘80s. Somehow, we were supposed to help Georgia farmers find a way out of this mess. One of my first tasks at UGA was to help the Extension Director review and revise a new national extension initiative called, “Restoring Profitability to Agriculture.” I didn’t have a clue as to how we could possibly make good on such a promise.
As the new head of agricultural economics, I was appointed to head up an advisory committee established by the Governor to address the farm crisis. At a public hearing, soon after arriving in the state, I had been in quoted an Atlanta newspaper as saying, “farmers who fail to follow sound business management and marketing practices, should be forced out of business, and the sooner the better for the good of all concerned.” I actually had said that such farmers “would” be forced out of business, rather than “should,” but I had not questioned the inevitable demise of farmers who failed to put the bottom line ahead of everything else. I suspect that misquote validated my economic credentials with many and made me the logical choice to head the Governor’s Farm Crisis Advisory Committee.
I received the list of my committee members from the Governor’s press secretary and set up the initial meeting. The press secretary also informed the news media that the Governor’s committee would be meeting soon to provide the Governor with recommendations concerning the plight of Georgia farmers. I got a call from an Atlanta television reporter, Ju Ju Chang, asking when we were going to meet and if it would be okay for her to attend and report on the committee meeting. Naively, I told her when and where we were meeting, assuming the meeting was open to the public, and thus, was open to the media. I didn’t bother to tell the Governor’s press secretary about the call.
We held our meeting and came up with a list of recommendations. The television crew was there with cameras rolling. As chairperson, I was interviewed for the evening news. I talked mostly about our recommendations, which included establishing a crisis hotline and several regional counseling centers where farmers could seek one-on-one help in dealing with their financial problems.
The following morning I got a call from the Governor’s press secretary. She was furious. The Governor had not given me permission to talk with the media, she scolded. I told her that I was a public employee, employed by the taxpayers, not by the Governor, and I didn’t feel I needed the Governor’s permission to talk with the media or anyone else. However, I said if I had been given instructions to clear my statements with her first, I would have done so. In the future, I said, I would appreciate receiving such instructions in advance, whenever she felt it was necessary. She assured me that I didn’t need to be concerned about any future relations with the Governor’s office because there would be none. The Governor established a telephone hotline but never did anything more. My potentially promising career in Georgia politics came to an abrupt end.
The Department of Agricultural Economics eventually was able to secure grant money from the USDA to carry out a farm financial crisis program on our own. We did one-on-one counseling with farmers, but on a much more limited scale than our committee had recommended to the governor. It was during these counseling sessions that I came face-to-face with the failings of my profession. It’s one thing to understand something in the abstract, but it is quite another to confront the same reality in the form of a living person sitting across the table from you.
We asked farmers to bring whatever financial records they had to the meetings with them, so we could help them determine the seriousness of their situation and, hopefully, help them find a way out of trouble. Anywhere from four to six faculty members would attend each of these meetings. One of us would take personal responsibility for each farmer who attended, and would work with the same farmer all day. We went over their current financial situation in search of possible alternative solutions to their problems. During these sessions, I began to realize that the farmers with the greatest financial difficulties were those who had been doing the things that the Universities, USDA, agricultural lenders, and the rest of us so-called experts had been encouraging them to do. The farmers who were in real trouble were the good farmers – the innovators and early adopters – who had borrowed heavily during the 1970s to modernize and expand their farming operations. These good farmers were being forced out of business.
The land would still be farmed after these farmers were forced out of business. It would be bought by other farmers – who were better farmers only in the sense that they had, or could get, sufficient capital to weather the downturn in prices. In many cases, this capital was made available through incorporation. Most were family corporations, but even at that time, publicly owned corporations were making inroads into agricultural production. The land would still be farmed, but the farm economy was being transformed from capitalism to corporatism.
Some farmers who came to these meeting found that they were not really in any great financial difficulty. They were not doing as well as they had in earlier years, but they were in no real financial danger. Many of these farmers would have been classified as the late-adopters or the laggards. They had not borrowed a lot of money during the 1970s, because they had not expanded their operations. They had diversified farming operations so they didn’t have all of their eggs in the export market basket, as the saying goes. They didn’t push for absolute maximum production, so they had lower cash operating expenses and could better weather a decline in commodity prices. When they bought new equipment, it was typically was used equipment that someone innovative farmer had replaced long before it was worn out. The farmers who had ignored the advice of the experts during the 1970s were weathering the farm financial crisis of the 1980s fairly well. These farms would stay in the hands of family farmers. These farms were economically sustainable.
During the rest of my time in Georgia, I went about the state telling the truth as I saw it. The general theme of my talks was, “The Farm Financial Crisis; It’s Not Your Fault.” I talked about the technology treadmill. I talked about how farmers had been encouraged to expand production, plant fence row-to-fence row, and then left to twist in the wind as the economy fell apart. I talked about Reaganomics, its impact on interest rates, the value of the dollar, international trade, and the farm economy. And I talked about how the farm crisis and farm bankruptcies were inevitable consequences of our national farm policy. I didn’t make many friends in the agricultural establishment, but a lot of farmers listened and began to understand what had happened to them and why. I was doing the best I could to be a good public servant in a bad situation.
I knew something was fundamentally wrong in the farm economy. Only later would I understand that the same thing is fundamentally wrong with the economy in general. Only later would I begin working in earnest to help build a sustainable agriculture, and, in so doing, to help build a more sustainable human society. But the direction of my professional career was forever changed during those face-to-face sessions with the farmers of South Georgia. From that time on, I have been a critic, and often an opponent, of the establishment. The establishment – universities, government agencies, civic organizations, and corporations – has been promoting an economic system that ensures the failure of capitalism and the success of corporatism. I didn’t start using the term “corporatism” until many years later, but little by little, I began to see the failure of economics reflected in the rise of a corporate society.
Webster defines corporatism as “the organization of society into industrial and professional corporations (or groups), which serve as organs for political representation and which exercise control over persons and activities within their jurisdiction.” We have a society of corporations, not a society of people. And, capitalism requires a society of responsible individuals, of people.
Capitalism is based on individual ownership of private property. But most private property in the U.S. today is owned by corporations, not by individuals. Private ownership by corporations is fundamentally different from private ownership by individuals. A true society must be made up of people, not corporations. The values and morals of a society must be a reflection of the values and morals of its people. Corporations have no morals. The only things a corporation values are profit and growth. People have hopes and dreams for the future. People have hearts and souls. Corporations have neither. The success or failure of most corporations today is measured solely in terms of their economic bottom line. In order for capitalism to work for the good of society, for the good of people, individual people must hold private property, not corporations.
I should hasten to point out I am referring here to publicly held corporations, where management or decision making has been separated from ownership. A family-held corporation, where the family participates in management decisions, is no different, in this respect, from a family-owned, individual proprietorship – the personal values of the family will be reflected in the decisions of the corporation. A closely held corporation, where specific individual stockholders can actively participate in decisions of the corporation, is no different from a partnership among people – the decisions will reflect the personal values of the stockholders. It’s only when the stockholders become so many, or when stockholders fail to impose their personal values on corporate decisions, that corporations become non-human. When stockholders own stock for the sole purpose of increasing their wealth, as in the case with ownership by mutual funds and pension funds, for example, corporate managers have no choice other than to maximize profits and growth. The corporation has taken control of its people.
Today, some large corporations attempt to reflect human values in their corporate management strategies. For example, Interface Inc., a large Georgia carpet manufacturer, and Fetzer Vineyards, a large California winemaker, openly advocate managing for long run sustainability – using economic, environmental, and social measures of success. They call it managing for the triple-bottom line. The executives of such corporations should be commended for their commitment to humanity, but they are the exceptions rather than the rule. However, executives of such companies publicly admit to pressures from stockholders to justify each decision in terms of economics and to give priority to profits. In general, as the number of stockholders becomes large, they find it increasingly difficult to agree on pursuing any common objectives other than profits and growth.
Lack of choice is the most important factor separating corporations from individuals. Of course, some individuals and family corporations are just as greedy and ruthless as any public corporation. But, individual people have a choice to be otherwise. They deny their moral and social responsibilities because they choose to, not because they have to. The managers of most publicly held corporations have no choice – they must maximize profits or lose their job. Most make the career choice to manage for profits and growth, but once their career choice is made, many other options are closed. Capitalism, on the other hand, requires individual ownership, individual decision-making, and individual responsibility.
Capitalism also is based on competitive markets, but as indicated previously, today’s markets are not competitive. It’s no longer a matter of markets being imperfectly competitive or sufficiently competitive – they simply are not competitive. There is no assurance today that pursuit of individual self-interests is being transformed into the common good. None of the economic conditions that must support capitalistic markets is present in today’s economy.
Markets are no longer characterized by a large number of buyers and sellers. Today’s markets can be characterized more accurately as being dominated by a handful of giant corporations. The actions of any one of these large firms can have a major influence on overall supplies and prices in the market place. These firms have the power to set prices and to increase or restrict market supplies to protect their profit margins. Cost savings are not passed on to consumers, but retained as corporate profits. The rewards necessary to reallocate productive resources are not passed on to suppliers of basic natural and human resources. Consumers get the variety and quantities of goods and services that maximize corporate profits, which are not necessarily the same variety and quantities needed to maximize consumer satisfaction.
These firms are impacted by, and thus are keenly aware of, each other’s strategies and actions. They jostle for market position, they conspire, they play games, – there are not so many that each can ignore the actions of any other. When the number of dominant firms drops to four or less, sociological studies have shown that they can conspire to enhance their collective profits, even without communicating directly. Such markets are not competitive, at least not in an economic sense.
In some industries, corporations may compete fiercely for market share, and thus, may produce even larger quantities at lower prices than would firms under perfect competition. However, as firms gain greater market share, by necessity, fewer firms survive, and the market becomes less economically competitive. Economic survival of the fittest may be defined as monopoly, where one firm controls the total market and has uncontested power to maximize its profits by exploiting both consumers and suppliers of inputs. In fact, the goal of today’s corporate competition is the elimination of economic competition.
Today’s markets are not characterized by homogeneity, but by a multitude of superficially differentiated products. Suppliers attempt to carve out a unique market niche for themselves so they won’t have to compete head-to-head with other suppliers. When successful, they have no direct competition for any consumer product in the marketplace. Each supplier has a monopoly, albeit weak in many cases, for each of their consumer products. This is no trifling matter. Retail shelves are so full of superficial variations of the same thing that there is no room for meaningful variety or true consumer choice.
It is not easy to get into or out of today’s type of business. Initial investments for new entrants would be huge. Today, total capital assets of industrial corporations are measured in millions and billions of dollars. Most have thousands, or hundreds of thousands, of stockholders. It isn’t easy to achieve a size that justifies a public stock offering, and without going public, most new enterprises cannot get large enough to compete for market share. Today, it is not easy to get out of most corporate businesses. In addition, management decisions have been largely separated from ownership, and management is not about to get out of a business for any reason short of bankruptcy. Thus, scarce resources are not efficiently reallocated among competing uses so as to maximize consumer satisfaction – as is necessary for efficient, competitive markets.
Corporations buy and sell other corporations, they merge and spin off, but all of this has little to do with responding to changing consumers’ wants and needs. Companies may claim they are responding to consumer demands by introducing new products or new and improved versions of current product lines. But there is nothing to ensure that resources are being allocated to meet consumers’ needs, as long as it’s difficult, if not impossible, to get into or out of business.
It is not easy to get accurate product information. Few transactions today take place face-to-face between producer and consumer. Most products go through at least a half-dozen different stages of production, each represented by a different specialized corporation in vertical supply chains that link production to consumption. Government regulations establish grades and standards, require specific labeling, and discourage fraud and deceptive practices. These are all reactions to the fact that consumers no longer have any real knowledge of when, where, how and by whom their products were produced. All of this information is helpful, but none of it can possibly take the place of direct contact with producers. Some retailers have adopted a policy to allowing customers to return items for any reason for a full refund, in an attempt to cope with the fact that consumers almost never have accurate product information at time of purchase. But a liberal return policy is not the same as giving consumers sufficient information to allow them to avoid buying things that will not meet their needs in the first place.
Advertising has probably done more to destroy capitalism than has anything other than the corporate organization. Advertising makes a mockery of the concepts of consumer sovereignty, perfect information, and undifferentiated products. Advertising today is not designed to provide information, it is designed to persuade the consumer to buy – regardless of whether they have a real need for, or even want, what is being offered for sale. When the first corporate advertising agency hired the first Ph.D. psychologist to produce its ads, sometime in the 1940s, the business of advertising shifted from informing to creating wants and needs. Advertising is used to create the illusion that one product is better than another – even when no tangible difference exists. It is designed to confuse; it is disinformation by design. Advertising is a purposeful attempt to escape the discipline of market competition. There is nothing in economic theory that deals with the use of potentially productive resources – labor, money, and management – to warp and bend consumer tastes and preferences to conform to the desires of producers.
There is absolutely no logical reason to believe that markets today are competitive – at least not in the sense of competition needed for a capitalistic economy.
[i] David Korten. 1995. When Corporations Rule the World. Kumarian Press, Inc. Wes Hartford. CT.