August 4, 2011
Dean Nitin Nohria
Harvard Business School
Dear Dean Nohria:
My experience includes running companies for over thirty years, including Chairman and CEO of ADT, Inc a NYSE company for eighteen years, and Board membership on many companies in many parts of the world followed by over twenty years of intense study of economic-political alternatives.
The recent economic disaster has made the shift to democratic capitalism urgent but it will need leadership from organizations such as HBS. For this reason I wrote you on March 28, April 3, April 11, and April 21. This letter includes a bibliography for the study of democratic capitalism. I hope that you have found my letters useful.
Economic freedom has improved the lives of hundreds of millions of people. The alternatives within economic freedom have, however, never been studied or researched by academicians. The alternatives range from a continuation of mercantilism to the democratic work culture. The former is a command and control structure in an environment of intimidation in which workers are treated as disposable cost commodities. In the latter, associates are treated with respect which maximizes their participation, and allows them to share in improved performance.
If the alternatives had been studied, it would have been clear that the democratic work culture results in superior performance, including profits. Because of this failure of education, study and research have been limited to a superficial argument over ideologies, socialism versus capitalism. The Left has never explained how more wealth can be distributed without first finding ways to build it; the Right has adopted the mercantilist philosophy with its shareholder capitalism’s sacrifice of long-term growth for immediate stock price by firing people. For lack of study and research, persistent misconceptions have led to repetitive and extreme damage to society, and these need to be corrected:
- Adam Smith was not an apologist for greed, contrary to a popular notion . His first book, The Theory of Moral Sentiments was mainly about the instinct for social cooperation; his second book, The Wealth of Nations, was about the benefits of individual entrepreneurial energy.
- Wall Street hijacked Adam Smith’s free market theory of equilibrium to rationalize deregulation of finance capitalism. Smith warned, to the contrary, that free markets should be protected from the speculators, “prodigals and projectors” as he called them, or they would deflect capital away from the job-growth economy.
- Marx’s theory of the evolution of the mode of production (article # 10) is manifested in the democratic work culture of the Information Age. Marx proposed a culture of respect and cooperation, in which motivation would be sustained by ownership participation. The additional income would stimulate greater economic growth.
- Marx conditioned social progress on giving priority to the superior economic system, not the political system. The superior economic system feeds, clothes, shelters, educates and encourages good health while democratic elections do none of these.
- Marx’s vision of a world united in economic common purpose in which the Warrior Sate becomes irrelevant, is coming close but needs research.
- The Marxists destroyed Marx’s visions through government structures that cannot assimilate complex, fast- changing data, and de-motivates people.
- John Stuart Mill in the same year, 1848, saw the same opportunities as Marx, integrated them with private property and competition, and then added a moral dimension (article # 11), an economically determined, positive value system that feels good and works better!
- The enthusiastic bi-partisan response to Jeff Gates’s book, Ownership Solutions, (see book cover) demonstrates the potential for the superior economic system to unite the political Left and Right. The Right defends the free market while lobbying privileges that destroy the free market; the Left reacts by trying to redistribute wealth through government programs. Democratic capitalism solves both problems by eliminating the privileges and distributing wealth broadly through ownership participation.
- One of the many casualties of the domination by finance capitalism has been the function of the stock market to move savings into long-term investment. There is now more equity taken out of the market in stock buy backs and deals than added in new equity for growth.
- Five centuries of European colonization is at an end, and as soon as >America recognizes that it can’t run the world on borrowed money, imperialism will be at an end. The new economic powers, China and India, both earlier victims of imperialism, will then be free to use growing economic power to improve the lives of their people—one billion plus, each—instead of wasting their wealth on military expense.
Mill’s chapter VII on “The Probable Futurity of the Labouring Classes,” Book IV of Principles of Political Economy, should be required reading in all university disciplines.His subtitle: With Some of Their Applications to Social Philosophy, is a reflection of his friendship with Auguste Comte, the French pioneer in integrating economics with emerging sociology. Imagine the improvement in citizens’ understanding of economic alternatives if Mill’s message is modularized and presented at all stages of education. Optimism for peace and plenty in the 21st century could then be based on an economically determined, moral system that can displace the economic and human waste from war. It will be led by MBA’s whose radically different education reflects the material and spiritual benefits contained in Mill’s Manifesto of Democratic Capitalism:
The other mode in which cooperation tends still more efficaciously to increase the productiveness of labor, consists in the vast stimulus given to productive energies, by placing the labourers, as a mass, in a relation to their work which would make it their principle and their interest—at present it is neither—to do the utmost, instead of least possible, in exchange for their remuneration. It is scarcely possible to rate too highly this material benefit, which yet is nothing compared to the moral revolution in society that would accompany it; a new sense of security and independence in the labouring class; and the conversion of each human being’s daily occupation into a school of the social sympathies and the practical intelligence.
The goal of society should be to find the economic system that builds the greatest amount of wealth and distributes it broadly. Many good things can contribute to the improving human condition that do not cost money, but before they can come within easy reach of seven billion people we require enough food, clothing, shelter, good health, quality education, and hope. It should be empirically evident that the system based on the worth and potential of each person in an environment of trust and cooperation improves performance in every human association. Citizens must, however, have sufficient knowledge to use their democratic power to demand that their government supports the superior democratic alternative. If citizens understood the prime conditions for success of economic freedom, then they would have rejected the Wall Street hoax of applying free- market theory to finance capitalism in order to deregulate. There was no such citizen understanding and the economic disaster was the result.
Education will determine how quickly the world can take advantage of this historic opportunity. Both ending imperialism and reforming the economic system will depend on citizens’ studying the economic alternatives as part of core curriculum. Business Schools can lead, but only after they make their own radical shift to change MBA education from shareholder capitalism to democratic capitalism.
Ray Carey ‘50