Stewardship-base Economics

Stewardship – Based

ECONOMICS

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Stewardship – Based

ECONOMICS RAYMONDWYKAO Mc Master University, Canada

World Scientific NEW JERSEY . LONDON . SINGAPORE . BEIJING . SHANGHAI . HONG KONG . TAIPEI . CHENNAI

Published by World Scientific Publishing Co. Pte. Ltd. 5 Toh Tuck Link, Singapore 596224 USA office: 27 Warren Street, Suite 401-402, Hackensack, NJ 07601 UK office: 57 Shelton Street, Covent Garden, London WC2H 9HE

British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library.

STEWARDSHIP-BASED ECONOMICS Copyright © 2007 by World Scientific Publishing Co. Pte. Ltd. All rights reserved. This book, or parts thereof, may not be reproduced in any form or by any means, electronic or mechanical, including photocopying, recording or any information storage and retrieval system now known or to be invented, without written permission from the Publisher.

For photocopying of material in this volume, please pay a copying fee through the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, USA. In this case permission to photocopy is not required from the publisher.

ISBN-13 978-981-270-479-5 (pbk) ISBN-10 981-270-479-5 (pbk)

Typeset by Stallion Press Email: [email protected]

Printed in Singapore.

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Contents

Foreword

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Chapter 1 / Introduction

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1.1 1.2 1.3 1.4 1.5 1.6 1.7

Life and Living Bubble Economy and Job Loss The Aging Population Petroleum Sales Tax Black Gold and War The Trinity of Economic Power Stewardship-Based Economics is About the Purpose of Life and Living

Chapter 2 / People 2.1 2.2 2.3 2.4 2.5

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Malthus’ Population Study People, Land and Home Overpopulation and Global Poverty are Not About Numbers Fact and Wisdom — Some Lessons from Experience People: The Most Valuable Capital

Chapter 3 / Resources 3.1 3.2

1 11 12 12 13 14 15

21 23 26 29 32 39

Introduction Resources: Our Life Support System v

39 43

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3.3 3.4 3.5 3.6 3.7

Renewable Resources Non-renewable Resources When Demand Exceeds Supply Revisiting the Relationship Between People and Resources The Market Economy — A System Governed by the Invisible Hand

Chapter 4 / Fear, Ownership and Stewardship Responsibility 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9

Fear is a Great Motivator Fear of the Unknown The Rich Have More Fears The Good and the Evil Ownership The Odd Couple: MBA and ROI The Unfortunate Reality Definition of Stewardship Stewardship Responsibility is Not the Same as Social Responsibility

Chapter 5 / Production 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9

Entrepreneurship Survival Ownership and the Accumulation of Wealth Employment of Resources Cost and Costing Issues of Concern Capital Discount Theory and the Future Capitalism — Can We Make It Work?

Chapter 6 / From Slave Trade to Globalization 6.1 6.2 6.3 6.4 6.5

Trade, War and Peace From Slave Trade to Colonization and Globalization Globalization Governance of the Market Economy The Multi-functioning Market System

49 52 54 55 56

61 61 62 64 65 66 68 70 73 75

80 80 82 84 86 87 88 91 95 96 101 101 102 106 114 118

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Chapter 7 / Distribution and Sharing

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7.1 7.2 7.3 7.4 7.5 7.6

Introduction Lakeshore, Oceanfront and Rainforest Differences Between Distribution and Sharing Distribution — Its Right and Entitlement in Practice A Summary of Net Income or Profit Distribution Conclusions

Chapter 8 / Capital, Capital Accumulation and Diseconomy 8.1 8.2 8.3 8.4 8.5

Introduction The Sacrifice: The Unaccounted Cost of Capital The Accumulation of Money Capital Capital Market Diseconomy

Chapter 9 / Two Plus One 9.1 9.2 9.3 9.4 9.5 9.6

Introduction The Government Privatization Philanthropists Social Entity Inc. Conclusion

Chapter 10 / The Candle of Hope 10.1 The Emergence of Private Property Ownership and Social Justice 10.2 The Hope 10.3 Stewardship-Based Education 10.4 Wrapping Up the Beginning Index

121 124 126 127 138 141 143 143 144 146 153 159 165 165 166 176 177 181 188 191 192 196 197 202 205

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Foreword

It is my honor to write this preface to Prof. Kao’s book Stewardship-based Economics. As the author’s occasional co-author and as his son, I have seen the development of Prof. Kao’s philosophy of Entrepreneurism from its inception. This book, the third in a series, is the culmination (though undoubtedly not the end) of Prof. Kao’s work on this subject in which he has been such a pioneer. This works reflects current concerns over the environment and global climate change, and at the same time, also reflects our growing concern over the distribution of wealth and the plight of the poor, and is very much his own blend of critique, evaluation and hope for the future. It is an important book, a book that tackles the critical question of how we perceive ourselves as individuals and how we interact as a collective. Over 230 years ago, Adam Smith tackled the question of how can we create a moral society and act for the common good, when the actions of man are fundamentally self-interested. His concept of the free market economy was a great leap forward over the existing regime. From chapter 10 of this book: “… when Adam Smith’s Wealth of Nation was published, ... governments granted monopolies and gave subsidies to protect their own merchants, farmers and manufacturers against ‘unfair’ competition … artisans of one town were prevented from traveling to another to find work. Local and national laws forbade the use of new, laborsaving machinery. Adam Smith … showed convincingly how the ix

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Stewardship-Based Economics principles of free trade, using competition as a stimulant for innovation and creation for self-interest and the common good, were scarcely understood. He saw how choice would spur on economic development, reduce poverty, and precipitate the social and moral improvements of humankind that are principles of his treatise on wealth. Well, that was more than two hundred years ago …”

Smith advocated a then novel solution, one that in many ways presaged our understanding of the evolution of life and of human behavior — he realized that the individual fundamentally acts best, based on what he can immediately judge and act upon; in this case, his own self-interest. A great idea for its time and indeed for today, yet, despite all the advances and changes in this world in the intervening centuries, there have been surprisingly few advances beyond Adam Smith, whose propositions remain the moral and functional basis for free market capitalism today. In a famous passage from his Wealth of Nations, Adam Smith wrote: “In civilized society [man] stands at all times in need of the cooperation and assistance of great multitudes, while his whole life is scarce sufficient to gain the friendship of a few persons. … man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favor, and show them that it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.”

However, times have now changed, and with the benefit of hindsight, Prof. Kao shows us very clearly the implications of Adam Smith’s moral philosophy, challenging us to elevate ourselves above the principles of

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self-interest. In a prior work, Prof. Kao replied with a fable,1 in which the butcher offers such a proposition to the pig he is about to serve up for dinner, paraphrased here. Butcher: Give me what I want, and I will give you what you want … [in fact] Haven’t we given you what you want already, we feed you and give you shelter … [and] even clean you? Pig: Yes … because you want me to be plump and healthy, so you will kill me to feed you? You know, you will never give me what I want, because what I want from you is to let me live, which is what precisely you can’t give me. Butcher: … other than serving human needs what else can you do to make your life more meaningful? Pig: … how could I [know]? I am not even human. This simple story illustrates three important points. First, free market economics relies on a “contest” between participants, in which each individual, acting in his own best interests seeks to obtain the best deal possible for himself (and presumably his dependents). This contest however, requires that the participants are (approximately) equals. Not only is the “free market” contest often an unequal one between the haves and the have-nots, but it becomes increasingly unequal over time, as the rich get richer and the poor get poorer, until the rich have all the advantages and the poor, none, with the very poorest having nothing to contribute at all. For the free market to work, each individual must have something that the other values and wants. Second, the contest is only valid if no one party has power over any other, i.e. no contestant can take what he wants by force from another, without destroying the system that supports them both. Third the contest only works where the participants all have a full understanding of the “contest” being played, or at least have equivalent understanding with the other. In the above situation, the contest fails for all three of these reasons — first what the butcher wants is precisely what the pig will not give freely; his life. Second, the butcher can (and does) 1

R.W.Y. Kao et al., Entrepreneurism: A Philosophy and a Sensible Alternative for the Market Economy (Imperial College Press, 2003).

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forcibly take what he wants from the pig. Third, the pig does not even understand the nature of the contest being played out — what is meaningful to the human (i.e. the betterment of human life) is not meaningful in the context of the pig. Without overstretching the analogy, these difficulties can be reflected in the implementation of capitalism we see today, whether it is on the level of international relations (the intervention of the Western nations in Iraq), the destruction of the environment in the name of progress, or compromises in human health and safety in the name of profit, and Prof. Kao draws upon these examples throughout. As he would put it, the contest is not just between shareholders, but must consider the role of all stakeholders, these stakeholders including not only all the people involved in the production process but also, and perhaps most importantly, the earth itself. While criticising free market capitalism, and the effects of the capitalist west on countries such as Russia and Iraq, Prof. Kao does not advocate a return to communism or the reinstatement of totalitarian regimes. It is not an either/or situation. What he says is something quite simple – it is not enough to provide better government, for example, to the Iraqis in comparison to Saddam Hussein’s regime. We can (and must) do better than that. It is not enough to simply have fewer people die under the watch of the Western coalition, than died before the invasion of Iraq. We can (and must) be better than that. In the end the contest is not of one system against another, of capitalism being better than communism or despotism, it is about being the best, for all of humanity both for our generations and those of the future. In this book, Prof. Kao contrasts the failures of capitalism (to recognize all stakeholders in our future) with the downfall of communism, which failed to recognize the need for creative ownership in all people. He offers a third way, one that recognizes the power of the free market and self-interest but also recognizes that the criticisms of Marxism against the capitalist system were valid and must be addressed. How does Prof. Kao challenge us to engage the motivations of self-interest with the need for cooperation and the common good? In his words, “it’s all about ownership.” Central to his argument, he appeals to the things that distinguish us from all other species on earth (at least as far as we know) — our ability to see into the future and our desire to create and innovate. As far as we know, animals only see dimly into the

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future, while we think and worry about the far distant future, indeed past our own demise, and in our thinking, express our desire to build for ourselves (our “legacy”) and for our children. Our ability to affect nature, our ability both to build and to destroy, is unprecedented and unequalled by any other single species and it can only be counterbalanced by our ability to foresee the consequences of our actions, and, by accounting for the roles of all stakeholders in the transactions of a free society. This is a book that is about much more than just business. It is a personal account, drawing illustrations from the author’s own experience, and a passionate plea for a new way to live. In today’s “expert” driven world, it is sometimes unfashionable to consider applying the creative and innovative energies of all people to all tasks. This book cries out for the need to redress this imbalance – to place the emphasis not on reliance on professional training or professional procedures but on the individual’s creative needs and abilities. It is the most human of books, and a tremendous call of hope for the future. Rowland Kao Wellcome Trust Research Fellow Department of Zoology University of Oxford, UK February 2007

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1.1 Life and Living ... every individual necessarily labors to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest, he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations In this passage, Adam Smith set out the mechanism of the “invisible hand” by which every individual strives for his own betterment through interaction with other like-minded individuals. Through this division of labor in a free market, the interests of society as a whole are achieved. Adam Smith’s work is generally viewed as the starting point of modern economics. As an academic discipline, economics now embraces virtually the entire range of human activity. Earlier works of economics 1

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concentrated on broadly defined factors: consumption, production, exchange and distribution. Increased specialization into the individual disciplines of micro and macroeconomics was followed by greater specialization into more specific topical areas such as the environment, resources and energy, within the levels of both management (micro) and governance (macro). The current application of economics is so wide that its sub-disciplines touch on almost every aspect of human life. The consequences of various economic activities on the micro scale have shaped and will always shape and change individuals’ behavior towards people, resources and the living environment. On the broader or macro scale, it can change a nation’s wealth and global economic “well-being.” In an ideal world, what we gain from macroeconomics can lead us to prosperity and peace, but unfortunately, it can also as easily lead to ruin and war. The fall of the Berlin Wall in 1989 and the subsequent breakup of the Soviet empire are generally considered as events that heralded the end of communism, and the triumph of capitalism. Unchallenged by any major opposing power, the Washington Consensus in the early 1990s attempted to impose American-style free market values on the rest of the world.1 Unfortunately, this has led to widespread discontent over the maldistribution of wealth — in many cases, wealth has been drawn away from the people in the countries it purported to help, and towards those who are already wealthy.2 Too often, the very rich simply want more and more, not just from the environment but from fellow human beings as well. We hope Bill Gates’ and Warren Buffet’s donations of billions of dollars to charity will set a good example for others to follow. Although the market system has been built mostly by the rich, since the very poor cannot afford to be consumers, it has also been built on the backs of the poor, who provided cheap, if not slave, labor. Like it or not, the exchange system within the market economy may have profited the rich, but worsened the situation of the poor. The system, which relies on the “invisible hand” of the marketplace, works on a mechanism that pays

1

J. Williamson, “Did the Washington Consensus Fail?” Outline of speech at the Center for Strategic & International Studies, Washington, DC, November 6, 2002. 2 J. Stiglitz, The Roaring Nineties. A New History of the World’s Most Prosperous Decade (Penguin Books edition, 2003).

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no regard to human welfare. The only thing that matters is money or the price that one can pay. Under such circumstances, only the government can help to relieve the situation of the poor, but its hands are tied by the difficulties involved in intervening in the marketplace. Acts that regulate free trade and affect market operations are of course against capitalist ideals. Free market capitalists believe “the sky is the limit.” Unfortunately, the sky has no limit. What the rich fail to understand is that Earth’s resources are limited. Technology and science are the engines that drive the human race forward in a remarkable story of progress. In the United States, the average life expectancy has risen from about 49 years in 1901 to 77 years at the turn of the millennium. This has been aided by a drop in infant mortality from about 165 to 6.5 per 1000 births over the same period.3 Prior to the invention of the electric telegraph in 1835, the fastest means of communication over distance was the hand-delivered letter. The worldwide web, which came into being only in 1991, has made the term “global village” more appropriate than ever. Video-conferencing is now available virtually for free to anyone with access to the Internet. Prior to the development of the first horse-drawn public transport in London in the 1830s, the main form of locomotion was walking. Today, at least one survey suggests there are more automobiles in the USA than people who are legally qualified to drive them.4 Technology has revolutionized our lives in every way, from how easily we enter life, and how we live it, to when we leave it. Such progress is not without cost, nor our successes without setbacks. Over 40% of the world’s population already face a serious water shortage. Fossil fuels, mostly laid down by generations of dying organisms over 300 million years ago, may be exhausted within the next 50 years (http://www.hubbertpeak. com/summary.htm), after perhaps 125 years of peak production and consumption. Beyond the effects that this depletion will have on our lifestyles, most scientists believe our rapid consumption of fossil fuels to be the main factor behind global warming. Meanwhile, the millions of deaths that result from emerging infectious diseases such as HIV or AIDS, 3

The World Factbook, 2005 (https://www.cia.gov/cia/publications/factbook/index.html). “America’s Love Affair with Cars, Trucks and SUVs Continues,” USA Today, August 30, 2003.

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and the catastrophic effects of Hurricane Katrina and the Boxing Day tsunami of 2004, are warnings from nature. They serve to remind us of what nature can do and how we should not take it for granted. Despite these developments, both good and bad, the sad thing is that we have not seen any earth-shaking changes in the last 100 years in the field of economics, particularly the ownership-based doctrine. Perhaps to some, there is no need for change, since honoring “ownership” is believed to be an undeniable human right. The only thing that seems to have changed is the expansion of exchange activities in both depth and extent. Ownership-based economics is an endless struggle in search of shortterm equilibrium between two players (the seller and buyer), without any thought to the true cost of human labor, resources or environmental health. If this is all there is, then the draining of resources, the pollution of the environment, and the depletion of global resources will continue in order to create more personal wealth. In truth, the magic of the market economy is the seduction of those who wish to become rich in a hurry. This is exemplified in the glamor of the stock market, which is nothing more than shifting money around, without adding value, but giving individuals the dream of becoming rich in a day. However, it makes many people happy, including the banks, large corporations and the government as well. This is the exchange system where the money game is played, which, following the downfall of communism, is the only game in town. This “magic” for the rich is built on a single, simple word: ownership. Without ownership, there is no exchange system or market economy. In fact, there will be no such thing as the learned discipline of economics. It is because of human greed for the right of ownership that we live and suffer today’s harsh realities. Some of these realities are illustrated in the following collection of economic or economic-related human situations. While most are based on real events, a few are fictional. They are intended to illustrate how economics impacts our lives, leading to the deliberation of the doctrine of stewardship-based economics; how this doctrine must lead to a change in the individual’s attitude towards people, the environment and resources, as well as a system to improve the distribution of resources without a total departure from the market economy.

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A total population of one At the beginning of the school term, the author typically poses the following question to his senior and MBA students: Imagine all the resources of the world are yours: countless millions (or even billions of dollars), vast private residences, gold, diamonds, and every luxury imaginable. Unfortunately, you are all alone; no other human beings and no animals. How do you feel? What would you do?

There have been many different answers, but the same answer has been given every term without exception: “I would prefer to die, or kill myself.” Some elaborate by stating: “What am I going to live for if there is no other living human being besides myself?” The economic reality of the above is that there is no economics if there is no human interaction. In this case, resources, even if unlimited, have no meaning. Life, for most of us anyway, is only worth living in the presence of others.

One bowl of cooked rice In June 1992, the author gave a talk to a mixed audience of approximately 300 participants in a Southeast Asian country. The topic was: “Entrepreneurship — innovation and creativity.” In the midst of deliberation, a participant raised his hand and asked a question: “Prof Kao, my question may not refer directly to what we know about entrepreneurship, but it may be related. Is it possible to have a strong government and government control, yet still allowing entrepreneurial spirit to flourish?” The author did not respond to the question directly. Rather he asked the audience: “Suppose the 300 or so of you in this audience, a mixture of young and old, men, women and children, had not eaten for several days. You are all in need of food, and we have only one bowl of cooked rice. Who should we give the rice to?” There are a number of options: give to the children, the women, the young, or the old. Divide it evenly or leave it in the middle to see who can get the rice and have it all to himself or herself.

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The various answers given surprised the audience. Finally, one young lady courageously said: “I’ve got it, give it to the strongest and smartest one who can go out and find more rice so that we can all have something to share.” This is obviously a hypothetical situation, but the message about economic reality is clear. When there is a shortage of resources, what we need to do is to find more and create more with innovative ways. The one who has the food owes it to all the other members of the group to share with them what he or she can find. Sharing is not about being stupid; it is a means of survival. Innovation and creativity for the better use and development of resources is not just meant to benefit the individual who created and innovated, but must also be for the common good. We need your business Phuket, with its beautiful beaches, reasonably-priced hotels and good food was a tourist paradise. The town had a fair-sized shopping neighborhood, and every effort was made to give visitors the time of their lives. Tourism provided jobs, and the sizeable regional economy depended on it. Europeans and Singaporeans were regular visitors. Unfortunately, Boxing Day, 2004 changed all that. The tsunami disaster devastated the area, ripping the region apart. Thousands were killed indiscriminately, both tourists and locals. Many businesses were utterly destroyed; a few could possibly restart again but many had hardly anything left to rebuild. Those who survived the disaster displayed the remarkable resilience that characterizes the human spirit; picking themselves up and starting their lives all over again as many other ordinary people have done throughout history. Some moved elsewhere to start again, others started up new ventures and new lives right where they were, in hope of better days ahead. The following is a short conversation between a tourist and a survivor of the disaster. T (tourist): How are you doing? S (survivor): Not good, sir. One day I may get a few dollars (US dollars are most favored), then, nothing the next. We do not see tourists anymore. T: Yes, I can see why tourists would stay away. The beaches are still not clean, with debris everywhere. Some people told me they had spotted

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bodies drifting not too far from the beach. It is so sad to see the suffering of people like yourself. Some of us feel bad coming here for our holiday, when the circumstances remind us all the time of what you people have gone through. We just do not have the heart to enjoy ourselves when we know people like you are suffering. I can appreciate why most tourists are staying away from here. Nevertheless, it is not all bad; some of my friends have made sizeable contributions to help the people here to pull through this difficult period. S: Yes, sir, we appreciate the help from all our international friends. However, what we need is your business. Your contribution and that from others helped to give us a lift during the difficult period, but it is business we need, so that we can continue to make our economy sustainable. This is an economic reality. Charitable contributions are an economic reality, but they can only serve the immediate short-term needs of the people to help pull them through a difficult time. The people need to be able to make a living for themselves, sustaining the economy through their own efforts. Economic reality of begging On a cold winter’s day, the author passed by a local pharmacy. In front of the shop was a person begging on his knees, his face pressed to the ground, as if he was praying. It seemed like he wanted to hide his face, or perhaps he preferred not to look at any passers-by. The author looked at him for a few seconds, for no particular reason nor with any expectation. However, the look seemed to be a form of communication in itself; the beggar raised his head. He looked young, in his twenties, and had an appealing look with his two big eyes. Making brief eye contact with him, the author noticed that he seemed to wish to express himself. The author placed a dollar coin in his baseball cap on the ground in front of him, and assuming he was not a Torontonian asked him: “Where is your hometown?” “Thank you very much, sir. I am from the coast.” “Can you get a job?”

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“No, sir.” “Begging is not a solution.” “I know, this is just a temporary thing. I will eventually find something to do, instead of this. I need food and warmth in this cold weather, and I have no other way to get money or food for now. By the way, sir, I know begging is not the right thing for a young person like me to do. I ought to go out and find some work to earn a living, and to serve others in need. What I am doing is not particularly wrong in this society. I do not sell anything, but I appeal to people’s kind hearts. As they pass by, they understand how we who beg feel inside. In a way, I feel begging is an exchange like selling things. People give me a dollar to relieve their conscience.” As he talked, he sounded like someone who has an understanding of people. The author finally asked him: “How much education do you have?” “College,” he responded with no expression. This is a reality of economics. Begging is not considered an admirable or useful function. It is not accounted for in any economic analysis. But economic analysis does not deal with the reality of life. What happens if a person needs food and shelter in order to survive? Private ownership is protected by the law; to take what is lawfully protected is punishable by the law. The young beggar was right — in the market economy, everything is for sale, and the only difference is the price. Here, the beggar’s price is the relief of the giver’s guilt. War and peace It was late afternoon, May 20, 2005. At Chicago’s O’Hare International Airport, incoming passengers from Hong Kong mingling with countless passengers from other parts of the world, lined up in front of a US immigration checkpoint. The line was very long, filling up the arrival hall from the edge of the checkpoint back to the escalator that led to the hall. There were eight stations opened for visitors and those in transit via US

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to other countries (e.g. Canada), and four for US citizens. The hall was packed solid. Those waiting can often do nothing but wait and subject themselves to the people who are in a position of authority. Initially it was an orderly process, though the immigration officers seemed to be taking their time asking questions. Armed personnel stood nearby as if worried that the “tourists” might strike anytime. In one instance, one person seemed to spend an inordinate amount of time with no less than five armed officers surrounding him. Tensions perceptibly built up among the incoming passengers, perhaps due to a combination of fear, worry and simple impatience. Some of them began to show signs of displeasure over the seemingly “endless” waiting. In a few, aggressive body language was clear. Boredom was heavy in the air when, like a sudden rain shower, it was replaced with excitement. A man in one line suddenly yelled out: “We are late!” At the same time, he raised a card with the words “We are late” written in bold letters, and started across the line under the plastic barriers. There was a sudden commotion as the sounds of “We are late” were repeated over and over. Others responded: “So what? Everybody is late, you will just have to wait for your turn.” This incident possibly precipitated another. A group of three or four young people of Asian origin rapidly went under the barriers and approached the woman officer in charge of directing people to each of the eight stations, presumably to ask to be moved up the line. The two incidents seemed to cause something to snap in the rest of the queuing passengers. Various people shouted angrily: “Get back to your place,” “You are no different than anybody else,” and “Get back!” At the same time, a few others similarly attempted to jump the line. The disruption and shouting continued despite the attempts of a few security personnel to take charge of the situation. It looked as if the order in the crowd was on the verge of breaking down completely. Suddenly, a few voices were heard saying: “Look, they are opening up more lines!” An immigration officer was opening up two more stations. All of a sudden, there was no more shouting or line jumping. Everyone returned to his or her original place in the line. The US immigration authority is the supplier of the service (resources) here and the packed crowd going through immigration represents the

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demand. The demand is not just for service, but also for immediate service, and the supply that meets this demand is what is required to prevent “war.” The key point here is that the supplier controls the resources (immediate service) and is able to alter the course for either peace or war. This is an economic reality: a perceived shortage of resources causes conflict, and the struggle for resources can easily lead to war if measures are not taken to ease the tension. The supplier is often the one who is in control.

A couch and two armchairs Although everyone has the right to own, no one can own anything beyond nature’s imposed limitation on the human lifespan. Given a long enough time, no one owns anything, though in a short period of time, everyone owns something. Ownership is at best custodial — stewardship is the only real solution. However, this is usually not recognized; if it were, there would be far fewer wars, which often originate from the claim for ownership. The entire North American continent was occupied long before Columbus, Cabot and Champlain came to the “New World.” Nevertheless, the land was claimed by the Spanish, French and English by decree, resulting in suffering and problems for the native peoples that continue to this day. On a more personal level, the author recently observed a situation in the waiting lounge of a lobby where all the seats were occupied except for a couple of seats next to a couch that was occupied by a man in his early sixties or late fifties. He was seated on one side of the couch with his briefcase placed next to him on the couch. Minutes later, a group of four people, including an elderly man, exited from an elevator and entered the lobby. When the man sitting on the couch saw the four newcomers approaching, he immediately took his briefcase from the side of the couch and placed it on one of the seats that was not yet occupied. The elderly man, who seemed to have some physical difficulty, approached the seated gentleman and asked if the seat was taken. The man replied, “Not at the moment, but I have someone coming to see me.” The late Milton Friedman advocated the “right of private property ownership,” saying “you can’t have a free society without private property.”

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This is an economic reality. Ownership has been given primacy over moral obligation. Unfortunately, the distinction between normal and obscene ownership is often not made.

1.2 Bubble Economy and Job Loss From 1996 to 2003, an excess money supply and questionable fiscal economic policies contributed to a global information technology expansion that resulted in a fictitious demand for high technology shares, equities, and property. The burst of this bubble was followed by interest rate hikes, resulting in plunging consumer and business demand, manufacturing oversupply, plunging profits and stock prices, and trillion-dollar nonperformance in the banking industries of Japan, China, and Taiwan. Trillion-dollar losses resulted in the US. The collapse of the IT industry, the mounting home and automobile loan defaults, and credit card delinquency — common features in countries as diverse as Hong Kong, USA, Korea, Singapore, and Malaysia - led to huge write-offs to maintain an acceptable capital ratio to keep the stock markets going. The deflation of the bubble affected investors and money traders, but the real hardship was on those relying on wages for a living. This is another story of how the realities of economics affect people. General Motors has been the number one in the automobile industry for longer than anyone can remember. The tables have now been turned. Toyota, with its expansion into the China market, may soon overtake it. On June 12, 2005, GM announced its intention to lay-off 25,000 out of 110,000 wage-earners from its US operations. Cost cutting was one of the reasons given, the challenge of dealing with workers’ pension payments was another. Clearly, this will not be the only case where the economic growth in China will result in jobs being lost in other countries. This is not a matter of theory, but a reality. While countries have survived, and the banking industry had to sell off bad loans to asset management companies or write them off, individuals who experienced bad investment losses must work hard to find ways to recover in the post-bubble economy. Some made good, but others did not. The real losers are the wage-earners, who are directly affected by jobcutting and downsizing. They are all the “realities of economics.”

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1.3 The Aging Population Some 50 years ago, the average expected human lifespan in most developed countries was about 60. This is changing, with life expectancies in some countries heading towards 80. As a result, there are many new challenges to society, from health care and pension provision to the voice of the elderly in government. Health care will likely top the list for those countries which are less prepared for the needs of their aged where there is a lack of a robust social security system. On a smaller scale, though it may not seem to be an important societal change, one also needs to look at parking spaces in public places, supermarkets, shopping malls and government buildings, as the population profile and age distribution change. As seniors form a bigger part of the population, more and more elderly people will be supported by fewer and fewer working younger persons under the current system. If like the entertainment industry where actor Macaulay Culkin could earn millions of dollars even before he was a teenager, then all would be well. In reality, who will be willing to share their earnings to support the old, and based on what system? In Britain, middle-aged wage earners are told not to expect to retire at 65, despite having contributed to pension plans for years under this promise. Should the old continue to earn their keep until the day they die? Everything changes. This is an economic reality. 1.4 Petroleum Sales Tax Only a few who use petroleum and petroleum products, and pay for them at the pump are likely to have looked at how the price is determined. Most simply pay without any question. At the retail level, petroleum sales tax and other taxes could amount to as much as 50% of the pump price. Government has the right to impose taxes as required, but no one seems to question the government seriously as to where the tax money goes. Petroleum and petroleum products are non-renewable resources. Ideally, the tax collected from petroleum sales should be largely used to find new sources of energy, reduce pollution and restore what has been taken from nature. However, politicians who need support to get into

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office build roads instead because it is the simplest “solution” to the problem of traffic congestion. It makes the politicians popular with the voters, as well as the companies that make money from the building of roads and cars. Having more roads typically leads to an increase in the number of cars, or at least a higher usage of cars, since, for example, it becomes easier to commute from a home in the country to the big city. This makes commuting a more attractive prospect for more people, compared to living in a crowded, expensive city. More cars mean not only more pollution, but also greater congestion. The solution? Build more roads! The economic factors compound one another, as the entire economy evolves with the number of cars made and the number of cars on the road. Conservation is not popular because it is difficult and fewer individuals make money from doing less. This too is a reality of economics. 1.5 Black Gold and War We need oil, and we need to put our hands on it before it dries up or falls into someone else’s hands. Metaphors can kill. The discourse over the decision to go to war in the Gulf or not was a panorama of metaphors. Former US Secretary of State James Baker saw Saddam Hussein as “sitting on our economic lifeline.” President George W. Bush portrayed him as having a “stranglehold” on our economy. General Schwarzkopf characterized the occupation of Kuwait as a “rape” that was ongoing. The US President said that US was in the Gulf to “protect freedom, protect our future, and protect the innocent,” and that we had to “push Saddam Hussein back.” Saddam Hussein was painted as a Hitler. It is vital to understand the role played by metaphorical thought in bringing us into this war.5 If in the words of President George W. Bush, there is such a thing as the “axis of evil,” then this may give him the “right” to engage in wars 5

Part of a paper “Metaphor and War: The Metaphor System Used to Justify War in the Gulf” presented by George Lakoff, Linguistics Department, UC Berkeley (Part 1 of 2), on January 30, 1991 during the Gulf War, at Alumni House on the campus of the University of California at Berkeley. An earlier version had been distributed widely via electronic mail, starting on December 31, 1990.

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against Iran and North Korea. North Korea has no oil, but Iran does have this black gold. The way to deal with “evil” can be anyone’s guess. Unfortunately, “if you do not listen to me, I will kill you” seems to be the simplest solution, but with the most dire of consequences. The price of a war is hard to account for. The war against Iraq, then, in Iraq, and finally for Iraq has cost the American-led coalition over 2500 servicemen and women (as of June 2006). The number of Iraqi lives lost is unknown, but generally reckoned to be over 100,000. The official war may have ended, but the fighting continues. Trillions of US dollars have been borrowed from the public, with an eightfold increase in the interest rate. These are all part of the cost of war, and they too are realities of economics. 1.6 The Trinity of Economic Power It is not fair to compare the trinity of economic power (currency, interest and taxation) with the axis of evil, particularly in what we would call economically advanced countries. While the trio of economic power can be angels from heaven, they can also be a death warrant. Currency and interest, which seem inseparable, work side by side. Currency, known to most of us as cash, controls the money supply. Interest rates are used by the central bank to regulate economic growth. Rates are raised to help slow down economic growth, and lowered to stimulate it. Today, in most parts of the world, the American greenback is the most influential currency, but the euro has the edge in EU countries. In UK, the British still hold their sterling highly, and to some extent the Commonwealth countries too. China is now one of the largest holders of the US dollar, so is Japan, though they are not in a prime position to be influential. In some countries, particularly those that are less economically stable, the wealthy tend to use the US dollar as the medium of exchange, but pay their workers in local currency. If the country’s economy is doing well, everyone benefits from it and no one complains. If the economy does poorly and the rate of inflation is high, the wealthy are protected, but what the workers receive will decline.

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The use of interest rates to govern currency circulation has been an effective means to control currency flow. Although it is effective, the pitfalls of manipulating interest rates give the rich a winning edge and put them in a position to squeeze the poor. Small borrowers pay high interest rates, particularly for credit card debt. What is seldom noticed is that taxes levied by governments have a built-in bias that tends to favor the rich, even though most countries adopt progressive income tax rates. To encourage investment and capital flow in stock trading, the capital tax rate is less than that for wage earnings. The marginal rate, which still applies to low income taxpayers, in fact discriminates against the poor. For example, if a family’s income is subject to a tax rate of 20%, the utility value of 20% is far greater than the 50% tax rate imposed on a high-income family. A 50% tax rate on a high-income family may simply mean the family gets to enjoy fewer luxuries, whereas a 20% tax on a low-income family may mean taking food away from its table. The market economy is essentially about facilitating the flow of capital. The rich have more to gain, since the poor have less or no money to flow. Unless a poor person happens to win the lottery (generally, the lottery is a taxation on the poor), the poor typically have little capital to exploit opportunities in the market economy, as compared to the rich. The discriminatory nature of the trio (currency, interest and taxation) is an important economic reality. 1.7 Stewardship-Based Economics is About the Purpose of Life and Living Economics, as the author sees it, is a learning and methodological discipline that deals with finite resources and the finite lives of people. Most contemporary economic theories claim that an individual has the right to private property ownership, but do not consider what stewardship responsibility is. At the very least, this ignores the causes that lead to human conflict and the depletion of resources that are only part of the consequences. Ownership breeds greed, thus making the environment, both human and natural, a hunting ground for the satisfaction of greed. Unfortunately, greed, like fire, can never be quenched by being fed.

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At an extreme, if the world has only a population of one, there will be plenty of resources but no such thing as economics, as that one person may find no purpose for living. Similarly, if there is only one bowl of rice, and self-interest is the only consideration rather than the community as a whole, it will inevitably lead to conflict and ultimately war. Traditional ownership-based economics does not take either of these into account; it considers only the immediate state of the individual and the immediate contest for resources or goods. In contrast, stewardship-based economics, according to the author, is a knowledge discipline that deals with the livelihood of people on a global basis, taking into consideration both the finite nature of life and of resources. The contrast with contemporary and traditional ownershipbased economics is fundamental. Where traditional economics is based on the right of private property ownership, the author’s definition is based on the theory that “individuals are all custodians of property. They may make proprietary decisions, but they must assume stewardship responsibility.” 1.7.1 The purpose of life and living It is not uncommon to hear people ask the question: What is the purpose of life? Confucius said that “food and sex are part of human nature.” To the author, food is for survival, and sex is for sustainability. Humanity as a whole is the absolute reality of economics. We seem to have attained a high level of understanding of economics, life, and living for today. To many of us, especially those living in the developed world, we seem to have plenty today, but what about tomorrow? Figure 1.1 attempts to sketch an overview, but it shows clearly that economics will always be confronted with the long-term problems of sustainability, so long as we continue with the idea of the individual right to ownership. The challenge is to get to the root of the problem. Poverty is the problem, and the root of this problem is ownership. Taking the long view, one can see that ownership cannot be a tangible reality for human beings because our lives are finite and we have to give up ownership eventually. The challenge is to change our mindset that we are not owners of the planet, but stewards.

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Stewardship-based economics Economics: the livelihood of people C1

People C2 Resources C3

Fear and desire for ownership C4

Input

Output

Production: the making of different combinations C5 Two plus one C9

From slave trade to globalization C6 Distribution and sharing C7 Capital, capital accumulation and diseconomy C8

The “Hope” C10

Fig. 1.1 A summary of stewardship-based economics.

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From ownership-based economics… Ownership-based economics Stewardship-based economics: individuals make proprietary decisions and assume stewardship responsibility at the same time

Classic doctrine: ownership based Individual right of private property ownership, to facilitate individuals in making proprietary decisions and acting on them for self-interest

Market economy based on an established exchange system relying on “invisible hand” for wealth distribution

Succeeds in wealth accumulation for the rich, induces greed

Individuals have no property, no property right, become nothing except live in poverty

Great motivation factor for individuals to create and innovate by taking resources from nature and employing labor to provide goods and services to service consumer needs, wants and greed in exchange for a greater value

End up in the deep hole of poverty

The poor fail in the exchange system, rejected by “invisible hand”

Government: facilitate system to make the rich richer, to provide for me and to help the poor survive, or provide a mechanism to help the poor be self-reliant. If not, they will fail to stay on in rich-dominated society

Fig. 1.1 (Continued).

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To Stewardship-based economics Stewardship-based economics: economics is about life and living; the livelihood of people

Each individual has the right to live and share in resources, to live among other human beings in harmony with the environment Making decisions to allocate resources sensibly for both self-interest and the interest of fellow human beings for longterm sustainability, thus, humanity can continue

Market economy based on an established exchange system relying on the “invisible hand” for wealth distribution Succeeds in wealth accumulation for the rich, but does not induce greed

To create and innovate for both self-interest and the common good

The poor fail in the exchange system, rejected by the “invisible hand”

The Hope Self-motivated residual redistribution and Government: to education facilitate the process

Fig. 1.1 (Continued).

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Questions for discussion 1. What do you see as the difference between ownership and stewardship? Since ownership is endorsed by the law, how can stewardship be integrated into it? In corporate reporting, the reporting has been used to discharge management’s responsibility. Why? 2. “Poverty is created by man, only man can solve the problem.” Discuss. 3. Earth is our home and it gives us everything we need. Why do we have people in abject poverty? 4. Economics deals with man and resources. If we do not have such a thing as a market economy, will we be able to live and enjoy life as we do now? (This refers to everyone, not just the well-to-do.) 5. Is greed part of the discipline of economics? 6. What do the rights of private ownership mean? Does it mean that the owner can do what he or she wants as long as it does not affect what he or she does not own? For example, should the owner of a completely isolated tropical island be allowed to destroy the rainforest, fish endangered fish species, and drive a high-speed motor boat, with no regard to the state of the coral reefs? 7. Do you know where your water comes from? Should the government privatize the collection of rainwater? 8. Do you use credit cards to make purchases? If you do, and miss a payment, do you think it is all right to be charged a 32% rate of interest? Appendix: Communication of Terminologies in Economics Economics as it is known to us

Stewardship-based economics

Consumption

People, fear, people and resources Chapters 2 to 4 Production, the making of different combinations Chapters 2 to 4 and 5 From slave trade to globalization and capital Chapters 5, 6 and 8 Privatization, social justice and stewardship Chapters 7, 9 and 10

Production

Exchange Distribution

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“All lives have equal value.” Bill and Melinda Gates, The Guardian, July 20, 2006 Economics is basically about people. Without them, there will be no buyers and no producers. Overpopulation, often held as the chief concern of our future, is driven by consumption in reality, not poverty. 2.1 Malthus’ Population Study Thomas Malthus’ An Essay on the Principle of Population is generally viewed as the starting point of concern on the issue of world overpopulation. In his work, Malthus speculated on the growth of the future population and how it would affect the well-being of humanity, both on an individual basis and the world as a whole. Till today, this topic is still very much a concern, not only in the academic circles but also among the general public, particularly in the wealthy, developed nations. Malthus’ theory on population was based on the facts of his time. First, it related to the supply of labor, where “he proves that every people, of whose history we have a trustworthy record, has been so prolific that the growth of its numbers would have been rapid and continuous.” Second, it related to the demand of labor. He wrote that no nation, for example, ancient Rome or the Venetian Republic, had been able to 21

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obtain an abundant supply of the necessities of life after its territory had become very thickly peopled. Third, he drew the conclusion that what had been true in the past was likely to be true in the future; that the growth of population would be checked by poverty or some other cause of suffering including disease, war, infanticide, or by voluntary restraint.1 Malthus’ prediction was effectively saying that no matter how abundant necessary resources appeared to be, the geometric growth of population numbers would inevitably overwhelm the arithmetic growth in our ability to increase our resource base. As it turned out, Malthus’ prediction was both right and wrong. He was wrong in that he could not have predicted the phenomenal changes in technology that would occur after his lifetime, changing from the agrarian-based system on which all previous civilizations had been founded to a capitalist-based system that drives western civilization today. Modern capitalism allows for an unprecedented concentration of wealth and expertise, and a geometric growth in our ability to exploit resources. Malthus was more correct in his understanding that ultimately the consumption of resources is the driving factor behind the crises that threaten civilization. In the pre-industrial and pre-capitalist world that Malthus knew, children were considered a source of wealth, a source of labor and security in old age, and a promise for the future. This attitude continues in less developed nations throughout the world today. However, one of the consequences of the advent of capitalism and the growth of the specialist, technologically based society that most of us know today, is that wealth comes in the form of capital accumulation, and success is measured in terms of career and children. To have more children beyond the one or two to “continue the line” is often seen as a burden that gets in the way of career advancement and a desirable personal lifestyle. This clearly indicates the differences in viewpoint concerning overpopulation. Many people in the more developed nations of the world prefer a more desirable lifestyle by having less children while those in less developed countries prefer to have more children.

1

A. Marshall, Principles of Economics, 8th edition (Macmillan and Co., 1952), p. 148.

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2.2 People, Land and Home 2.2.1 A short visit in history Conflicts over the perceived need for land among different people have led to wars that have stained the greater part of human history with blood. Sadly, this is still happening today. It is not an overstatement to say that history has been filled with people struggling for resources, most importantly, land. The human desire to control land and the resources that come with it has caused countless casualties, and at the same time destroyed the very resources we have sought to control. In the Bible, the “Children of Israel” led by Joshua, entered the already inhabited “Promised Land” of Canaan, a rich area that would ease the hardships in their lives. They killed the inhabitants there and took the land as their own, justifying their actions with prophecy and the promises of God. Their actions foreshadowed the problems of Palestine, which had arisen since that time. The Maori people migrated to New Zealand, a land of great natural wealth and beauty. There, they found the native Morioris and completely destroyed them, with only a few remnants remaining on the very small offshore Chatham Islands. The colonization of the New World by the European powers occurred for a number of reasons. The French sent shiploads of their good Catholic sons and daughters to create a “New France” to produce wealth to be given back to the old country. The Spanish aimed not only to civilize and Christianize the local populace, but also used these people as slave labor to mine gold and silver for Spain. The English sent away their discontented and protesters for freedom of religion and thought, who went on to found the first modern democracy, the United States of America. In all these cases, the result was the same — disaster for the native peoples of the lands, who now occupied the fringes of the lands they once called their own. In the 19th century, the Belgians, seeking to establish a colonial empire to match their neighbors, took over the Congo and in a genocidal war killed vast numbers of its inhabitants. In the 20th century, Germany used “Lebensraum” or “living space” as its justification for aggression, which ultimately resulted in the Second World War. Today, the war against Iraq was instigated on the basis of a search for Osama Bin Laden. It continued on the basis of the accusation that Iraq

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was engaged in making weapons of mass destruction, and perpetuated in the name of humanity, with the claim of bringing democracy to the Iraqis. There are accusations, however, that the war came about only because of the oil that lies beneath Iraqi soil. These examples illustrate that the struggle for land has always been with us, and that the excuses of limited resources and the “need” for expansion are never far away. Two recent examples illustrate the point that too often our perceived need for land and resources is far from rational. 2.2.2 Struggle for ownership The Gaza strip, which is legally Palestinian territory, was taken forcefully by the Israelis more than three decades ago. Following their occupation, a large number of Jewish people settled there and made the land their home. As part of the recent peaceful settlement made between the Israelis and Palestinians, the withdrawal of Israel from Gaza called for a full evacuation of all settlers by August 17, 2005, with the evacuation orders enforced by the Israeli army. Two days before the deadline, the Jewish settlers, some in anger and some in tears, protested against their own government, saying: “We will not move; this is our home.” A woman spoke to a reporter with tears flowing down her face: “Why must we move? Gaza is our home, it belongs to the Jewish people and it says in the Bible that Gaza is land given to the Jews by God.” One day before the deadline, some men knocked down the walls and smashed whatever they could inside their homes, as if to say: “If we cannot have it, neither can you.” Another person said to a reporter: “How can there be any justice in this world? If we don’t move by tomorrow, we will be removed by force. This is our home; you cannot accuse us of trespassing in our own homes.” August 17, Eviction Day. The Israeli army used force to remove the residents. Naturally there was resistance, with some residents linking themselves together in a human chain, refusing to be moved. One person yelled out loudly: “Please don’t use force; to use force is not part of our language.” Every eviction squad carried maps of the internal layout of the houses they are entering, including information about the residents of each house.

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After each neighborhood was cleared, the police blocked it off by standing shoulder-to-shoulder in a blockade. Activists sat in a circle in the middle of the settlements, singing prayers and engaging the soldiers in conversation. The police grabbed them one by one and put them on board buses, which took them away from the settlement. Military personnel carried the elderly and dragged the women from their homes. Some members of the more militant settlements dug trenches to keep out the army and chained themselves to their property. Others claimed that they would kill themselves. In the settlement of Kfar Darom, both the young and old prayed together in their synagogue and refused to leave. Of course in the end, they all left — their protests and prayers were no match for the bulldozers and soldiers, who could not be swayed. The Gaza strip is hardly a paradise for the Palestinians. They face extremely difficult economic conditions, not just because of the Israeli occupation of these regions as a result of the 1967 Six-Day War. Almost 1.4 million of them are crowded onto 360 square kilometers of land, which is ranked the sixth most densely populated region in the world. All those ranked above it (Macau, Hong Kong, Singapore, Monaco and Gibraltar) are significantly more wealthy, with the first four being among some of the wealthiest places in the world. By contrast in Gaza, some families have lived in crowded refugee camps ever since they fled or were expelled from Israel in 1948 during Israel’s war of independence. Unemployment is inordinately high, particularly since many Palestinians have been unable to get to their jobs in Israel after Israel closed its borders to Palestinians for security reasons. The story that is currently unfolding on the stage of Gaza is only the latest act of a production that has been going on since the dawn of history. Historically, Gaza has been the pathway between Africa and Asia, and a land of strategic significance. This significance has now waned, but it retains an enormous emotive power to three religions, Christianity, Judaism and Islam, although its value has little to do with its ability to support life. What has been happening in Gaza is only a small story in human history. Although Gaza is strategically important to Israel, Israel was willing to give it up. To an outsider, it is worth virtually nothing: a tiny, overcrowded strip of dry desert land. To both the native Palestinians and the Israeli settlers, however, the Gaza strip represents their home — the land

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that they have fought for and toiled over; the land they have lived on and loved for more than 30 years, despite the many wars and acts of terrorism, the hatred and the loss of lives. The struggle over the Gaza strip demonstrates how little the value of ownership has to do with the perceived monetary or productive value of the property in question. In the case here, although land is the most valuable property, it is of little value in the productive sense. Hence, the value of a property is the value that the stakeholder places upon it. 2.2.3 Hurricane Katrina’s victims In late August 2005, the deadly Hurricane Katrina smashed into the American south coast. The city of New Orleans, whose levees were inadequate to protect it, was left flooded by as much as 29 feet of water. Over 80% of the city was submerged in water. There is no accurate account of the death toll caused by the hurricane and the subsequent flooding, but the Mayor of New Orleans believed it to be in the neighborhood of 10,000. The flood not only took numerous lives and destroyed property, it also did not leave the dead to rest in peace; many once-interred bodies were seen floating on the flood waters in what was once the most vibrant city in the United States. Although the residents had been warned earlier to leave the city, many did not take heed of the warning. Afterwards, rescue teams found the bodies of many who had died in their homes, which were filled with water. There were survivors who expressed that they had been willing to die in their own homes because these were all they had. Here, the perceived value of the property exceeds its only real quantifiable value, which is the value of life. 2.3 Overpopulation and Global Poverty are Not About Numbers Global poverty is not caused by overpopulation; neither is the conflict over the Gaza strip about overpopulation. The stubbornness of the residents of New Orleans in the face of Hurricane Katrina is not about the objective value of their homes. Rather the chief cause of global poverty is the abuse of ownership endorsed by the law, which ignores stewardship responsibility. Since resource distribution in the market economy is reliant

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on the invisible hand, there is no reliable subsystem to deal with the challenge of easing off the pressure of global poverty. Global trends of population growth are, on the surface, alarming. The United Nations Population Reference Bureau made a prediction of worldwide population growth (Fig. 2.1), which shows the relative population growths in more developed and less developed countries. It is difficult to rely on a single figure for an intelligent assessment because there is no clear indication as to how the Bureau classifies countries as being more or less developed. For example, China and India in the early 21st century (2005) are classified as less developed. By the year 2150 they might be reclassified, which would change the overall picture completely. Nevertheless, the implication of such a figure appears to be clear — the outstripping of the more developed world by the less developed world and its global impact. The trend in increasing numbers of people suggests the possibility of a massive change in the impact of humanity on the planet Earth. This impact, however, is not determined solely by the number of people on the planet. It also depends on how these people consume resources. A more accurate depiction, if one is concerned with resource consumption, is the “ecological footprint” of the individual. The population issue is closely

Fig. 2.1 World Population Growth, 1750–2150. Source: United Nations, World Population Prospects: The 1998 Revision; and estimates by the Population Reference Bureau.

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related to lifestyle and living standards, and the availability of affordable resources to meet needs. In this sense, the population issue is no more than a concern for resource availability. Paul Ehrlich, in his paper presented at the International Conference on Population and Development in Cairo, September 5–13, 1994, noted: Concern about population problems among citizens of rich countries generally focuses on rapid population growth in most poor nations. But the impact of humanity on Earth’s life support systems is not just determined by the number of people alive on the planet. It also depends on how those people behave. When this is considered, an entirely different picture emerges: the main population problem is in wealthy countries. There are, in fact, too many rich people… The amount of resources each person consumes, and the damage done by the technologies used to supply them, need to be taken as much into account as the size of the population. In theory, the three factors should be multiplied together to obtain an accurate measurement of the impact on the planet. Unhappily, governments do not keep statistics that allow the consumption and technology factors to be readily measured — so scientists substitute per capita energy consumption to give a measure of the effect each person has on the environment.

Which is more of a problem for our future: overpopulation or the accumulation of consumerism and consumptive power in the hands of a few? Poverty and population are separate issues. While poverty is caused by the system of distribution in a market economy, population is an issue as long as its demand for resources cannot be matched by the availability of resources. Toronto is a city that should have sufficient resources to meet the needs of all its citizens. Yet it has 175,000 people who are reliant on food banks for their basic needs. Of the 175,000, 38% are children. The fortunate part of this unfortunate reality is the availability of other subsystems of distribution — the food banks and other charitable organizations. Can you imagine that in a cold climate such as Toronto’s, there are people who sleep outside, on top of the heating vents of buildings to keep warm? Similarly, the families that shelter themselves in the sewers of the resort town of Bali in Indonesia are another case in point.

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2.4 Fact and Wisdom — Some Lessons from Experience 2.4.1 Facts In a small village with a population of not more than 20,000, there lived a family of four — a single mother with virtually no formal education, her two daughters, aged 13 and nine, and her son, aged five. The woman’s husband had died young, and now she could only earn just enough to keep the family alive and out of debt by washing clothes for other people. This family would fit any definition of “poverty.” They lived on only two meals a day, getting by without receiving any form of charity or relief from the government. Some of the villagers pressured the woman to remarry for the children’s sake, but she refused to comply, in the belief that to be true to herself, she could only have one man in her life. In addition to poverty, the family faced other fears; some men in the village had on several occasions attempted to take sexual advantage of the woman and her two daughters. Out of desperation, the woman with the help of a few relatives attempted to find work for the elder daughter. She got a job in a teashop to pick tealeaves for packaging, but male workers in the shop made several attempts to sexually assault her. After two days, the woman decided not to risk her daughter’s virginity, which was of inestimable value at that time. Poverty was driving the family into the ground. Nevertheless, there remained some hope: the local hospital needed a few nursing assistants, aged 14 to 17. Meeting the age requirement and possessing some basic public school education, the elder daughter applied for the position. The whole family was filled with hope, but unfortunately, the daughter did not succeed in obtaining a place. Poverty is a crime created by humanity. As Jesus Christ said, the poor will always be with us. The crime of the market economy is that it perpetuates poverty, while promising (incorrectly) the possibility of riches for everyone. Yes, everyone has the possibility of becoming rich, but only at the expense of many others. This insight is not one for which the author can claim any credit. It should be obvious to anyone who lives in a major city in the developed world, where beggars sit in front of multi-billion dollar skyscrapers. We must be aware that once people are in a state of poverty, their right to make proprietary decisions can also be taken away from them. In the story above, this resulted in attempted sexual assault and despair.

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2.4.2 Wisdom In 1951, Hollywood released a movie entitled Five, which was about a woman and four men, who were the only survivors of a nuclear attack. They struggled for survival, never knowing if they could make it to the next day. At one point, one of the five who could not endure this anymore said to the rest: “I am going to the city where there is food, money, jewelry and everything that I want.” Ignoring the pleas of the others who did not want him to go, he went ahead to the city. Sure enough, there was no one there except him to take charge of things. However, halfway on his return trip back to the others, he died of radiation poisoning. The rest of the movie showed two of the other men dying as well, leaving only one man and the woman. In typical Hollywood fashion, the last scene showed the couple finding a green sprout peeking from the ground — the hope of life, with the two of them representing the new Adam and Eve, so that humanity can continue. As the author sees it, Five has two clear messages. First, there are those whose greed is so great, that the desire to satisfy it will drive them to do anything, even though it may destroy them as a result. Second, even if there are only a man and a woman left alive in the world, humanity still has hope and a responsibility as long as they can nurture the sprouts of life peeking out from the ground. In other words, the first message is a warning that greed kills; the second is that hope continues, so long as humanity and the earth can work and grow together. On the other hand, one person can still be considered too many, if there are no resources to support that person. Although population and resources are separate issues, one cannot overlook the reality that poverty is closely related to the availability of resources.

2.4.3 Wisdom derived from fact Long before Marco Polo traveled to China, a moth was found there, whose cocoon could be drawn out into an uninterrupted thread that was as strong as steel yet softer than any other textile — that thread was silk. The Chinese found a way to cultivate the silkworm, which they kept a secret for hundreds of years. The production of silk is essentially very simple. Silkworms feed on mulberry leaves to survive. They do not chew up the

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complete leaf, always leaving behind a residual so that the mulberry tree will be able to regenerate itself in the coming year. Afterwards, the silkworms form cocoons, and eventually emerge as pure white moths. Humans harvest both cocoons for the silk and the eggs for the silkworms. By controlling the number of silkworms, man can control their population and produce a continuous supply of silk. Like silkworms, humans also have some simple rules for existence. Confucius once said that there were two important things in life: food and sex. Food is necessary for the continued survival of humans, and sex is necessary for the continued survival of the human race. One could imagine, if all that was of concern was the continuation of human life, then, as with the silkworms, controlling food and sex would effectively result in an indefinite continuation of the human race. While recognizing this as a ridiculous proposition, one can draw two points from it on the problem of humans and economics. First, humans do not follow such simple rules — we are far more complex than that. Therefore, while the principle may be true, the attempt to follow a set of rules to govern all humans is bound to fail. This is the failing of the state-run economic system such as the Soviet-style communism. On the other hand, humans are not like silkworms — they are far more diverse in their needs and wants — and success leads to greater consumption. A “successful” silkworm does not become infinitely fatter; a successful human being, however, will continue to accrue wealth and, just as importantly, will become disproportionately more successful in accruing further wealth. This is the failing of capitalism; it is based on the level playing field. In truth, the playing field can never be level — the rich will always get richer and the list of their needs can be as long as the Great Wall of China. Although the Great Wall has its end, there is no limit to what the rich need and want. An individual who owns three automobiles, two private jets, four mansions in different continents, private beach resorts, country retreats and exclusive golf courses can still claim that the problems of the world center on overpopulation. This is true, but perhaps not in the way that such a person would think. Overpopulation of the rich is as much the problem, if not more so, than the problem of overpopulation of the poor.

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2.5 People: The Most Valuable Capital If overpopulation is not the problem and resource distribution is, then resource redistribution holds the key to eliminating some of the world’s poverty problems. The focus of economics is people; how people live, and how people employ and consume resources. However, the consumption of resources is only a part of the purpose of living; living in harmony with others and with nature is also part of the purpose of living. As a social animal, man’s economic activities must ultimately benefit not just the individual, but the group as well. Prior to consumption, resources need to be processed to suit human needs. Therefore, all human activities are of a servicing nature, using human physical or mental labor for creative and innovative purposes. Hence, labor is human capital, and the most important aspect of economics. The idea of minimizing cost, often through cheap or slave labor, has always been on the minds of economists and high-level business executives. If organized labor had not fought for, and largely secured, the rightful value of labor, the consequences would not be difficult to imagine. Even to this day, the rights of labor to organize and speak collectively are still viewed with disfavor. Large corporations, including large retail chains and automobile manufacturers, who employ mass human capital in the global market, more often than not, do whatever they can to discourage their employees from forming unions. The Western world takes pride in having largely abolished slavery, first in Great Britain in the early 1800s, and later in the United States during the Civil War in the 1860s. Modern labor practices, however, while lacking the name of slavery, still bear many of its features, which are often justified under the glorifying name of “globalization.” Under this umbrella term, the shift of large-scale industrial production away from the developed countries serves at least two major corporate goals — first, to move away from the regulation of practices, which is deemed excessive by the developed countries; and second, to take advantage of the cheap labor available outside these countries. Following the collapse of the Soviet Bloc, the Washington Consensus pushed the concepts of the free market economy into countries whose governments were in need of hard cash, and whose people needed jobs to survive. The advocates of these practices claim that such countries need

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them to make economic progress and provide the people with jobs. Perhaps they even consider the practice of employing cheap labor as a “mission of mercy.” The corporations engaged in these labor practices bear some similarity to someone who purchases a cheap machine at a low price, provides very little or no maintenance for it, and as a result make a much bigger profit. If the machine breaks down, he discards it and purchases another. The following is a case in point. Assume that WTD Corporation manufactures a product using a standard cost system. Under the system, three basic cost categories are used to guide operations, planning and measurement: theoretical cost, standard cost, and actual cost. The computerized cost system stores the following specifics: Actual cost: Cost of all categories such as labor cost which includes direct and indirect labor inputted in the product; material cost which includes direct and indirect materials inputted into the product; commercial cost which includes advertising, promotion and marketing, and administration; financial cost which includes interest charged for loans. All such costs are incurred and paid through cash disbursement. Theoretical cost: Costs incurred assumed to be under ideal conditions with maximum units of product yield by the company in all categories. Similarly, the production capacity of WTD Corporation is measured under three capacity categories: theoretical capacity, practical capacity and standard capacity. Theoretical capacity: A capacity based on the description of documentation issued by supplier(s) of the machinery, computers or any other properties, verified by the company specialists in charge of the production, identifying their maximum capacity, which yields the highest output under optimal conditions. Assume that such a capacity be recognized as 100% performance, and yielding 100% output expected by the company, and is a nominal value of 100,000 units in a given month. Practical capacity: A capacity of production that will provide 90% of theoretical capacity (90,000 units per month) of output based on theoretical capacity with a best effort inputted into the production process.

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Standard capacity: A capacity to be used for control purposes, taking into consideration all expected irregularities, downtime and any other slowdown. This is assumed to be 80% of theoretical capacity (80,000 units per month). For illustration purposes, assume that the company’s budgeted production is 80,000 units in a given month. The cost per unit, if produced in the home country, will be: Direct labor 300 hours per unit, total expected labor cost will be: 80,000 units × 300 hours per unit = 24,000,000 hours Wages paid to direct labor is at a union-negotiated rate of US$20.00 per hour. The direct labor cost in a given month will be US$20 × 24,000,000 = US$480,000,000 Assume that the board and executives of WTD Corporation decide to move its production to a country (Country X) that is desperately in need of cash and has plenty of eager hardworking laborers willing to accept almost any wage just to make a living. After negotiating some concessions on tax, land and other facilities, WTD Corporation’s initial capital investment is US$10,000,000, amortized on a straight-line depreciation at a rate of US$1,000,000 annually for ten years. The company moves its production process to this low-wage country with weak standard labor laws, and no active union. With the help of the local government and through some other deals, the company opens its doors and starts to manufacture the product in Country X. Besides the assumption that all other costs are similar or less than what it would be to manufacture the product in WTD Corporation’s home country, there is also the known fact that wage rates in Country X are only a fraction of those in the home country. The company will not move to Country X completely; it will leave its R&D department, finance section and personnel office in the home country. At US$2.00 per hour in Country X, wages are considered generous, especially when

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compared to some other companies that pay a going rate of US$1.00 per hour. Let us calculate WTD Corporation’s operating results after relocation for the same amount of products manufactured, based on the assumption that all other costs are basically the same except for the amortization of the relocation cost of US$1,000,000. The company will have a cash saving of: 24,000,000 labor hours × US$2 = US$48,000,000 The labor cost saving: US$480,000,000 − US$48,000,000 = US$432,000,000 This represents a favorable cash flow. It is further assumed that WTD Corporation’s operating results meet its standard capacity and other cost elements. Taking into account the US$1,000,000 relocating cost amortization, the net financial income will be US$431,000,000 per annum. Where does this money go? It certainly does not go into the workers’ pockets, or to the local government or the home office government. Labor efficiency in many countries such as Country X is often very high, a consequence of local cultural attributes, or sometimes the training in a “command economy system” where obedience and efficiency are highly prized. Therefore, there might be, for example, an additional 10% savings in the number of direct labor hours required to produce each unit. Country X’s lack of adequate labor standards for the protection of its workers might further translate to additional “savings” for WTD Corporation in building code regulations, requirements for workers’ facilities, etc. The truth is there are some who reap great profit from this whole setup. The situation is accentuated by the substitution of technology for employment. For example, recent trips to Home Depot, a popular hardware store chain, have shown that the original 12 checkout counters with 12 cashiers have now been replaced by only six cashiers with six self-service checkouts. Similarly, telephone operators have largely been replaced with automated services based on touchtone menus. Whether such actions benefit the community as a whole or not, it is clear that the chief

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beneficiary is not the public and certainly not the redundant workers; it is the owners of the businesses. How do we compare WTD Corporation with a slave economy? Certainly, in many cultures, slave-owners were morally and legally obliged to provide their slaves with the necessities of life and care. In the current global economy, workers have only one place where they can work, with employers paying them minimal wages, and with virtually no other obligations once the workers are paid. Slave labor practices may no longer be visible, but they are certainly not dead. The question is: how long can the practices last and when will the slaves refuse to be enslaved anymore? On one hand, population and resources seem to be distinctive issues. On the other hand, people (population) need resources to survive, thus creating an integrated relationship between the two that is almost inseparable. Observe the following: In the simplest situation (Fig. 2.2), there is no interaction between people and resources, and the Earth continues as it has done for billions of years, with species rising and falling of their own accord. Humanity will become extinct. This may be good for the Earth perhaps, but it is not good for humanity. This simple and obvious example makes an important point — humanity cannot exist without consuming some resources and having an impact on the Earth. It also illustrates the point that a stable equilibrium between people and the Earth can take place only when there are no people on Earth, and even then the Earth may not be in equilibrium since it will change and may eventually become extinguished even without any human help. In the current real situation, it is estimated that perhaps 25% of the people on Earth control and consume 75% of its resources (Fig. 2.3). There are many reasons for this situation. The simplest explanation is perhaps what is commonly known as the “Matthew Effect.” Simply put,

Humanity consumes no resources and is extinct

Resources untouched by man  continuous regeneration

Fig. 2.2 Resources and people are distinct entities.

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25% of the resources consumed by 75% of the population

Fig. 2.3 The rich 25% consume and control 75% of resources.

this states that “the rich get richer,” that is, in most natural systems, having an advantage will generally lead to further advantage. Here is a simple illustration. Suppose in an attempt to form a just society, it is decided that how much a person is allowed to eat is solely determined by how heavy that person is. After all, a larger person obviously needs to eat more in order to survive. On day one, person A (let’s call him Fred) weighing 75 kg is allowed to consume 2.1 kg of food that day. Person B (let’s call him Barney) weighs 50 kg, and is allowed to consume 1.4 kg of food. A year later, Fred, who now weighs in at 90 kg, requires a hefty 2.5 kg of food per day. Poor Barney, who has not been doing well on his “diet,” now weighs a mere 40 kg, and so needs only 1.1 kg of food. The next year, Fred weighs 110 kg, and Barney only 35 kg… The end-result is obvious — Fred will become enormously fat, while Barney will get thinner and thinner. Of course, this cannot go on indefinitely with real people, but the point is obvious — if doing well means you can do even better without actually contributing more, then the Matthew Effect is at work. In reality, life is more complicated than that. Take sports for example, where it is often an advantage to be bigger, but not so big as to sacrifice speed or endurance. Nor is this the whole story. If it is possible for everyone to do better together, then perhaps, it is all right for some people to do much better than everyone else — this is the argument for capitalism, that in the end everyone benefits. Unfortunately, it is always true in the capitalist system that having more money is an advantage, and there is definite evidence that some of us are not doing well enough.

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Questions for discussion 1. Discuss the causes of poverty. 2. The market economy is both a system of exchange and a system of distribution. Other than the market exchange system, do we have other systems that deal with wealth distribution? 3. Geographers have told us: To live, human beings have two choices — we could either change the environment to suit our needs, or change ourselves to fit the environment. Explain the statement. Must we always insist on changing the environment to suit our needs, wants or even greed? 4. Consider human beings as resources. Are we renewable? Give reasons for your answer. 5. Do you consider ownership an infinite right in our society? Why? 6. What is equilibrium? Why is attaining equilibrium so important in the light of people who are living on or below the poverty line?

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3.1 Introduction Milton Friedman said: “The social responsibility of businesses is to increase profits.”1 He also said that corporations have no social responsibility because they are buildings; social responsibility rests with the people.2 This is similar to saying that “guns do not kill people, people kill people.”3 Perhaps Friedman had a poor memory, since this did not tally with his comments to the New York Times, written some 30 years ago: “How is it possible for buildings to make and increase profits?” Milton Friedman had great influence on the practice of business in the market economy, particularly in the perception of moneymaking or profit. His argument is that corporate decision-makers should not assume they have a social responsibility since they are employees of the shareholders. In his view, shareholders are only interested in the bottom line, the rate of return on investment. He wrote: What does it mean to say that the corporate executive has a “social responsibility” in his capacity as a businessman? If this statement is not pure rhetoric, it must mean that he is to act in some way that

1

“Property, Profit and Justice,” an interview with Milton Friedman, New York Times Magazine, September 13, 1970, p. 249. 2 The Corporation, a film by Mark Archer, Jennifer Abbott and Joel Balkan (2004). 3 There is some truth in this. Although if someone wanted to kill me, I would rather he not have a gun.

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Then, he continued: …Or that he is to make expenditures on reducing pollution beyond the amount that is in the best interests of the corporation or is required by law in order to contribute to the social objective of improving the environment. Or that, at the expense of corporate profit he is to hire the “hardcore” unemployed instead of better qualified available workers to contribute to the social objective of reducing poverty.5

Perhaps Friedman needed a reminder on how the law system works. First, a law is made based on justice, but is not justice itself. The relationship between law and justice is held in the hands of judges, and perhaps more importantly, in the hands of individuals with their own sense of judgment and justice. Any law and government intervention is corrective, not preventive. The preventive part comes in when individuals decide whether to do something or not. Perhaps this is the reason for the many outcries at corporate crimes now. Enron and Worldcom are two very good examples, but there are many others. Fines are imposed on corporations who are offenders of the law.6 Once the damage is done, however, who is to say that fines or jail sentences are adequate to deal with the “cost” to society? Friedman also needed to be advised that human beings are manipulative; they are able to manipulate circumstances to suit their needs, wants and greed. The breakdown of Friedman’s viewpoint is most apparent in the case of the use and distribution of resources. In Chapter 2, it is argued that overpopulation is less of a threat to mankind than the consumption of resources associated with the overpopulation of the rich. When the finite resources of the Earth and the problems of the environment are included as part of the consideration, the real problem 4

Friedman, op. cit. Ibid. 6 Archer, Abbott and Balkan, op. cit. 5

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becomes even more apparent. Consider, for example, the problem of global warming. Global warming is everyone’s concern today, although there is still considerable debate as to whether carbon emissions derived from human activity are a major contributor to changes in the climate. Unfortunately, this will remain “controversial” so long as money can be made from it, for example, the production of vehicles such as SUVs, which consume increasingly large amounts of fossil fuels. Alhough some recent evidence has shown that the demand for these vehicles has fallen, it has been generally attributed to the changing fashion and increasing pump prices of gasoline in the US, rather than to any understanding of the ecological impact of these vehicles.7 Figure 3.1 shows three levels of carbon emissions.8 In this example, one might consider a rise of four degrees celsius in the average temperature to be catastrophic to human life. It is possible that it may already be too late when the temperature has increased by one degree celsius. The trend will

(A) Safe levels of consumption

(B) A perceived problem

(C) Approaching catastrophic resource consumption

Fig. 3.1 Consumption as an expanding balloon. The balloon is always under pressure to expand (arrows) due to an increasing desire to consume. Safe levels of consumption or equilibrium (A) lie below the level at which there is a perceived problem (B), which leads to catastrophic resource consumption at a level where disequilibrium occurs (C). Level (A) is often exceeded despite warnings, often the result of unchecked greed. Cause of disequilibrium: unchecked greed for private property ownership outside of marginal theory of demand.

7

C. Tierney, “Party’s Over for Large SUVs as Tastes Shift,” The Detroit News, December 9, 2005. 8 Please note that the author is not an expert on global warming, and the following is just an example that he hopes most readers can relate to. He does not claim the figures to be accurate. The arguments and the possible results, however, accurately reflect the current understanding of the situation as reflected in the scientific media.

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continue inexorably, and there is nothing we can do to stop it. However, the rise may not become clear until it reaches two degrees celsius. Even then, some will continue to argue that it is a natural fluctuation in the Earth’s temperature, or that a two-degree rise is fine as long as it stops there. Almost certainly, the ones who argue the most will be those who stand to gain the most from a continuation of the current trends, since they are also the ones who stand to lose the most from a change in the way things are being done, if the Matthew Effect stands. Because the average consumer will not see the problems until it is too late, there will be inevitable tragedies that will make catastrophes such as the recent Boxing Day tsunami and Hurricane Katrina seem commonplace. The pure free-market economy by nature does not allow the achievement of equilibrium. Thus, there is always the need for intervention (i.e. via government action) as shown in Figs. 3.2 and 3.3. Unfortunately, such intervention does not always work. Like a tug-of-war, it relies on a dynamic tension between the free-marketers and the government. On the one hand, the free-marketers always try to expand; while on the other hand, the government tries to respond appropriately to avert any potential disaster, without being too heavy-handed so as not to hinder economic growth. Even if the system works some of the time, it cannot work all the time, as seen in the issue of smoking and its effects. The delay tactics employed by unscrupulous tobacco companies, which included the misrepresentation of scientific findings, are now acknowledged to be responsible for the delayed implementation of legislation to prevent deaths due to cancer by decades.9 A more positive approach will be one that is stewardship-based. The direct acknowledgement of the true cost of activities, including all human and environment-related factors, will naturally reduce the outward pressure to expand because the appropriate return on an investment made will no longer be the only motivator. A perfect system with permanent sustainability is of course not possible. Mistakes in perception and changes in the natural equilibrium point mean that constant corrections must be made. The critical difference is one of attitude — so long as resource consumption is not the prime focus of economic activity, the potential for a catastrophe is reduced, preserving 9

M. Brenner, “The Man Who Knew Too Much,” Vanity Fair, May 1996.

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(B) A perceived problem

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(C) Approaching catastrophic resource consumption

Fig. 3.2 Compared to Fig. 3.1, government intervention now opposes expansion (black arrows), hopefully, but not necessarily, at level A.

(A) Perception of problem

(B) Safe levels of consumption

(C) Approaching catastrophic levels of consumption

Fig. 3.3 Compared to Fig. 3.2, the order of perception and action is reversed. Stewardshipbased activity reduces the pressure to expand, thereby reducing government intervention, long before maximum safe levels of consumption are reached.

the Earth and its resources not just for our generation but also for the generations to come. 3.2 Resources: Our Life Support System As living beings, we are dependent on planet Earth to be our life support system, providing all our basic needs of air, water, food, heat and shelter. Without air, one will die in a matter of minutes; without water, in a few days; and without food, perhaps in a few months. Heat is needed to regulate temperature, provide warmth and cook food. Human beings generally do not consume Earth’s provisions as they are. We tend to change what is available, by creating and innovating, to

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suit our needs. The author shall assume here that all of Earth’s resources are available for all living things. It is sad to see that there are greedy individuals who desire to take everything for themselves, without any thought of stewardship responsibility to others. 3.2.1 Air and water Air is unquestionably essential for life, yet it is not a marketable resource in most countries, although it is possible to purchase breaths of fresh air in Japan. Despite the absolute value of the air we breathe and the clear benefits of clean air, we pollute the air virtually without question. It may be argued that what we experience is a trade-off, but what if there is no trade-off. This happens when pollution of the air causes sufficiently catastrophic effects such that any benefits become negligible. One may think that the “invisible hand” would guide us away from a catastrophe. However, the case of climate change shows us that such thinking is not valid. In a collective effort to curb air pollution, which has been blamed for global warming, some 141 countries, accounting for 55% of total greenhouse gas emissions, have ratified the treaty known as the Kyoto Accord. The treaty pledges to cut these emissions by 5.2% by the year 2012, a recognized minimum reduction to combat climate change. However, the world’s top polluter, the US, has not signed the treaty, claiming that the changes are too costly to implement and the agreement is flawed. A further drawback is that large developing countries including India, China and Brazil are not required to meet specific targets for now.10 Things have become so bad that even the countries, which were most in favor of the Kyoto Accord, are now admitting that they will not be able to achieve its targets,11 while there are scientists whose findings suggest that catastrophic effects may already be in motion.12 Air is a gift from nature with no strings attached. Clean and pure, it is critical to humans and most other living beings. In the name of employment, profit and the GDP, we have messed it up badly, refusing to 10

“Kyoto Protocol Comes Into Force,” BBC News, February 16, 2005. “EU Missing Greenhouse Gas Targets,” BBC News, November 29, 2005. 12 “Stark Warning Over Climate Change,” BBC News, April 14, 2006. 11

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commit to providing renewable alternatives to fossil fuels, with the excuse that these alternatives are too costly. Water shortages and water quality are also causes for serious concern. The total volume of water on Earth is about 1400 million km3, of which only 2.5% or about 35 million km3 is fresh water.13 Most of the fresh water is found in the form of permanent ice or snow, locked up in the Antarctica and Greenland, or in deep groundwater aquifers. The principal sources of water for human use are lakes, rivers, soil moisture and relatively shallow groundwater basins. The usable portion of these sources is only about 200,000 km3 of water — less than 1% of all fresh water and only 0.01% of all water on Earth. Much of this available water is located far from human populations, further complicating the issues of water usage. In some developed countries, bottled drinking water is more expensive than a liter of gasoline. Just as the conflict in the Middle East has involved the rest of the world because of oil, one wonders if there will come a day, when the need for the control of clear fresh water, for example, from Canada’s vast lakes, will lead to a serious dispute between neighboring countries. UNESCO, who has recognized the potential for international conflict, has launched the “world water assessment program” (http://www.unesco.org/water/wwap/), which identifies potential regions of conflict for water. It is largely human activities that have caused water shortages. Irrigation of deserts to grow crops and keep golf courses green has emptied rivers and lakes. Meanwhile, shifting climate patterns have changed the levels of precipitation throughout the world, making the weather more variable and unpredictable. As a result, massive catastrophes such as Hurricane Katrina make the headlines, while in other countries, droughts lasting several years are worse than what anyone has ever seen before. As the demands on water increase, such as the requirements for fresh drinking water, sewage disposal, especially of chemical wastes, and irrigation demands, fresh water becomes unsuitable for drinking. Industry continues to pollute the water while meeting minimum requirements (or even circumventing them) in order to “serve consumer needs and provide

13

Data summarized from http://www.unep.org/.

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jobs,” and to feed growth and expansion. Self-interest — to maximize profits — is not included in the list of motivation factors here. Nevertheless, the key motivation for decision-makers has always been the same — the need to meet shareholders’ requirement of the rate of return on their investments (ROI). 3.2.2 “I am responsible, but not guilty” In May 2000, seven people died and more than 2000 became sick in Walkerton, Ontario, Canada, from E. coli contamination of the town’s water supply. Livestock manure was one of the factors implicated in the accident, exacerbated by other factors such as infrastructure failure, a high-risk well location, human error and extreme rainfall. The tragedy highlighted the need to solve the serious drinking water problems related to contaminants from animal waste entering groundwater supplies and to the roles played by earlier budget cuts, staff reductions and greater reliance on municipalities for the regulation of environmental services. Crucially, the tragedy was directly linked to the privatization of water inspection services. Mike Harris, then Premier of Ontario, who was responsible for the privatization initiative, responded to the Walkerton tragedy by saying: “I am responsible, not guilty.” Less than two years after the Walkerton tragedy, problems with the Canadian water supplies surfaced again. More than 1000 boil-water advisories were active across Canada for a variety of reasons. Dangerous pollutants continued to contaminate the water. For example, the pathogen cryptosporidium had seeped into the drinking water in North Battleford, Saskatchewan. The industrial chemical trichloroethylene had crept into the water wells in Beckwith, Ontario, and the hazardous chemical trihalomethane has been found in the water system in Liberty, Saskatchewan.14 Contrasting the Walkerton tragedy with Friedman’s view on social responsibility, the hard question to ask here is: while corporations (private water inspection contractors) are entitled to make profits, and “more profits to fulfill their social responsibility,” under the circumstances, were the innocent people who died or fell ill supposed to pay the price for the profits that the contractors made? Bear in mind that corporations like 14

CBC News, December 20, 2004.

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people, can be fined, jailed (suspended operations for a period of time) or executed (charter removed and put out of business). Corporations, which committed environment offence charges and were subsequently found guilty, include Exxon and Chevron. They were fined US$123 million and US$6.5 million, respectively. In Canada, there is no death penalty for a person who is found guilty of a first-degree murder charge. A death penalty could, however, be imposed on a corporation if it commits a crime that is deemed to be serious enough to warrant such a penalty. It is interesting to speculate what Friedman’s position would be on a death penalty for corporations. 3.2.3 The rivers are black, and Chinese die of cancer15 “All the rivers around us that we drink from are polluted,” Mr. Wang said. “You can taste it. It’s acrid and bitter.” The victims have started to come out; there are people dying of cancer, tumors and other unusual causes. Mr. Wang Linchen, head of the Communist Party of a Chinese village in Huangmengying shared his story in the hut of a farmer who had died of cancer just like the other victims of polluted drinking water.16 On Sunday, January 29, 2006, CBC (Canada) televised a program at 8pm entitled China Rises. Besides reporting on the economic growth and rapid development in the cosmopolitan city of Shanghai, it also showed how rivers and lakes were polluted. The once clear waters that the villagers had relied on for consumption were now contaminated by industrial pollution, and had dying and unhealthy fish. The quality of water was too poor even for the plants. When toxic substances enter lakes, streams, rivers, oceans, and other water bodies, they dissolve, or lie suspended in the water, or deposit on the bed. This results in the pollution of water whereby the quality of water deteriorates, affecting the aquatic ecosystems. Pollutants can also seep down and affect the groundwater deposits. (Fresh clean water is not renewable, but reclaimable. It can be cleaned by energy, in particular, solar energy.) 15 16

Section title from J. Yardley, New York Times, September 12, 2004. Ibid.

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The above problems are not unique to China. Water pollution has many sources. City sewage and industrial waste discharged into the rivers are the most polluting of them. In India, the facilities to treat water are not adequate in any city. Currently, only about 10% of the waste water generated is treated; the rest is discharged as it is into the water bodies. As a result, pollutants enter groundwater, rivers, and other water bodies. Such water, which ultimately ends up in our households, is often highly contaminated and carries disease-causing microbes. Agricultural run-off, or the water from the fields that drains into rivers, is another major water pollutant as it contains fertilizers and pesticides. About one-third of the world’s population live in countries with moderate to high water stress. The problems are most acute in Africa and West Asia. The lack of water is already a major constraint to industrial and socio-economic growth in many other areas, including China, India and Indonesia. If present consumption patterns continue, two out of every three persons on Earth will live in water-stressed conditions by the year 2025. The declining state of the world’s fresh water resources, in terms of quantity and quality, may prove to be the dominant issue on the environment and development agenda in the coming century.17 Anything that is self-regenerating is renewable — plants, fish, animals, and even the Earth itself. In a way, self-generation and reproduction are gifts of nature. Only when there is respect for what nature has provided for us, then renewable resources will continue to serve us. In fact, part of the study of economics is to ensure that through human care and efforts, renewable resources can continue to renew themselves to serve us. This has been much discussed in the author’s early writings. Two of them are presented here as examples. One was a freedom fighter’s last wish, noted by the author on a visit to Lake Como, Italy. The message was engraved on a steel plate displayed at the park border to Switzerland. It reads: Like the falling leaf, I am just about to drop to the ground where I can fertilize the soil for the future… 17

Global Environment Outlook 2000.

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The other was a conversation between the author and a farmer. The farmer told the author: “We are stewards of the land that is provided for us to make a living by the good Lord. We have to take care of it to ensure that it can continue to provide food for us so we can survive. We should not be like the fishermen, who seem to have no sense of stewardship responsibility. All they do is to catch as many fish as they can. The fish’s future does not seem to concern them at all.”

3.3 Renewable Resources 3.3.1 Grain production The worldwide food crisis can be measured in terms of the decline of annual per capita grain production. Three billion tons of grain are required to be produced annually in order to provide every person with a daily diet, which includes a typical staple such as wheat flour, rice, or maize, with sufficient calories and nutrients. However, as of around 1990, less than 1.9 billion tons were produced yearly. Since then, the world’s annual grain production has further declined (Fig. 3.4; see also http:// faostat.fao.org/). The decline in grain production comes as no surprise, as we approach the limits to the improvements that can be made through irrigation, increased fertilization and other means. Meanwhile, the high prices of land and the low prices of agricultural products have made it impossible for farmers to make a living in many countries. In some places, the pressure to convert land for other uses is high, which often takes away some of the most fertile land available. The import of “cheap” foodstuffs has also made it very hard for local producers to compete. The incomes of farms in the UK, for example, have declined by 60% since 1995. Selling their land to developers in return for a chunk of cash seems to be an easy way to get rich for farmers. As one farmer told the author: “Nowadays, you get no respect as a farmer. When you sell off your land, you have cash in the pocket.” Urban housing, recreational areas, industry, and the infrastructure to support them are replacing farmland in many places. Where farmland is still productive, the concentration on “agribusinesses” and cash crops that produce the highest ROI is not always conducive to feeding

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Fig. 3.4 Total land area devoted to grain and soy bean production is levelling off or declining, and per capita grain production is in steady decline. Source: United Nations Food and Agriculture Organization compiled by Worldwatch Institute, 2000.

the largest number of people. In theory, this might allow for increases in the prices of more basic foodstuffs as they become more in demand. In reality, the balance of resources in the hands of the upper 25% means that in the choice between producing beef for the developed world and producing grain for the poor, raising cattle will usually win. The global distribution of food is not so simple, nor is the trade-off between land useable for raising livestock and land that can be used for growing grain, particularly where only grass and not grain can be suitably grown. Nevertheless, it is not clear that the emphasis on profit rather than production is conducive to feeding the world’s poor and starving. Officially, the United Nations Food and Agriculture Organization (FAO) and sister UN agencies — the World Bank, the International Monetary Fund (IMF), the General Agreement on Tariffs and Trade (GATT), and the World Trade Organization (WTO) — appear to have

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dedicated themselves to deal with the problem. They blame hunger on poverty, but fail to say who is responsible for poverty. 3.3.2 Fish As the shortage of grain supply becomes more acute and increases in livestock production are untenable, the world turns increasingly to the sea for food. Unfortunately, current fishing practices are not sustainable.18 Exploiting a different resource without changing the way we exploit resources is in the end only a stopgap measure — as all resources, whether renewable or not, are ultimately exhaustible. What is needed is a change in the way we think and act. 3.3.3 Rainforest: valuable source of food and medicine Rainforests are a vital source of medicines. To date, less than 1% of the world’s tropical forest plants have been tested for pharmaceutical properties, when at least 25% of all modern drugs originate from rainforests. Most of these were first discovered and used by indigenous peoples.19 Rainforests with their fertile soil are also a great source of food — vegetables and fruits in particular. The rainforests have produced many varieties of fruits and vegetables — bananas, pineapples, oranges, lemons, coconuts, cashews, peanuts, corn, rice, avocados, onions, tomatoes, eggplants, peppers, ginger, sugar, cinnamon, vanilla, cocoa, and even the kola nut, which is used to flavor cola drinks. Even though we can now cultivate many of these foods in hothouses, credit must be given to the rainforests for being the original source of these foods. Man’s cultivation of food for consumption has not benefited the rainforests. Take the example of palm oil, which is now possibly the largest produced vegetable oil in the world. Although a high yield product, it requires large stretches of land for its cultivation. Malaysia, the world’s largest producer, cultivates about four million hectares of land alone.20 The production of palm oil is likely to increase as new 18

See for example, Cod: A Biography of the Fish that Changed the World, by Mark Kurlansky (Walker and Company, NY, 1997). 19 http://www.rain-tree.com/facts.htm. 20 http://econ.mpob.gov.my/economy/su_review2005.htm.

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uses for it are found. For example, it is considered a potential source of “biodiesel.” Cattle grazing and the fast food hamburger industry are among the worst offenders of deforestation. Nonetheless, the greatest offenders are logging, mining, the relocation of the rich escaping from overpopulated and polluted cities, and even tourism. As the main culprits here seem to be the rich not the poor, the claim that deforestation is caused by the poor is nothing but a great social injustice. According to the international agencies such as the Food and Agriculture Organization (FAO) and other inter-governmental bodies, poverty and overpopulation are the main causes of forest loss. These organizations believe that the solution to the problem is an increase in development and a reduction in population growth. However, what the World Rainforest Movement and many other non-governmental organizations believe is that unrestrained development and the excessive consumption habits of rich industrialized countries are directly responsible for much of the forest loss. An individual in an industrialized country is likely to consume 60 times more of the world’s resources than a person in a poor country. The growing populations in rich industrialized nations are therefore responsible for much of the exploitation of the Earth. There is a clear link between over-consumption in the rich countries and the deforestation in the tropics. As Marcus Colchester, director of the World Rainforest Movement’s Forest Peoples’ Program, based in Penang, Malaysia, said: “Deforestation, in other words, is [itself] an expression of social injustice.”21 3.4 Non-renewable Resources 3.4.1 Petroleum — the black gold According to Time Magazine, easily accessible oil reserves, amounting to about 70% of the total reserves, are mainly concentrated in the Middle East countries such as Saudi Arabia, Iraq, Iran and Kuwait, and in Russia. Large deposits are also found in the Gulf of Mexico and in Venezuela. Other extensive reserves in areas such as the Athabasca tar sands in 21

http://www.worldvision.com.au/resources/files/poverty_environment_1103.pdf.

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Alberta, Canada, are also potentially extractable, but these tend to be extremely expensive to exploit, in terms of both energy and monetary costs. Despite improvements in technology, the discovery of new oilfields, and suggestions that existing oilfields may be refilling, it is unquestionable that oil is a non-renewable resource. Consumption has increased from 67,237,000 barrels per day in OECD countries in 1978 to 82,674,000 barrels per day in 2004.22 Based on recent information (2003), the US uses more oil than any other country in the world. Most of it is pumped into the country’s 200 million cars in the form of gasoline. The above information does not include China, an emerging economic power anticipated to become the fourth biggest economic power in the world by the year 2010, after the US, Japan and Germany. China, with a population of over one billion, produces 12,000 cars per day. It appears that the dependence on petroleum is worldwide and it is increasing. The truth about war is that it is always a last resort. It is the reaction of people who are backed into a corner, which is precisely where Western society is today. We face an immediate and perpetual decline in our standard of living if we do not exploit every oil, gas, and uranium deposit available on Earth. The public does not question how a continuous stream of oil is being provided at whatever the current price. Issues arise not only over the gain of control of oilfields, but also with the transporting of oil to where one wants it. For example, Afghanistan’s main strategic importance lies in the fact that it offers the most feasible route for a pipeline to transport oil from Central Asia to its markets. This is the reason for the Soviet Union’s invasion of Afghanistan in 1979.23 Unfortunately, the Taliban, an Islamic movement that is not recognized as a government by most of the other nations, controls the territory across which the pipeline would extend. From the outset, it was clear that the construction of an oil pipeline could not begin until a recognized government, which has the confidence of the various governments involved, moneylenders and the companies assuming the work of construction, was in place. 22 23

http://www.oecd.org/statistics. http://www.newhumanist.com/oil.html.

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There are also rumors that a state-owned oil company in China with US$5 billion is making a bid for control of an oil company in Canada. In all, it is clear that everyone lives in fear of an oil shortage, which will cause society to come to a standstill. Oil not only provides easy mobility for those who rely on cars as a means of transport, it also puts jets in the air and ships at sea, for civilians during peacetime as well as for the military during wartime. Would it be possible for us to live without oil, the beautiful black gold (petroleum)? This is what economics is about. 3.5 When Demand Exceeds Supply Based on what we know, demand will eventually exceed supply in the case of non-renewable resources because by its very definition, we are not able to put back what we have used up. In the market system, everything is for sale; the only difference is in the price. What would happen if the gas price at the pump jumped to US$500 per gallon? Here is a concluding remark made by researchers in the US.24 Will the world ever physically run out of crude oil? No, but only because it will eventually become very expensive in the absence of lower-cost alternatives. When will the worldwide production of conventionally reservoired crude oil peak? That will in part depend on the rate of demand growth, which is subject to reduction via both technological advancements in petroleum product usage such as hybrid-powered automobiles and the substitution of new energy source technologies such as hydrogen-fed fuel cells where the hydrogen is obtained, for example, from natural gas, other hydrogen-rich organic compounds, or the electrolysis of water. It will also depend in part on the rate at which technological advancement, operating in concert with world oil market economics, accelerates large-scale development of unconventional sources of crude such as tar sands and very heavy oils. Production from some of the Canadian 24

http://www.eia.doe.gov/pub/oil_gas/petroleum/feature_articles/2004/worldoilsupply/ oilsupply04.html.

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tar sands and Venezuelan heavy oil deposits is already economic and growing. John H. Wood, Gary R. Long and David F. Morehouse, The Future Is Neither As Bleak Nor As Rosy As Some Assert If you have an annual income of US$2 million, it will be no big deal. For those who earn US$10 or less per hour, all they can do is smell the gas fumes emitting from the exhaust pipes of passing cars. There is an old saying among the Chinese rural community: “A person, rich or poor, has three responsibilities — responsibility to oneself, responsibility to other people, and responsibility to the Earth.” Renewable resources are renewable only if we provide the opportunity for their renewal. If we abuse, damage, or overuse them, they can become as unrenewable as the oil in the Earth. Renewable resources can be damaged by overfishing, the destruction of habitats through pollution or their removal in favor of human activities, and the overexploitation of crops and livestock making them vulnerable to new diseases. These are just a few examples. There are many other activities that can put an end to renewal capability. If human beings consider themselves as resources, and renewable, then we must face the fact that our own actions may make us non-renewable as well.

3.6 Revisiting the Relationship Between People and Resources Economics is about people and resources. People consume resources for survival. Chapter 2 introduces the relationship between people and resources — it is an interdisciplinary subject, relating to the needs theory from behavioral science in particular. The Matthew Effect, which is also introduced in Chapter 2, offers a different perspective gained from examining the relationship between consumption and Maslow’s needs theory model. In Maslow’s theory, needs are expressed hierarchically — basic needs for food, water and shelter are common to everyone; only when these are satisfied, then needs of a higher order are expressed. Figure 3.5 shows that the poor have only their basic needs satisfied, consuming only a very small portion of resources. Ascending

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Middle Class

Well-off

Rich

Super-rich

Multimillion-dollar salary Mansion Regular first-class air travel

Food, water, shelter (basic needs)

Secure job Private home

High salary Private home Two cars

Private yacht Entourage (excessive needs)

(luxury needs)

(lifestyle needs)

(comfort needs)

Progression of Needs

Fig. 3.5 The relationship between Maslow’s hierarchy and the consumption of resources. This only considers consumer needs and does not include other needs such as marriage and children to which Maslow’s theory also applies. Each category of persons requires all of the lower categories, for example, all require food and water.

the hierarchy, the number of individuals, who can aspire to consume things that require a growing proportion of resources, gets smaller and smaller. 3.7 The Market Economy — A System Governed by the Invisible Hand The exchange system of the market economy assumes that every individual is a consumer as well as a buyer; hence, the system works in the interest of everyone. The system functions in the market as a place for exchange as well as wealth distribution, with the invisible hand serving as the unbiased tool of exchange. Unfortunately, while the invisible hand is unbiased, it is also indiscriminate. Therefore, in monetary terms, many consumers are not buyers because they are not in a position to be so. The exchange system will be further discussed in a later

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chapter. Figure 3.6 shows how the market economy works for the rich and the poor. Figure 3.6 suggests that in an ownership-based economy, the rich and powerful will continue to increase their wealth and control. They will consume and waste a growing proportion of resources. The refugees of the system, the result of injustices perpetrated under the invisible hand,

Market Economy

Invisible hand = Price = $$

System of exchange

System of distribution

$$

Poor* Rich

Poorer†

Very rich

a $$

b

$ $ 0 or −1 Subsystems to provide refuge for the rejects or failures from the exchange

The government

Charitable organizations

Fig. 3.6 Exchange system under market economy. Note: * Some of the moderately poor and those with exceptional ability or luck are able to generate a small amount of residual to re-enter the exchange system. They do well and gradually move up to become rich, or maybe even very rich. † The poor are unable to enter or re-enter the exchange system, drifting downward to become very poor.

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can only rely on government intervention, supplemented by the work of charitable organizations in order to attain the required sustainability. The corrective measures arising from government intervention and the work of charitable organizations will lead to either a strong government with authoritative central planning or a welfare state economy. If it fails to attain the level of a sustainable economy, the consequences are anyone’s guess, although the downfall of Soviet Communism may be instructive here. So long as we continue to pursue the ideal of the market economy, we will have to live with the idea of the rich getting richer and the poor usually getting poorer, unless government intervention is effective at redistribution. However, one does not know which side the government will favor. Many governments continue to support the rich because they provide jobs or pay high taxes. Thus, governments are reluctant to legislate or place limits on personal wealth and ownership through taxation or other forms of direct intervention. In this case, we have to rely on the work of charitable organizations, which depend on their leadership’s commitment to their mission. The market economy as it stands is much in accord with Darwin’s theory of natural selection — the strong (the rich and wealthy) will survive, while the weak (the poor) will usually not. Although this theory applies to the animal kingdom too, where the strong survive and the weak are consumed by the strong, there is one difference. In the animal kingdom, no matter how strong a particular species is, its stronger members will rarely eat of the same kind, and will generally consume only what they need. In the market economy, the invisible hand does not care whether human beings belong to the same species, and will allow an individual to accumulate as much as he wants. Through the exchange system of the market economy, almost all of nature’s gifts are owned by people who have taken control of the resources without assuming stewardship responsibility. Virtually everything has a price tag; consequently, only those who can pay the competitive price are able to benefit from the available resources. All except the air, which may yet become a marketable resource like fresh clean water. We need to bear in mind that all human beings are entitled to Earth’s resources to sustain their life on Earth.

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As Bill and Melinda Gates said, all people are of equal value. The poor are rightly entitled to be equal stewards of nature’s resources, but they have been pushed out of the exchange system because of the judgment extended by the invisible hand. If we claim to be civilized human beings, we must find ways to bring them back into the market economy as consumers and buyers. Questions for discussion 1. Why is it important to have a definition of a learning discipline such as economics? 2. Air and water are critical to us and to most life on earth. Are they renewable? Why? In your opinion, should there be a way found to put air into the exchange system in the interest of making a profit? Discuss. 3. Gasoline, which requires expensive exploration, extraction and refinement processes to produce, has a market price of $0.82 per liter, while a one-liter bottle of drinking water (which is also freely available from the taps in most developed countries) is priced at $1.50 per bottle. Explain how this can happen. 4. Tourism is an important source of revenue and it provides jobs, particularly in those island countries with no natural resources which may be unable to provide sufficient staple food such as grain for the entire population. Yet tourism can be an unfriendly industry to the environment. Discuss. 5. When we drink water, why must we think of its source of supply? 6. What is the role of an elected government with regard to the conservation of resources and environment health? How can such responsibility be measured? Use super highway projects as an example. 7. Would the market economy that is being practised in a large number of countries in the world be able to find its own equilibrium to bring about a sustainable economy? If you think it is able to, show how it is possible. If you think it is not possible, give reasons why. 8. Imagine a corporate executive who is asked a question regarding the care of the environment. He responds with: “I know all about this, but it is a matter of what is more important. When I am dead and

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gone, it will not matter anymore, so what good will it do to worry about it now?” Discuss. 9. A visitor to Guatemala noticed the local people drinking water from the tap. The water was blackish in color and had a funny taste. She asked them where she could buy a bottle of water. One local told her: “We do not want to have bottled water because plastic bottles cause pollution.” Discuss.

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Chapter 4

Fear, Ownership and Stewardship Responsibility

The differences between ownership and stewardship can be summarized in two words: responsibility and accountability. To understand this, a deeper discussion of the implications of each term is required. Both ownership and stewardship involve making proprietary decisions and acting upon them. Responsibility and accountability, however, will make a distinction between the two as to which is right and which is wrong. 4.1 Fear is a Great Motivator Life is full of unpredictable twists, but one thing is certain — it is a journey of no return. If we take an optimistic view to life, life can be filled with hope and joy. For example, there is the joy of food, sex, new experiences, interacting with people, and seeing the wonders of the world such as Niagara Falls, the Pyramids and the Great Wall of China. There is also the joy of achievement, either personally or vicariously, such as a promotion, winning a prize, or achieving an honor. Some of these joys can last a long time, while some may be only a short experience. Aside from joyful experiences, life is also filled with countless “fears.” These are powerful motivational factors that can steer human action and govern individual behavior. Sometimes, they may even be aimed at directing entire nations. The BBC documentary, The Power of Nightmares, by Adam Curtis, argued that a small cadre of powerful Americans including Dick Cheney and Donald Rumsfeld were responsible for using both the fear of the Soviet threat in the 1980s and the fear of global terrorism since 61

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9/11 to establish their power and authority to manipulate events. This is just one example of how fear can be used by people in authority to motivate others into action. The yellow, orange and red alert system is built on the fear of terrorist attack. Although the fear is not completely unfounded, the impact of it has the most powerful and wealthiest country in the world in its thrall now. There is always the fear of Cuba’s uncertain future. Although North Korea has traded away its ability to produce new nuclear weapons in return for immediate energy and other aid, there is still the fear that Iran will continue nuclear weapons development plus also “China has its own agenda.” One might ask what the fear is all about. Do the poor want to take what the rich have? Or do the rich want to take more from the poor? 4.2 Fear of the Unknown For the individual, the greatest fear lies in not knowing when life will end. Almost without exception, everyone treasures his or her own life, often hoping that it will never end. Of course this would mean that if we continue to reproduce, the world would overflow in only a few generations. From an individual’s point of view, longevity is similar to a good wish made during Chinese New Year — it might come true, or it might not. Although all of us know that life will end one day, we will usually find out when and how it will happen only at the very last moment. The right to make proprietary decisions, therefore, becomes the single most important right extended to us by a just legal system. The use of people’s fears can be found throughout our entire governing apparatus, including law and administration, and the system of exchange. The cosmetics business is based on people’s fear of aging, while the insurance industry is based on our fear of accidents and misfortune, which can lead to ridiculous measures such as insuring mobile phones against theft or washing machines against breakdown for as much as a third of the cost of the item. It is a simple fact that extended warranties are offered only because the companies that offer them make money from them. For small items, it is actually better to use the money saved from not paying for an extended warranty to pay for their repair or the purchase of a new replacement. Yet fear will cause some of us to pay for the extended warranty to “buy some peace of mind.”

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Although there may be grounds for some of these fears, the exploitation of them is at the very least an uncomfortable aspect of the relationship among individuals, corporate bodies and governments. After 9/11, it appears that the entire Western world has been at the mercy of “fear.” In the last US general election, the major strategy for getting votes seemed to be based on fear, and George W. Bush’s record as a “war leader.” Never mind that no matter what Mr Bush says, there is a world of difference between what the Americans face and a “real” war, or that it is insulting to maintain that the “war on terror” is adequate justification for the violation of human rights, while claiming simultaneously that Iraq is not in a state of civil war. Most of us have a natural aversion to war and all its horrors, and will do whatever we can to avoid it. Unfortunately, we are willing to permit a war at a distance to “avoid” the possibility of war on our doorstep. This may perhaps make sense, but it indicates a willingness to believe in phantom “weapons of mass destruction” and to accept any number of faults, in favor of a “war leader” whose war record in office turns out to be exceptionally spotty. Our fears and the desire to protect what we hold close to us (translated to mean what we own) can, therefore, lead to irrational actions. Understanding the nature of “ownership” and appreciating what it means in relation to an individual and to humanity, and natural resources as a whole is a very complex matter. Michael Jordan, one of the world’s greatest basketball players, is quoted as saying in a television commercial: “I have failed over and over and over again in my life, and that is why I succeed.” The fear of failure is one of the greatest inhibitors to real success, yet it is also one of the most used “motivation” tools in education and business. The use of regulatory practices designed to prevent and punish failure rather than to reward innovation is symptomatic of this, as is the emphasis in universities on the end-result of “getting the degree” rather than the learning and development process to create exceptional graduates. The desire to acquire ownership is often rooted in fear, the greatest of which is the fear of death.1 Until this day, only faith has been able to remove the fear of death from the minds of some. Christianity emphasizes 1

Unless you believe the polls that say the greatest fear is the fear of public speaking!

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grace, love, and unity through God and Jesus Christ. Although the different Christian sects and denominations may sometimes interpret or say it differently, fundamentally they all believe that ultimately human goodness can only result from an understanding of God’s love for mankind. It is the result of man’s appreciation of God’s gift of sacrifice in sending his son Jesus Christ to be crucified, and man’s obedience to God’s command to love one’s neighbor. “Salvation” is a gift from God; it is not earned by human efforts. For Buddhists, mortal life is something to be endured, as we strive towards the perfection of “nirvana” (i.e. liberation from the suffering of the cycle of life) over the course of many reincarnations. Still, many of us are motivated to achieve happiness in the here and now by capturing what we can to enjoy now. This is especially true in the developed world, where the possibility of personal death seems very remote, at least for the first 50 years or so of life, when we devote ourselves to the achievement of success and enjoyment in this life without worrying about the next. 4.3 The Rich Have More Fears It is not an easy task to categorize the range of fears that affect people or the reasons behind them. An interesting paradox here is that often, the rich have more to fear than the poor. This paradox is a simple mirror of Maslow’s hierarchy of needs. Just as the basic fact of human behavior, which is to have needs, does not disappear, instead the nature of the needs simply changes; so too can we say that satisfaction of the basic needs for food, water and shelter does not lead to the elimination of fear. The poor, or those for whom death is a close reality, can appreciate that life is a gift. They are able to derive great satisfaction from a good meal or having a roof over their heads for the night because they know that these may not be available to them the next day. Such fears are remote to the rich. Yet the more the rich have, the more they covet, and the more they have to fear to lose. Often, even though they may already own more than they can possibly need, there is still the fear of missing out on getting even more. Ownership is thus the basis of both security and, paradoxically, insecurity, hence proprietary decision-making as a right of ownership becomes the basis of our society.

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4.4 The Good and the Evil The “axis of evil” was a phrase used by US President George W. Bush to denote three evil countries — Iraq, North Korea and Iran. Iraq is no longer considered an evil because military action is deemed to have driven the “evil” out of the dominion, but North Korea and Iran seem to have got away without facing any military action, at least for the foreseeable future. Nonetheless, evil continues to exist. Even as we speak of evil, there should also be good. Who are considered good these days? It is hard to tell. However, for evil to be meaningful, it has to have a contrast. Therefore, we have both evil and good. This brings to mind Taoism, a religion and philosophy that is still very much a part of Southeast Asia and also known in the West. Related to it is the discipline of tai-chi, a form of martial art and exercise for people seeking inner and physical strength. A key image of Taoism is that of the yin and yang, representing duality and balance, like the physical and spiritual forces acting in harmony, or the good counterbalancing the evil (Fig. 4.1). This concept can be applied to our understanding of the two sides of ownership and stewardship, which is quite similar to the story of good and evil. Perhaps the best way to illustrate the contrast is to embed it in a story — the well-known story of King Solomon’s wisdom, which most of us would have undoubtedly heard about. There were two women, both of whom claimed to be the mother of the same baby. They took their case to King Solomon, who was known for his great wisdom. Both presented convincing and tearful claims, with each branding the other a liar. The king could not decide who was the rightful mother, so he ordered the baby to be split into two. In that way,

Fig. 4.1 Yin and Yang.

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each woman could have one-half of the baby. One of the two women agreed to this action and thanked the king for his good judgment. The other woman cried and pleaded with the king: “Please, Your Majesty, let her have the child.” She was the real mother who could not bear to see her child killed. This story clearly illustrates the true meaning of ownership. From passion and love comes proprietary rights and stewardship. Without passion and love, ownership is based only on greed. 4.5 Ownership Ownership lies at the foundation of Western capitalist society. It is a right created by man, not by God. Nevertheless, some circles treat it as if it had sacrosanct status. Private ownership is the foundation of the academic discipline of economics because if ownership does not exist, there will be no need for a government or an exchange system. In fact, there will be no need for money. Would this be possible? It is certainly not possible in this world. Since ownership is created by man, it can also be changed by man, who could, for example, take it away in a judgment made by the court, or by an administrative decree. Land can be expropriated for government use in both Western countries like Canada and perhaps more easily in state-controlled economies like the People’s Republic of China, where the Three Rivers Dam project flooded out entire cities and displaced millions of people. The permanence of ownership is an illusion, one perpetuated by the powers that be as a useful fiction; in reality, ownership can be taken away in a moment. Of course, at the end of life’s journey, everything that one owns will become a matter of the past. Ownership entitles one to claim the right to make proprietary decisions and to command resources, at least for self-interest initially. Ownership applies not only to human beings; it is seen throughout the animal kingdom as well. Wolves, bees, ants, birds, and fish — all have their own way of claiming ownership. Yet, we know well enough that ownership cannot be permanently attached to any individual, since no one lives infinitely. However, some people will die for the right to a few scraps of land. The ownership-driven “profit” mentality lies behind the idea that corporate entities, especially the top-level decision-makers of large multinational companies, can justify their actions by invoking the right to maximize the

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rate of return on investment (ROI) for shareholders, as long as no legal restrictions are violated. Unfortunately, self-interest and greed, expressed in the form of handsome self-remuneration can have catastrophic consequences, as reflected in the introductory words of the University of Michigan Statement on Stewardship: There was increasing resentment against businesses for their unethical practices, betraying stewardship responsibility, although feelings were mixed. People recognized the critical role of business in providing meaningful employment, yet many were beginning to perceive large corporations as part of the problem rather than part of the solution. Executive pay and corporate policies on “downsizing” were but two of the issues that undermined trust. Moreover, people began to recognize the extent to which the global network of transnational corporations and financial institutions, with its tendency to override personal, social and spiritual values and an inexorable logic of economics, and short-term profit, was monopolizing the human future and subsuming all activities in its sphere. Yet even while that engine of the global economy seemed unstoppable, a quiet yet widespread set of alternative social and economic forms was beginning to take shape. The shift away from large, authoritarian corporate structures to much smaller, more participatory organizations dedicated to stewardship, based on cooperation rather than competition, and committed to a sense of responsibility toward all stakeholders…

The corporate mentality invokes the legal system as its moral governor, yet the law, while based on the concepts of justice, is not necessarily justice itself, and it is most certainly not morality itself. The legal system works best only when it is invoked to regulate the extremes of society. This is true for practical reasons (it would hardly do to have everyone charged with legal violations on a regular basis) as well as on moral grounds — legal governance should not be the guide to what the moral centre of society should be, rather it should be its reflection. By the same token, proprietary decisions and actions made based on the right of ownership should not relinquish moral primacy in favor of the legal system. One situation illustrates this point. In a television interview set in

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a small Central American country, the cabinet minister in charge of health asked the marketing executive from a pharmaceutical company how the prices charged for life-saving drugs could be justified, when the people were too poor to pay for them. He went on to accuse the executive of being immoral. The executive responded: “Yes, Minister, it is immoral, but legal.” Mining operations are another example of a legal but immoral activity. A £1000 wedding ring — equivalent to one ounce of gold — creates up to 30 tons of toxic waste. To produce that single ounce, miners have to quarry hundreds of tons of rock, which are then doused in a liquid cyanide solution to separate the gold. Payal Sampat, the campaign director for Earthworks, the mining watchdog, told The Independent: “Gold mining is arguably the world’s dirtiest and most polluting industry.2

Although the author does not have any exact figures, it is likely that most mined gold, which has enormous worth, serves very little useful purpose. The costs, environmental and otherwise noted in the story above, can be “justified” in the name of job creation, regional development, or consumer need satisfaction. What are not so easy to justify is the longterm environmental degradation and the effect on the people and land when the gold runs out. 4.6 The Odd Couple: MBA and ROI Some 50 years ago, business education took a turn from the traditional economics-based commercial program to develop a fresh new degree with an emphasis on corporate management — the Master of Business Administration or MBA, now a respected academic credential. The rosy success of this educational wonder has, however, created the self-sustaining myth that as long as corporations make profit, there will be continued success for the MBA degree holders, who will also be doing their duty in providing jobs for the general public. After five decades of development, the package needed to earn the degree may vary from university to 2

D. Howden, “The Real Price of Gold: It Weighs 1 oz, It Costs £1000 and It Creates 30 tons of Toxic Waste.” The Independent, October 26, 2005.

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university, but the fundamental premise behind the MBA is constant — the only measure of success is the maximization of the rate of return on the shareholders’ investment. This has been endorsed by the majority in the academic world who hold teaching positions in business and research, particularly in the areas of finance and financial management. In one sense, ROI or the rate of return on investment is merely a number derived from accounting information. It can be manipulated like any number based on imprecise information. The calculations on which the number is based are not perfect. They are taken from the exchanged value as well as the estimated value, with some that can be deferred and others that can be charged out immediately. Although everything must comply with accounting standards and be verifiable, it is always subject to some interpretation. Nevertheless, ROI has become the only yardstick to measure how well a business is doing in respect of its responsibility to serve shareholders in financial terms, regardless of the real interests of the shareholders or the interests of the society and the environment. 4.6.1 “MBA — the devil’s degree” In an article written by Sam Grewal entitled “MBA — the devil’s degree,” the author describes an indictment made by the late Sumantra Ghoshal, a respected management theorist from the London Business School. Before Ghoshal passed away in 2004, he wrote what amounted to an apology for the way MBA programs had created poorly equipped and often unethical managers and executives who dominated the corporate world, creating a calculating business culture that affects everyone in it.3 The main criticism is that MBA programs operate as self-fulfilling prophecies; that a strictly economic understanding of human behavior (human beings are self-centered and self-serving) is used to rationalize why companies have only one purpose — to increase the value of their shareholders’ stocks. According to this criticism, students learn that unethical behavior is excusable because profit is the only goal. This is the reason why a generation of MBA graduates has been accused by some of doing more harm than good to the business world. The tragedy is compounded because not only must it not be taught that profit is the only 3

Toronto Star, March 15, 2005, pp. C1 and C3.

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goal, but also that so-called profit is not profit at all. At best, it represents the unpaid costs owed to the environment and possibly the fruit of labor that should be rewarded to those who have worked hard and done everything according to what the executives wanted. To be fair, ROI is not the cause of unethical behavior, but rather the people who use ROI as a vehicle to railroad themselves into unethical behavior. 4.7 The Unfortunate Reality Let us return to the Taoist concepts of yin and yang. Yang reflects the bright things such as economic growth, improved GDP performance, and the corporations’ enjoyment of their harvest, keeping in mind that in many cases, the perception is that it does not really matter how this is being achieved. The dark side or yin must also be kept in mind. Economic growth is usually maintained over only a short term; there is always the possibility of a downcycle and the questionable maintenance of corporate profits. A major flaw has been attributed to the part of accounting. Accounting figures can be manipulated to capitalize expense, defer write-offs, and hold off investments, all of which are possible ways to change the apparent bottom line. The true and fair representation of financial information ensures the proper functioning of a capitalist society. The manipulation of accounting figures amounts to cheating the public and harming society as well. The implicit approval of what amounts to legalized cheating is likely to encourage illegal cheating, as companies and executives push themselves harder and harder to succeed and to achieve better ROIs, while congratulating themselves for their excellent performance and rewarding themselves munificently. The Enron scandal can perhaps be the best example of what it means to overstep this generous line. Several other examples in the postEnron days tell us without any doubt that this is not an isolated incident.4 1. Worldcom overstated its cash flow by booking US$3.8 billion in operating expenses as capital expenses, and gave founder Bernard Ebbers US$400 million in off-the-books loans. Ebbers was convicted on all counts for his misdealing, and was sentenced to jail for the crime. On September 21, 2005, the judge ordered the return of US$6.1 billion to investors. 4 From the website newsmax.com, Hot Topics, based on a story in The Times, July 1, 2002, pp. 15–16.

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2. Xerox falsified financial results for five years, boosting income by US$1.5 billion. However, the company agreed to pay a US$10 million fine and to restate financials dating back to 1997. 3. Nortel Networks Corporation is taking ousted chief executive Frank Dunn and two former finance officers to court to recover nearly US$18 million worth of bonus triggered by phantom profits.5 The above stories reported by the media concerning corporate scandals are only the tip of the iceberg. In the ownership-based, money-driven market economy, government and business-linked scandals also come as no surprise. “Sponsorgate” is an ongoing scandal that may lead to the collapse of the current government of Canada forcing an early election for a change in government. The scandal involves the misuse and misdirection of funds that were intended for government advertising in Quebec over the preceding decade. The funds were apparently channeled to advertising firms that were allies of the Quebec branch of the Federal Liberal Party. Evidence suggests that in some cases, few or no services were rendered in return. The Liberal Party has thus been accused of moneylaundering and embezzlement of Canadian tax dollars. Under what we consider the democratic system, the government is managed by elected representatives. Everyone who meets the voting age requirement has the right to vote and be voted into office. A person needs to have an enormous campaign fund or “war chest” in order to be voted into office. This is required to win the media exposure war and to make sure you are better known than the opposition candidates. This makes it necessary for would-be politicians to solicit election funds. As a result, the rich can have enormous influence that is far beyond the value of their democratic vote. It is legal for executives acting for corporations to offer financial support to the party or party candidates. The reasons for supporting political parties and candidates are clear enough — that they will represent the (business) interests of the corporations. The issues of sponsorship and corruption are only part of the whole picture. Similarly, recent scandals in the United Kingdom over the issuing of loans to both the Labour and Conservative Parties have caused a major 5

CBC News, November 14, 2005.

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furore, as there is no legal requirement for loans to be reported, even if they are interest-free or for an extremely long term. Allegations have been made that loans to the Labour Party have resulted in the lenders being given noble titles.6 Several extremely wealthy lenders have been exposed this way. Under the umbrella of “free enterprise,” major business undertakings in the United States often involve key government individuals. US VicePresident Dick Cheney is well known to have been the former chief executive of Halliburton Energy Services, a Texas-based company that has billions of dollars in contracts in post-war Iraq, including the extremely controversial “Restore Iraqi Oil” or RIO contract, which is worth an estimated US$7 billion and was not subject to a bidding process.7 Other examples are listed at http://www.newsmax.com/archives/ articles/2002/3/4/211830.shtml, which reflect the relationship between the US government and business. Information, which has been released based on a 2001 Freedom of Information request, indicated that the US Commerce Department might have as many as 10,000 pages of documentation covering years of contact with Enron executives, including a corruption scandal linking the Clinton administration to Enron and a payoff of US$25 million to Bambang Trihatmodjo, son of former Indonesian President Suharto, for a power plant project in Java. There is no philosophical, moral or legal justification for either banning or endorsing the relationship between business and government, unlike the example of the explicit separation of church and state in the US, although there is recent evidence that some church groups are increasingly flexible in their definition of this principle. If we care to do so, we can cite familiar standard-bearers such as “the rights of free enterprise” or the “invisible hand,” and the question of who can speak on the right of business to advocate its interests in a democracy. Perhaps we may even consider it a natural development. It is a logical business development because business needs government help; government has the power and mandate to strengthen a business’ position in the marketplace. Unfortunately, once money is involved, noble purposes are likely to fly out the window. In the profit-driven, ownership-based motivation of human ingenuity, where can we find the soul of stewardship in a market economy? 6 7

R. Syal, “ ‘Cash for Peerage’ Tycoon Was Asked to Hide Loan,” The Times, July 8, 2006. T.J. Burger and A. Zagorin, “The Paper Trail,” Time Magazine, June 7, 2004.

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4.7.1 Ownership — a legalized system of distribution to separate the haves and the have-nots Ownership-based economics centers around the accumulation of resources for future disbursement, which would most likely be used to aid in further accumulation. This refers primarily to money in the modern world. It is unfortunate that a particular section of the population would not be able to participate in this activity. Before accumulation is possible, expenditure must be made on the basic needs of life and beyond that, those simple luxuries that unfortunately do not lead to any further accumulation. Karl Marx once said: “Religion is the opiate of the masses.” One can justifiably say that conspicuous consumption fulfils the same role in the modern capitalist, free market society. The consumption of goods as a surrogate for proper wealth accumulation allows for a new plasma screen TV but it does not allow for capital accumulation. Indeed, for people living in extreme poverty, whatever they could acquire might not even be sufficient for immediate consumption. As saving is not possible, they are likely to stay in poverty as long as they have no residual that can be used to acquire new resources to either improve their living standards or to generate income. While some people who are living in poverty are able to improve their lives through hard work or the right opportunity, as long as the system remains unchanged, there will always be another wave of poor to replace them. 4.7.2 Responsibility and accountability In reality, all of us are stewards and accountable for every decision and action because we assume ownership rights. The discussion above indicates that ownership-based economics is ultimately not sustainable; stewardship must be the basis to manage or govern the economy. The following is a brief comparison between the traditional thinking of ownership-based economics and economics that is based on stewardship responsibility and accountability (Table 4.1). 4.8 Definition of Stewardship Stewardship is not an unfamiliar word, although it may not be easily located in economics texts, which are mostly based on the ideas of private

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Table 4.1 Ownership-based economics versus stewardship-based economics. Reality of economics

Ownership-based

Production

Produce goods and services To innovate and create by employing capital and for self-interest and the labor. common good. To obtain more in order to Added value to goods and satisfy needs, wants and services. Stress the greed. Its distribution built-in distribution function built into the function that creates system is not emphasized. riches and helps the poor to be more self-reliant, not just as consumers, but buyers in the market as well. Maximization through the Sharing. Redistribution exchange system, not from exchange receiving the price of system, rather labor and fruit of labor. government and charitable organizations. Needs, wants and greed. For survival, betterment Have plenty of and sustainability of undistributed residual both individual and as personal property. humanity as a whole. Ownership as the ultimate Not part of economics in goal, with no limit and the interest of no consideration of the humanity, people, utility function to the resources and the individual. environment.

Exchange

Distribution

Consumption

Greed

Stewardship-based

property rights and ownership. While texts define the individual’s private property rights, they seldom mention the rights of others. Where decisions and actions are involved in the allocation of resources, the definition of the word “stewardship” may vary from one situation to another. Here are some of its commonly acknowledged definitions: — For the individual, stewardship is “the careful and responsible management of something entrusted to one’s care.” (Merriam-Webster’s Online Collegiate Dictionary, 2001)

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— For general use, stewardship is defined as a responsibility to take good care of resources entrusted to one. (Wikipedia, the free online encyclopedia) — In the Christian context, stewardship refers to the responsibility that Christians have to care for the gifts that God has bestowed on them.8 — The University of Michigan uses the term to amplify its stewardship responsibility by incorporating it into a statement that reads: Stewardship Responsibilities in the Management of Human, Financial, Physical and Information Resources. — Environmental stewardship is the responsibility of environmental quality shared by all those whose actions affect the environment; this includes protecting the environment through recycling, conservation, and regeneration. — In an organizational context, stewardship refers to the management’s responsibility to properly utilize and develop the talents of the members. — Thinkers in many religions, for example Seyyed Hossein Nasr (Islam), Henry David Thoreau (Protestant), Thomas Berry (Catholic), and Mohandas Gandhi (Hindu), deplored consumerism and elevated respect for nature to be a good in itself. For our purposes, stewardship is an extension of the concept of ownership; stewardship asks only that decision-makers make decisions responsibly, and be accountable for the decisions they make (Fig. 4.2). 4.9 Stewardship Responsibility is Not the Same as Social Responsibility Friedman noted in The Corporation that a corporation has no social responsibility, nor does its management. Why should management have 8

Christians have a responsibility to care for the gifts that God has bestowed on them. In some settings, stewardship is operationalized as time, talent and treasure. An example of stewardship is found in the first book of the Bible, Genesis chapter 2 verse 15. The verse teaches that humans (via stewardship) are responsible for nature. However, humans are not permitted to control nature directly (domination). They have to “go through God,” which is classed as dominion. Since the late 1970s, small groups of conservative Christians have challenged the primary view of stewardship, and urged various forms of Dominionism. See http://www.integrativespirituality.org/postnuke/html/modules.php?op= modload&name=phpWiki&file=index&pagename=Stewardship.

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Stewardship-Based Economics Ownership: a legal status that gives one the right to make proprietary decisions and act upon them for self-interest.

+ Taking on the responsibility before the decision is made; assuming accountability for the decision and actions involved, and accepting the consequences.

Stewardship

Fig. 4.2 Simple illustration of the difference between ownership and stewardship.

social responsibility? It is not part of the management function. Perhaps he is right to say so. However, what he had not said is that social responsibility is not stewardship responsibility. Management as a whole is the steward of the entity, and stewardship responsibility is all about management function. Some corporations do participate in projects that are for the common good. Perhaps it is for show, but we hope that there is at least some genuine goodwill. An international competition held in Toronto in 2005 named the “Students in Free Enterprise World Cup” saw 34 large corporations coming forward to sponsor the event. Such corporate initiatives, which claim to be for the common good or a means of sharing profit, are quite different from “giving it back.” Let us look at the example of an owner of a mining company that pays slave wages in a foreign country. The company makes a profit and the owner “assumes social responsibility” by making a donation or sponsoring a social project such as the redevelopment of a hospital or university in exchange for a named wing or foyer. This is quite different from an anonymous donation. The former is about self-glorification and a form of immortality, while the latter is a fulfillment of stewardship responsibility. Is it good stewardship when profit-sharing or “giving back” to a university or hospital is not about putting something back

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where the minerals were taken from, but is about “helping” modern cities that have nothing to do with the damage done by the mining operators? Figure 4.3 illustrates how stewardship is about a series of concentric responsibilities, which are all related to one another and intricately entwined. Corporate support of university education and hospitals in cities is an important initiative in corporate social responsibility, but it has little to do with the towns and villages where the corporations have made their fortunes. Perhaps this is another type of wealth distribution system, like Robin Hood in reverse. In The Corporation, Milton Friedman remarked on corporate social responsibility, saying (paraphrased here by the author): How do you define “socially responsible”? What business is it for a corporation to decide what is socially responsible? That is not their expertise nor is that what their shareholders want them to do. Therefore, for them to do so, I think they are going out of their range. Friedman is right, but there is no way anyone can say that management has no stewardship responsibility or accountability — that is the difference. It should be clear to all of us that we are not the owners of Earth; we are just its inhabitants (Fig. 4.4). As inhabitants of Earth, we cannot claim ownership of the Earth or any part of it; we are its stewards. The Earth in its entirety has been bestowed on us for our care. More importantly, it

Debt owing to the future

Unpaid environment and nature s contribution Unpaid fruit of labor Shareholders entitlement

Fig. 4.3 Perceived corporate management’s stewardship responsibility and accountability.

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God s gift to mankind and all other living beings so that we can all live together in harmony doing God s will

Nature: ecological development originating from the Sun. All living beings live in accordance with environmental variables. Human beings are part of the environmental variables. Ecological balance accommodates all living beings who live in peace and harmony

Planet Earth: home to all living beings human beings + all other beings Assuming all living beings are under human control and at man s mercy

Ownership:

right to make proprietary decisions and act on them within the framework of legal system

*Making proprietary decisions and acting on them for the satisfaction of eight areas of needs and greed. Concern for sustainability is not an option

Stewardship: Responsible and accountable for all resources entrusted to humanity

Proprietary decision and action taken to satisfy needs, also assume stewardship responsibility

Stewardship accountability and long-term sustainability

Fig. 4.4 Distinction between ownership and stewardship on different basis in the Earth environment. *

Note: See Chapter 3 for Maslow’s eight areas of need. Sustainability is not clearly or distinctly noted or included in any of the eight areas of needs.

is also meant for future inhabitants, human and otherwise. While ownership is only a legal device used to facilitate transactions among people, the purpose of stewardship is to increase the utility function for ourselves and all other living beings on the planet.

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Questions for discussion 1. Ownership is all about making proprietary decisions. With ownership, we have the right to make decisions for whatever we own. Do you agree? Why? 2. So far, there is no provision in our legal system to determine how much an individual can own. Do you think there should be such a limit? Discuss. 3. Is the phrase “immoral, but legal” valid? Is there anything wrong with our legal system? Explain. 4. The market economy is governed by the invisible hand. Would it be fair to say that this invisible hand is owned by man? If so, why then is it not possible to ensure that the system works for both the individual in the marketplace as well as for the common good? Explain. 5. Poverty is man-made. Do you agree? 6. What are the differences between ownership and stewardship? Why should they be different?

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Chapter 5

Production

The Making of Different Combinations* “We have not inherited the earth from our ancestors, we have only borrowed it from our children.” Anonymous 5.1 Entrepreneurship Entrepreneurship — a popular buzzword in academic institutions, the marketplace and governments today. The noted economist Joseph Schumpeter said: “Whatever the type, everyone is an entrepreneur only when he actually carries out new combinations.” While the making of different combinations may make an individual an entrepreneur, the author’s opinion of an entrepreneur is a productive agent who innovates or creates, for both self-interest as well as the common good. Making money is primarily driven by self-interest; how to make it to serve the common good as well is the challenge. Examining the way infants develop, one will notice that they start with almost no awareness of their surroundings, other than the ability to respond to bright lights, sounds, and warmth. As they grow in awareness, they begin to touch everything within reach, sometimes even putting * The making of different combinations is a phrase used by Joseph Schumpeter to denote entrepreneurship.

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things in their mouths. Such early discovery builds up confidence. As they develop mental associations, they learn to manipulate things in order to get what they want — first their caregivers, then the objects around them, making different combinations to create new things for themselves. This desire is fundamental to all human beings, and is a part of our continued learning process. The circumstances for adults are different from that of children’s — the traditional expression of creative and innovative activities usually relates to goods and services, hence the use of the term “production.” The “end product” of every production process contains “labor,” “materials” (resources) and related expenses. As in all things made on Earth, occupancy contribution is also included as part of the production “cost.” “Cost” connotes sacrifice. Sacrifices are made by humans, together with the contributions made by the environment, the services rendered by nature and the provisions taken from nature. While reflecting real costs, these are not all-inclusive; other contributions may need to be taken into account later. Of all the living beings on the planet, humans are unusual in the way they change their environment, that is, to make combinations of resources, to suit their own needs. The rate at which humans make new and different combinations in new and innovative ways is essential for their continued survival on this planet. This need, which is rooted in human nature, varies during one’s lifetime, and is different from individual to individual. There are an estimated 731 billionaires in the USA, and perhaps half that number throughout the rest of the world. What drives individuals to continue to want to increase their wealth in this fashion, to continue to accumulate wealth despite having more than they could ever want in a dozen lifetimes? As Maslow indicated, people are initially motivated by the very basics of survival to secure the acquisition of the basic sources of subsistence. Later they are motivated by the need to protect their “legacy” for the future, which is most likely in the form of children, but it could also be their business, intellectual legacy or some other thing they value. They are perhaps motivated by the “selfish gene” here, a theory that suggests human nature has its root in the “desire” of every gene to survive. It will be more correct to say that the more successful a gene is at surviving, the

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more of that gene will be available in the future. Protection of that legacy requires the accumulation of things of substance, hence the desire for ownership and the desire to make proprietary decisions. 5.2 Survival Survival instincts are inborn. Newborn infants have no means to acquire resources but they are able to express themselves and their needs by crying. As their brain develops, their hand coordination increases. They will grab at anything within their reach as they explore the world around them. If anyone attempts to take the object away from them, they will likely cry. The desire for survival, expressed through crying, and the need to explore and innovate thus predate the desire to acquire. Observation of the expression of entrepreneurial spirit in business creation would suggest that people who create new ventures are more often motivated by the need to survive rather than the need to make money. Although money is made from these ventures, the latter also provide jobs and strengthen the local economy as they are often locally based. Here are some examples of this kind of motivation: 1. Refugees and immigrants typically arrive at their new homes with minimal financial means, language difficulties, little education, and few skills, which will help them to land a decent job. While starting a new venture to create a product or service is often an act of desperation, it is also one that will allow them to decide their own fate, where hard work and effort can be rewarded. 2. School dropouts and children growing up with little formal education remain common, even in societies where universal education is available. The situation is worse in the very poor countries where most of the young people outside the privileged few have little chance to receive a good formal education. Those who fail in school or lack education are often seen as failures and risky employment prospects. Yet these people often drop out of the system through no fault of their own, or they may never even have had the opportunity of an education. These include Richard Branson (Virgin Records, etc.), Thomas Edison and Benjamin Franklin. Indeed, Bill Gates dropped out of Harvard, though he was certainly not underprivileged before that.

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3. Dissatisfied homemakers who have followed the traditional route now find time on their hands as their children are all grown-up. Often, they are not fighting for survival in the sense of having to provide basic food and shelter, but they may be seeking ways to establish new identities for themselves outside of raising their family. Ventures such as opening a restaurant, providing childcare facilities to others or developing new products are all common outlets of their expression. 4. “Corporate refugees” are another not uncommon category of people who create their own ventures to enable them to make proprietary decisions. One particular group are women who have attained a certain level of success in the corporate world, and then for whatever reason, “hit the glass ceiling” and find further promotion difficult. Full of energy and ideas, they are the ideal candidates for starting a new venture, away from the unfortunate corporate subcultures that hinder innovation and success. There are also other groups of people who suffer from similar problems, whether due to lifestyle requirements, age, discrimination or some other reasons. Taking life into their own hands, some of them move on to start their own business with the experience, skills, business knowledge and established networks of contacts that they have acquired. The examples mentioned above illustrate that pressure and particularly changes in circumstances have made it necessary for some people to take matters into their own hands in the interests of self and the common good. It is a matter of making different combinations of the resources available, including the individuals’ own talents, in order to make the environment better and more conducive for living. It is this motivation that makes it possible for human beings to change the environment to satisfy their needs and desires. The idea of individual self-interest, ultimately expressed at the “selfish gene” level (noted above), was first and foremost expressed by Bill Hamilton, the great evolutionary theorist, and popularized by the writings of Richard Dawkins. This has formed the foundation of much of the modern standpoint on human behavior, as the author sees its close association with the need for survival and the desire for ownership.

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In our global system, patent, copyright, intellectual property and other aspects of ownership are recognized by international law. They protect the rights of the individual creator, be it inventor, writer, or artist, while recognizing individual effort. The recognition of ownership goes beyond the pure need for survival. In the same way, we need to go beyond the understanding of survival of the individual and go towards understanding the survival of our progeny. In both cases, actions are taken that go beyond the simple question of survival and into why we act to protect our children or accumulate more and more wealth. The former concerns the continuity of our genes, even if we ourselves cannot continue living. The latter is about building legacies, even if we cannot take it all with us when we die. 5.3 Ownership and the Accumulation of Wealth The author has devoted considerable discussion on the topic of ownership as it is one of the issues at the heart of the challenge, and because economics has so far been entirely based on the human need to make proprietary decisions in the allocation of resources. Ownership is a matter of “taking charge”; first of all to satisfy very basic needs and to pursue further comforts as insurance against hard times, in order to secure a better life, which perhaps includes honors, wealth and fame too. A push-pull relationship among the three — survival, selfishness and the need for ownership — is illustrated in Figs. 5.1 and 5.2. Figure 5.1 shows that ownership is a direct result of the need for survival and the development of selfishness. Figure 5.2 shows how creation and innovation lie at the heart of life, bringing in resources to make new combinations and enhancing the process of life itself.

Survival

Selfishness

Ownership

Fig. 5.1 Survival, selfishness and the need for ownership.

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Output To create and innovate

The making of different combinations

Employment of resources Infusion of capital  where money does all the talking

Labor, resources, land, occupancy, bureaucrats (organizations, government services)

Fig. 5.2 The cycle of life based on the need for ownership and to make different combinations.

A lifelong challenge for any individual, the making of different combinations must have at least two elements — self-interest and the good of others. It is the second element that makes economics a discipline that acts for the good of humans as a group. On a smaller scale (micro level), this refers to those involved in the collective working environment, and on a grander scale (macro level), the work of nations and groups of nations. Every person is a supplier of something, either goods or services, for self-interest, and is known as a consumer. Consumers are traditionally represented by the demand curve, while suppliers form the supply curve. If the demand meets or equals the supply, an equilibrium is reached. Otherwise, the product will move towards the point of equilibrium by means of adjustments. This is usually represented by money and price, and also conceptually by the movement of the curves themselves, for example, by a reworking of the product as shown in Fig. 5.3. In fact, the entire market economy concept is found in Fig. 5.3. The demand may go up and down, as does the supply; it is the price that pushes the curves. The demand curves (D and D1) in economic analysis do not represent economic reality because they make no clear distinction

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Stewardship-Based Economics X S S1 D1 D 0

Y

Fig. 5.3 Supply and demand.

between the cost (represented by supply curves) used for current production and the capital that must be maintained for use by future generations. The discount theory brings the future to the present by recognizing this important concept, but the quantification is far from a reflection of how we consume and waste capital of the future.

A simple exchange system where the supplier and the would-be buyer (demand) establish their own transaction is generally called a barter system. One could exchange a one-year old laptop for a HDTV system, a small rowboat for a ten-year-old automobile, or a used exercise machine for a day of clearing up a garden. In one case, a man who had a single red paper clip got himself a house through a series of 14 trades (http://onered paperclip.blogspot.com/2005/07/about-one-red-paperclip.html). All these transactions could be done without involving money. However, governments frown on this form of trade because there is no information or basis for the collection of taxes. 5.4 Employment of Resources In traditional economic terms, the making of different combinations, which we have become accustomed to calling “production,” employs factors such as labor, materials or resources, land occupancy, other forms of services provided by suppliers and, of course, money from money suppliers such as banks and investors. All transactions in our exchange system are done in monetary terms, but they are viewed as costs or sacrifices. Although exchange systems have existed for a long time, cost determination

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has always been a great challenge, long before the publication of “A Statement of Basic Accounting Theory,”1 a landmark document that pays extensive attention to this problem. The document maintains that the needs of investors are accounted for if the accounting process is seen as one that identifies, measures, and communicates information to permit informed judgments and decisions by users of the information. This work was an enormous success and had substantial impact, which placed cost determination in the hands of accountants as a result. The use of resources is a critical element in the determination of cost. However, there remains the question of whether accounting methods of cost determination accurately reflect the elements that go into cost and resources in particular. 5.5 Cost and Costing Cost is a sacrifice; it is measured and communicated to those who have an interest in the incurring process. In accounting, when communicating information needed by users, certain criteria must be observed, based on postulates that are used in today’s accounting practice. The recognized sacrifices in accordance with accounting principles are as follows: Direct labor and direct materials. These refer to human efforts or sacrifices and resources acquired through the exchange system that are directly inputted into a service or identifiable from the end product. Indirect labor. This component of human effort is recognized as an indirect product or service cost. Although it is not directly identifiable or associated with a product or service, it still makes an important contribution and cannot be disregarded in product or service costing. Indirect manufacturing or production cost. These costs include a variety of sacrifices that support the production, selling, administrative and financing efforts. Along with direct labor and materials, and indirect labor, they constitute a total sacrifice on the part of the producer or corporation, which is recoverable through selling the product or performing the service. 1

“A Statement of Basic Accounting Theory,” American Accounting Association, 1966.

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The reward received from product sales or services performed usually exceeds the costs incurred. In traditional terms, this is known as a profit, which belongs to the shareholders. However, the issue of costing is far from over because there are other cost recognitions and costing complications that we must recognize, if the “economic” reality is to be reflected in the study of economics. 5.6 Issues of Concern Inasmuch as accounting practice needs to reflect economic reality, accounting and economics are in many respects quite remote from each other. While accounting quantifies everything that can be transacted, signifying what it is, economics, on the other hand, prompts what it should be. There is an old and perhaps unkind joke that is circulated in the business world: “Accountants can show us all kinds of profit, but we do not believe them. On the other hand, economists tell us what a profit should be, but they cannot show us where it is.” 5.6.1 Contributions from silent partners There are innumerable silent partners that contribute both directly and indirectly to support economic undertakings, which are unaccounted for. These include: –

2

The Climate. Changes in climate around the world can be correlated to an increase in the levels of greenhouses gases and the emission of these gases as a result of human activities in the last 50 years, although proof of causation is difficult. The potential offenders are legion, ranging from users of intercontinental travel to automobiles and dirty power sources. Just as the tobacco industry denies the negative effects of its product on human health, the energy industry has been accused of putting roadblocks in the determination of the true causes of climate change. For example, UK’s Royal Society, the country’s leading academy of scientists, recently published a letter accusing ExxonMobil of funding 39 groups, which misrepresent scientific evidence, to the tune of about US$2.9 billion.2

http://image.guardian.co.uk/sys-files/Guardian/documents/2006/09/19/LettertoNick.pdf.

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–

–

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Land use. Examples include the clearance of rainforests to plant harvestable crops or the conversion of wetlands to make them “usable” for housing. These activities destroy the habitat of wildlife and have consequences on the conversion of greenhouse gases, which adds to the effects of greenhouse gas emission. The air. While the effects of climate change are long-term, other air pollutants affect human, animal and botanical health directly, and thus have a cost factor associated with them. There is no direct recognition of this factor in accounting practices. Water quality. As with the air, industries and individuals pollute the water with discharged waste, detergents and chemicals from pharmaceutical manufacturers and others.

The above are just some of the real cost factors that many industries fail to recognize and reflect in their costing. What is hindering universal recognition of these costs is the issue of how they can be recognized; this is still in the hands of the accounting profession. Measures such as taxes for environmental health preservation have been proposed, but levying taxes or imposing fines on polluters require government legislation and action. The fundamental challenge is still in the hands of decision-makers in the private sector. Here, the help of professionals is needed to create a subsystem that makes it possible to recognize the contributions of silent partners to corporate entities and economic activities in general. The following is an example of what has happened in Canada, which many people consider to be one of the most progressive and advanced countries in the world. Pallbearers carried 327 Ontario workers to their graves last year as a direct result of workplace conditions. Another 359,353 claimed compensation for work-related injuries. Missing from the official record were an estimated 6000 workers killed by cancer, lung disease and other ailments, all attributed to toxic substance exposures in their workplaces. A Tribute to Workplace Victims — April 28, Day of Mourning, CUPE 3906, Hamilton, Ontario

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So far, there is no costing record to show that 327 people lost their lives as a result of their workplace conditions or that 6000 workers died from cancer. Why? There are also other costs. In March 2006, National Geographic published the following: However, on account of the need for cheap energy, big mining companies hit pay dirt by scalping mountaintops in the billion-dollar coalfields of southern West Virginia. But residents pay a high price in noise, air, and water pollution.

Most of us will agree that the statement, “We have not inherited the earth from our ancestors, we have only borrowed it from our children,” is a reasonable summary of our responsibilities to this Earth. Yet we are guilty of ripping off the Earth and emptying it of its valuable resources without giving anything back. Accounting so far has no particular procedural and disclosure requirements to deal with this fact, while economic analysis views it as capital. 5.6.2 Labor cost — fruit of labor versus wages paid for work done Both direct and indirect labor are vital components of the costing system and determinants of product costs. In direct labor costs, disbursement in the form of wages or salary payments is recognized, but the fruit (in Karl Marx’s words, surplus value) of their labor input value is not part of the labor cost. The system withholds the “surplus value,” which ends up in the profit pot by design to increase the share value. To illustrate, assume a product’s labor cost according to current practice is US$10 per unit or per hour. The company relocates its operation facilities to a developing country, where labor productivity is the same or better than at home, but workers are paid only US$0.50 per unit or per hour. Consequently, there is a labor cost surplus of US$9.50 (US$10–US$0.50). This surplus value of the fruit of labor of US$9.50 will go into someone else’s pocket, not to the workers who provided the labor to produce the product. Historically, the cause of labor unrest has often been linked to the cost of labor or the human value inputted into a product or service. In fact, Karl Marx’s revolutionary ideas about the class struggle originates, at least in part, from this very dilemma. Still very much a concern for many, it has

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resulted in some hundred years or more of revolutionary movements. In recent years, the problem has been exacerbated by global expansion and internationalized businesses, which set up plants in developing countries, paying slave wages to the local workers. Although they may claim to be helping these developing countries by providing much needed employment, with the argument that any job is better than no job, they cannot escape the fact that they are exploiting people who lack bargaining power. Based on what is in practice, Fig. 5.4 shows that costs cannot be quantified if they are not recognized, even if they are identifiable. Comparing accounting costing and costing that includes economic costs, it seems fair to say that our current costing system has a clear bias that favors an inflated profit, facilitating the accumulation of capital at the cost of, or sacrifice from, nature and labor. 5.7 Capital Capital, in both theory and practice, refers to something very basic — the things that are owned and used to provide ongoing services. The British Direct labor

+

Indirect labor

Direct material

+

Indirect material

May be segregated into variable and fixed

Shop cost

+ Manufacturing or factory overheads Commercial and administrative cost + financial service cost (??) Taxes and other government services (??)

Costs need cash settlement, measurable based on current acceptable accounting practice

Fig. 5.4 Product and business costing in the current accounting model. Costs can only be incorporated if they are recognized by the system. Income tax will only be levied after a tax payable status is determined. Other costs such as environmental cost and unfair wages are not in the system, and cannot be included. In stewardship-based economics operations, shareholders are also providers to the entity, the same as other providers. Therefore, they receive an entitlement. In this case, economic costs are recognized. The cost model is as illustrated in Fig. 5.5.

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Economic cost = A

Costs need cash settlement, measurable based on current acceptable accounting practice

B

Measurable sacrifices made by workers and owed to the environment, unpaid or underpaid resources taken from nature. Needs cash settlement

+

+

+ Sacrifices made by humans in serving business other than wages/salaries received from the regular pay system

C

Resources taken from the Earth but their contribution is ignored or not renewable Cost of war  the loss of human lives, resources and other sacrifices made by humans and the environment’s contribution to the war Irreparable damage to the environment, resources belonging to future generations used for the present, lost and unaccounted for (e.g. unknown species lost through rainforest destruction to make room for human endeavors)

Fig. 5.5 Economic cost of any product or service, if properly accounted for, should include all of the following, plus any other sacrifice made by humans as well as nature’s contribution.

nobility have an old saying, “To sell the silverware for groceries,” which is equivalent to selling off the capital in exchange for impermanent benefits, resulting in the end of the family’s heritage. Similarly, the Earth has capital, a gift from nature that helps to sustain the continued existence of human beings and other living beings on Earth. However, if we continue to dig everything from the ground, strip away the surface of the Earth, and clear the ocean floor, what will be left for the future? Capital, which is subject to the discipline of economics, has been a great challenge to many thinkers. The most striking and well-known work

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on the subject is Karl Marx’s Das Kapital, which led Lenin to overthrow the Russian Empire to establish the beginnings of Soviet Communism. Mao Zedong, the late founder of the People’s Republic of China, and his successors also claimed to have followed Marx’s ideologies in one way or another. In fact, long before Mao, Sun Yat-sen, who founded the Republic of China, also shared some of Marx’s thoughts, in particular his land policy in the Principle of People’s Livelihood, which stated that land should belong to the state. In his deliberation, Marx advocated that capital gains, which increase in reality value, should be subject to a high capital gain tax rate, since the contribution of reality (including land) value is a contribution of society, hence the individual’s receipt of such gain should be kept to a minimum. 5.7.1 Capital — a permanent source of service Besides Karl Marx, many other thinkers have explored ownership-based economics. These include David Ricardo (increasing land value as land is progressively used), Clark and Knight (land is indestructible, hence a source of service permanently available for production). Marshall, on the other hand, considered capital as an instrument to generate income. Whatever its definition may be, capital as a permanent means used to generate value or income can be seen as originating from two distinct sources. One is man-made, the other is provided by nature, such as land, and is a clear resource that should always be there to provide service for all. However, the latter, once transformed or translated into monetary terms, will end up on a balance sheet as transactions labeled in some arbitrary fashion by accounting practice. More importantly, ownership will be established. With the established ownership endorsed by the law, the “rightful owners” will eventually dig up and exploit all the available resources. This problem has long been recognized. Other contributions on the nature of capital include the works of Bohm-Bawerk, von Hayek and Fisher, all of whom considered the capacity to provide a flow of services over time as the unique attribute of capital. Consequently, interest is to be paid for the services provided by capital, but the capital itself must remain intact. The taking of resources out of Earth, turning them into commodities and generating money to fatten the individual’s wallet give no consideration to capital’s unique

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nature, or the debt to the future that must be paid for the use of resources that are meant to serve future generations as well. Although all businesses, in one way or another, operate on the assumption of making a profit, what matters most is the seldom-asked question: How is it possible to make a profit if capital is not returned for future service? 5.7.2 Legalized pilfering In ownership-based economics, what we take from the Earth is known as capital. In accounting, for the purpose of recording and determining what is to be distributed, the same is viewed as assets, amortized into product cost and recovered from sales. Once any part of nature is assigned a monetary value, legalized pilfering or stealing from nature can begin. An example is as follows: Approximately 100 million barrels of oil reserves were discovered, which were valued at US$40 billion according to current market prices. An accounting entry is established to record the discovery and to establish the claim: Dr. Extracting rights for petroleum deposit US$40,000,000,000 Cr. Shareholders’ capital US$40,000,000,000 The shareholders have thus established their personal claim to the petroleum deposits. Part of the Earth is hence separated from its origin, transforming it into a commodity, then cash, and eventually ending up in someone’s pocket (Fig. 5.6). What we have just witnessed is the taking of part of the capital that is supposed to be there for the future. There is nothing that can be done to return petroleum deposits to the ground. Extracting rights may be amortized over a period of time against the revenue received from the sale of petroleum. The cost of processing

Petroleum underground

Assets

Cash or its equivalent

Pocketed profit

Fig. 5.6 Process by which capital reserves end up in someone’s pocket.

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and refining petroleum is not included in the above illustration, since it will be recovered as the cost of refining and the cost of doing business or the cost of sales. The point here is that the value of petroleum is never restored, rather it ends up in the form of cash in somebody’s pocket. 5.8 Discount Theory and the Future Seldom a major issue in economic analysis, the discount theory, which attempts to discount the future for the present, is a serious crime against future capital. What we call “consumer credit” is a clear example of how rapidly we cut into the future. The expansion of consumer credit spending is not real economic growth as it is reported to be. Rather it inflates real growth by borrowing from the future for the present. In the last few years, consumer credit (borrowing) has been increasing at a phenomenal rate. Consumer credit in China, which was reported as near zero in 1995, has grown to approximately US$240 billion by the end of 2004.3 In the United States, the total debt level reached US$25 trillion or some US$450,000 for a typical family of four, with an estimated total consumer credit debt of US$2.2 trillion in 2005.4 Not unexpectedly, the average consumer debt for credit cards, automobiles and such hit record highs.5 According to Standard & Poor’s, in 2003, households racked up US$412 billion in credit card charges, up 185% from five years ago. 5.8.1 Economic growth built on borrowing from the future Thus, countries claim economic growth without accounting for the fact that future capital is being borrowed through consumer credit spending which is discounted to the present. For example, using Citibank’s calculation method, a balance of US$1000 at an interest rate of 17%, with a pay-off of 10% from the balance, will take 63 months to pay off. If the balance of US$1 trillion is a constant through careful management, over a period of 20 years with a low interest 3

S.A. Tay, “China Weighs Credit Database Options,” Asia Times, China Business, March 16, 2006. 4 http://www.creditcards.com/statistics/statistics.php. 5 F.W. Engdahl, “Is a USA Economic Collapse Due in 2005?” (http://globalresearch.ca/ articles/ENG407A.html).

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rate of 10%, the total future value of US$1 trillion will be US$8.514 trillion (present value of US$1 receiving annuity for 20 years at an interest of 10%). While the above is for illustration only and the figures used are unrealistic, it does serve to demonstrate the cost to the future. The example suggests that future human beings would have to work and generate sufficient value of approximately six times the value that we wish to spend via credit on products and services created now. If they continue to spend as we do, the impact on living standards and the use of nature resources is unthinkable. 5.9 Capitalism — Can We Make It Work? To some people, capitalism as a method of accumulating personal wealth through creation, innovation and productive methods and distribution is not a thoughtful doctrine. Rather it is a process of accumulation based on greed, which takes advantage of the blind “justice” of a price mechanism that does not have the best interests of everyone, even though creation and innovative activities are supposedly to be in the interests of man. Through the years, philosophers and economists have developed various thoughts in respect of the notion of capitalism. This is shown in Table 5.1. From what we know, capitalism works in today’s market economy and monetary system, but only for the rich and not the poor. Since the poor have no residual, which means no seed capital, they cannot accumulate wealth. Capitalism will continue to work in the market economy to facilitate the accumulation of personal wealth by individual(s), while generating poverty in the process. The reason for this is simple. No individual can accumulate wealth in substance, for example, no single person can accumulate mansions by the thousands, vehicles by the millions, or food by the tons just for personal consumption. Money or legal tender is, however, a powerful tool that can be accumulated in any imaginable sum and still not be enough. This is how capital accumulation works, and how individual wealth accumulation has no limit. This topic shall be explored in greater detail in Chapter 6.

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Table 5.1 Definitions of the various interpretations of capitalism in retrospect.* Author

Definition

Source

E. Heckscher

Modern capitalism as that Economic History Review, “unwholesome Irish stew.” Vol. 7, p. 43 J.H.R. Carmwell True capitalism means an In Definition Capitalism and economy of free and fair H.E. Czerwonsky competition for profit and continued work opportunity for all. R.H. Tawney As being no more than Religion and the Rise of a political catchword. Capitalism (1937 edition) W. Sombart The origin of capitalism is Der Mederze Kapitalism in the development of (1928 edition) states of mind and human behavior conducive to the existence of those economic forms and relationships that are characteristic of the modern world. E. Hamilton The system in which wealth Economica, November, issue other than land is used for 1029, p. 339 the definite purpose of seeking income. F.L. Nussbaum A system of exchange History of Economics economy in which the Institute of Europe orienting principle of (1956), p. 61 economic activity is based on a division of the population into owner and property-less workers. K. Marx A system of production for Capital (1906), Vol. 3, a distinct market. The p. 914 mode of production is not merely to the state of technique, but also to the social relations between men, which resulted from their connections with the process of production. (Continued)

(Is this the title of a book?)

(missing word here?)

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Stewardship-Based Economics Table 5.1 (Continued).

Author

Definition

Source

G. Schmoller

The relationship that exists between the production and consumption of goods, or the length of the route which the goods traverse in passing from production to consumer. The fundamental feature of capitalism is the wage system under which the worker has no right of ownership of the wares that he manufactures. He sells not the fruits of his labors but the labor itself. A phase when the possession of capital and the habit of pushing trade have become dominant in all the institutions of society. Capitalism may be considered as “the process of net capital formation.” However, it requires that productive resources be re-allocated to “toolmaking” … People with the monetary resources to buy the services of productive agents do so, and they direct these services into the production of capital. The people who accumulate money resources and the people

Principles d’ Economic Politique, Passim (Mercantile System), pp. 8–9

E. Lipson

E. Cunningham

B.S. Kierstead

Economic History, 3rd edition, Vol. 11, p. xxxvi

The Progress of Capitalism in England, pp. 24, 73

Capital, Interest and Profit (1959), pp. 5–6

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Table 5.1 (Continued). Author

R.W.Y. Kao

Definition who make the decisions about what kinds of new tools to produce and in what quantities are not the same people. The first we shall call capitalists, and the second group entrepreneurs. Capitalism is legalized stealing from the environment and from the future resources of our children and children’s children. `

Source

Based on Exxon’s TV commercial claiming: “We develop resources of the future for the present” or other commercials such as: “We bring the future resources for your present enjoyment.”

** Source: R.W.Y. Kao, Raymond W.Y., An Entrepreneurial Approach to Corporate Management (Prentice-Hall, 1997), pp. 115–117.

Questions for discussion 1. Production is essentially the making of different combinations. Do you agree? 2. Among the various inputs used for production, labor cost is the prime cost. Why are certain sacrifices made by the working population not recognized as part of production cost? 3. In capitalism, laborers sell their labor, not the fruits of their labors. Explain. 4. Economics is supposedly a discipline that guides business and government decision-makers in working for the common good and the interests of the general population. However, in reality, it is a mechanism that facilitates the accumulation of capital or wealth for some, while exploiting the labor value of others, along with the draining of natural resources and the environment. Do you agree? Why?

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5. Do you agree that “we have not inherited the Earth from our ancestors, we have only borrowed it from our children?” Why? How is it possible to convince others that all of us have a stewardship responsibility to care for what nature has provided for us? How should we learn to share rather than to live in greed? 6. Investors are those who provide enterprises with money (money suppliers such as the banks), with the expectation of receiving a desirable return. Do you think that shareholders should receive at least a reasonable fixed return, the same as those who supply money to the business? Why? 7. How can mining operators return what they have taken from the Earth, particularly from underground? Taking what has been deposited there for millions of years, mining operators have reaped undisclosed personal fortunes. As a form of return, consider a billionaire who donates a few million dollars to the university and hospital in a large city. His operations have caused an environmental disaster in the mining town. As a gesture of concern, he turns the mining land property over to the local government. The local government plans to build a golf course there to attract visitors and earn revenue from the tourists (but no one knows for sure where the money will go). Comment on this scenario. 8. If all costs are not accounted for, where is the profit? Discuss. 9. Reducing pollution and reclaiming contaminated land are the responsibilities of the government — this is what we pay taxes for. Discuss. 10. In a market economy, such as the one we are in now, whose responsibility is it to deal with growing poverty?

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From Slave Trade to Globalization

6.1 Trade, War and Peace The beginnings of globalization can perhaps be found in the colonial period of European history, after the great period of exploration when Columbus (note: Columbus was not the first one who discovered the American Continent, rather it was the Chinese; see “1421”, the year China discovered the World, authored by Gavin Menzies), Magellan, Cartier, Cabot and others found a whole new world to explore and exploit. Although the Europeans had known about China for centuries (certainly the Hellenistic Greeks had relations with China), the expansion of European power led to the inevitable — war. War and peace are two words loaded with emotion — peace with joy, and war with sorrow. To the author, one of the greatest tragedies is found in the long history of the relationships between China and the European nations during the 19th and 20th centuries. By the beginning of the 1800s, European supremacy over the rest of the world had become apparent. The military might of Great Britain, developed over a series of wars with France that ended with the fall of Napoleon, was now concentrated on the maintenance of an overseas empire, something that was unprecedented in history. Trading in goods from China was extremely lucrative for both the Europeans and Chinese. However, the ruling Qing Dynasty’s trade restrictions shifted the balance in favor of imperially sanctioned monopolies. The preference for payment in silver in particular was a disadvantage to Britain, who had to buy silver from continental sources. The British eventually realized that an illegal trade in opium from British-controlled 101

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Bengal would offer a much higher profit. Between 1821 and 1837, import of the drug to China increased fivefold. Alarmed by the trade losses and the estimated two million Chinese habitual opium users, the Qing government attempted to end the opium trade. Although the attempt was initially successful, conflict over the treatment of rioting British sailors in 1839 gave Britain the excuse it needed. Subsequent events led to an open war, where China proved to be no match for a modern army. In 1842, the war ended with an unequal peace treaty, the Treaty of Nanking. Its first and last articles outlined the key details related to British interests. The “supplementary treaty and general regulations of trade” stipulated after the conclusion of the Treaty of Nanking were “abrogated” by the first article. That supplementary treaty made provision for British consuls to reside in Hong Kong and five Chinese ports to be opened for British commerce. Hong Kong was ceded to Britain for 99 years, which eventually lasted until 1997. Further wars and unequal treaties followed, with the Chinese compelled to accept the treaty of Tianjin (1858) and others, which sent China spiraling into the status of a second-rate colony. A modern, prosperous China is emerging only now, and this is only one of the tragic stories of the first round of globalization. In the Americas, Africa, and Asia, the story of Europe’s colonization of the world is one filled with blood and violence. Colonial expansion and trade are also closely linked with slavery. In the 18th and 19th centuries, a multi-part trade system developed based on the slave trade. Salt was moved from England to North America to salt cod, the cod were then transported to Jamaica to feed the slaves who were transported from Africa to provide free labor to produce the sugar that was sold in North America and England. When examined closely, many similarities between the old slave trade and the new practices of globalization can be found. Some may find this surprising, but others may not, since both are about “trade.” 6.2 From Slave Trade to Colonization and Globalization “Nobody ever saw a dog make a fair and deliberate exchange of one bone for another with another dog. Nobody ever saw one animal by its gestures and natural cries signify to another, this is mine, that yours; I am willing to give this for that.” Adam Smith, The Wealth of Nations

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Whether or not the above is true,1 trading between animals will certainly be the exception rather than the rule. If one were to observe animals, their usual form of exchange is through either taking (the stronger or quicker from the weaker) or stealing. Trading is a system developed by humans to exchange surpluses — it could be argued that even beggars trade, offering a relief of guilt in exchange for money. Trade probably started peacefully as a way of preventing conflict and learning to live together to improve living standards. Simple trading has progressively evolved to more complicated trading systems, and expanded from purely local activities to ones that span the globe. Although the evolution and development of more sophisticated trading systems can take place in a peaceful manner, the example of the Opium Wars shows us that if parties cannot agree on a trade, they are more than willing to force a trade whether their partners like it or not. The slave trade from Africa is one of the best examples of this, occurring at a time when Europe began to boast of its humanity and Christian values during the “Age of Reason.” 6.2.1 Slave trade The African slave trade, whose abolition was celebrated in the late 19th century with the end of the American Civil War, is a shameful part of human history. Nevertheless, it continues to exist today in an altered form — the practice of slave labor for the purpose of maximizing profits for corporate gain is still prevalent in today’s exchange system. The term “slavery,” though familiar and often used, is less often formally defined. For the purposes of this book, we will consider the following to be examples of slave labor practices: a. Employing human labor while paying substantially less than what the labor is worth, with the consequence that no residual is possible once survival needs are met. b. If a country has labor standards laws, which include a stipulated minimum wage rate to be paid to workers, yet the employer pays the workers a lower rate. 1

M.K. Chen, V. Lakshminarayanan and L. Santos, “How Basic are Behavioral Biases? Evidence from Capuchin-Monkey Trading Behavior,” Journal of Political Economy, June 2006.

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c. When any individual is forced into prostitution for the purpose of making a “profit.” d. Taking advantage of any individual’s need for a job in order to survive by paying him or her slave wages for the principal purpose of making a profit. e. Employment of forced child labor in any capacity. While slaves have been around since the dawn of history, it is the African slave trade that has made the greatest impact in making us aware of the harsh reality of how the “rich and powerful” were able dictate the lives of others and colored human history with shame. The Europeans justified slavery by arguing that they were providing an opportunity for Africans to become Christians. By 1540, an estimated 10,000 slaves a year were brought from Africa to maintain the diminishing populations in the Caribbean Islands. By the 17th century, the removal of slaves from Africa had become a holy cause that had the full support of the Christian Church. British merchants became involved in the trade and eventually dominated the market. They built coastal forts in Africa where they kept the captured Africans until the arrival of the slave-ships. The merchants obtained the slaves from African chiefs by giving them goods from Europe in exchange. In the beginning, these slaves were often captured soldiers from tribal wars. As the demand for slaves increased, raiding parties were organized to obtain young Africans. The African slave trade grew significantly with the development of plantation colonies in the Americas, especially in Brazil. Other countries involved in the European slave trade included Spain from 1479, the North American British colonies (later the United States) from 1619, Holland from 1625, France from 1642, Sweden from 1647, and Denmark from 1697.2 This sordid story is often referred to as “The Black Holocaust,” a name that refers to the horrors endured by millions of men, women, and children throughout the African Diaspora. In terms of sheer numbers, depth and brutality, it is testimony to the worst elements of human 2

“African Time Lines Part III: African Slave Trade and European Imperialism Timeline of African History, 15th through early 19th centuries.”

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behavior and the strongest elements of survival.3 Between 1450 and 1850, at least 12 million Africans were shipped from Africa across the Atlantic Ocean — the notorious Middle Passage — primarily to colonies in North and South America, and the West Indies. Eighty percent of these kidnapped Africans, or at least 7 million, were exported during the 18th century, with a mortality rate of probably 10%–20% on the ships en route for the Americas. The ugliest parts of the slave trade in the colonial market system still occur in many former colonies, now the breeding ground for modern forms of slavery and other similar business transactions, even in the 21st century. In Southeast Asia, women and young girls have been forcibly transferred from rural to urban areas and across national borders for the purpose of prostitution, with devastating impact on them and their families. Although many women’s organizations are working hard to put a stop to sex trafficking in their native countries, the reality of these practices occurring even in the 21st century is still shocking. 6.2.2 Colonization The slave trade and colonization went hand in hand; in the underpopulated colonies, slaves were deemed “necessary” to turn the colonies into marketable business propositions. However, even after slavery was officially outlawed in many countries, the exploitation continued. Colonial governments who wanted to promote the growth of commercial production saw the traditional system of land tenure as a barrier to what they conceived as “agricultural modernization,” or a more “rational” exploitation of resources in pursuit of profit. Colonial masters had one thing in mind — to exploit cheap or free labor and cheap available resources to support their own personal ambitions. With their inhuman attitude to what we may call “human rights,” it is difficult to believe that they belonged to such a thing as a “civilization.” The author recalls a personal experience that took place during his early school days. The principal addressing the morning assembly would always remind the students to remember how the colonial masters in Shanghai used to order the factory security guards to turn their machine 3

http://www.geocities.com/CollegePark/Classroom/9912/blackholocaust.html.

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guns on the workers who demanded wage negotiations because the wages they received could hardly sustain their simple lifestyles.4 The colonial systems were all, almost without exception, fed by cheap labor. For example, the Spanish system in the audiencias (judicial districts often found in the colonies) was exploitative, relying heavily on cheap native labor. Domestic industry was constrained during the colonial period because the audiencia was bound to Spain as part of a mercantile system. Under this arrangement, the colony functioned as the source of primary materials and the consumer of manufactured goods — a trade pattern that tended to enrich the metropolitan power at the expense of the colony.5 The Spanish system of exploitation may seem like a thing of the past, but the idea of economic expansion using cheap labor to exploit sources of primary materials so that the rich can benefit from the low cost and secure high gains for themselves still exists. However, now it comes under the very attractive name of “globalization.” 6.3 Globalization At its most basic, there is nothing mysterious about globalization. The term has been commonly used since the 1980s, reflecting technological advances that have made it easier and quicker to complete international transactions, both trade and financial flows. Globalization refers to an extension of market forces beyond their national borders. These are the same market forces that have operated for centuries at all levels of human economic activity — village markets, urban industries, or financial centers. On the positive side, globalization is essentially a part of market expansion. Markets promote efficiency through competition and the division of labor — the specialization that allows people and economies to focus on what they do best. Globalization offers greater opportunity for people to tap into more and larger markets around the world. This means they can have 4 As noted in the section on the Opium Wars, parts of China including Shanghai were taken by the British, French, Japanese and a few other powers as settlements (colonies within a country). These were called sectors. Each sector was completely governed by the colonial administrator. In effect, China had no jurisdiction over these sectors, so the machine gun episode was effectively outside of Chinese jurisdiction. 5 Source: US Library of Congress, Colombia Table of Contents (http://countrystudies.us/ colombia).

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access to more capital flows, technology, cheaper imports, and larger export markets. However, markets do not necessarily ensure that the benefits generated from increased efficiency are shared by countries that must be prepared to embrace the policies needed. Some form of government intervention is often necessary, and in the case of the poorest countries, they may need the support of the international community as well. In a profit-driven world largely motivated by self-interest, the pursuit of a global expansion of economic gain is a natural process. Seeking the cheapest possible labor and the most convenient and cheapest resources available to minimize input cost is all part of the “profit maximization” plan (Fig. 6.1). As always, the furtherance of personal wealth comes as part of the package. Globalization is an expansion scheme for pursuing “unlimited” growth in order to satisfy the desire of shareholders for a higher ROI and provide consumers with better-priced products or services. The bottom line is simple in business terms — offshore contracting, establishing branch plants or overseas operations where cheap labor and resources are available. Other than its similarity with slave labor and colonization with regard to taking advantage of cheap labor and resources, the offshore contracting

It is all about economic expansion and the making of profit and more profit.

Early period Slave trade: for cheap domestic and agricultural labor

More sophisticated period For economic gains and personal benefit; colonialism is nothing more than the exploitation of cheap labor and available resources backed by political and military power

More civilized In the name of shareholders interests, the already rich and well-to-do corporate decisionmakers expand their operations into less developed countries to take advantage of the cheap labor and resources available. Part of exchange system based on negotiation

Characterized by taking advantage of the need to survive

Fig. 6.1 Economic expansion in retrospect.

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of branch operations has been one of the more effective business expansion strategies for more than a century. The Japanese had their early experience of global expansion in the 1980s. For a period, Japanese companies “exported” their plants (branch plants), technologies, capital and technological personnel. They did not call it globalization, but said: “The multinational enterprise is a chain of companies operating under different national sovereignties, but under the same management.”6 6.3.1 Globalization — the family tree Although “globalization” is a word that has only recently become popular, the preceding sections show that it does have a long history, though not necessarily an honorable one. It is an indication of how it has evolved such that many of us are comfortable with it as the answer to the world’s challenges and, in particular, to help those in less developed countries achieve a better life. There are also people who think that we should globalize everything that can be globalized including ideas and concepts that are the very souls of independence, such as entrepreneurship and an enterprising culture. The author puts forth two related but separate views on globalization — one based on its “family tree” such as development; the other still on the same basis, except it is on a one-way track — the track of profit-making. From the progress point of view, economic expansion in the name of making profits is not entirely perverse. Information exchange, i.e. knowledge and technology, is an integral aspect of globalization. Direct foreign investment brings not only an expansion of the physical capital stock, but also technical innovation. Generally, knowledge about production methods, management techniques, export markets and economic policies is available at very low cost and it represents a highly valuable resource for developing countries.7 The most prominent example is the European Union, an organization of European nations that originated from the Treaty of Rome (1957), creating a united political and economic “superstate.” Each country remains a 6

I.A. Litvak and C.J. Maul (eds.), The Issues of Direct Foreign Investment: The Experience of a Host Country (Praeger Press, New York, 1970). 7 “Globalization: Threat or Opportunity?” IMF Staff, April 22, 2000 (http://www.imf.org/ external/np/exr/ib/2000/041200.htm).

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Slavery trade + colonial system of economic expansion

A chain of companies operating under different national sovereignties but under the same management

The multilateral trade system

Globalization

Free Trade

Operational model

European Union (25 member states)

Fig. 6.2 The globalization family tree (A).

sovereign nation with its own laws and government, but citizens of member countries can move freely from one country to any other member country in the Union. There is a free flow of resources, capital, services, technology and information, and now currency. The most important feature of this Union is the free movement of labor among member nations (Fig. 6.2). The current regulations governing the European Union require its member nations to maintain their inflation and unemployment rates below specified levels. The European Union also has the European Bank and European Monetary Fund, modeled more or less on the UN organizational structure, which has the World Bank and International Monetary Fund. Unfortunately, both organizations are having a difficult time reaching the poor because money is what the poor do not have. It would be a mistake to model globalization on the European Union. The characteristics of economic globalization are distinct from those of the European Union because there are broader cultural, political and environmental dimensions to globalization that have to be considered, and because profit is the clear motive for corporate expansion and economic globalization.

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Globalization is a historical process, the result of human innovation and technological progress. It refers to the increasing integration of economies around the world, particularly through trade and financial flows. The term sometimes also refers to the movement of people (labor) and knowledge (technology) across international borders. Today, there are countless corporations with globalized operations. Major corporations have operations expanded across all parts of the world, though much less so in Africa outside of the mining companies because there is not much opportunity there to make a profit. WalMart, Sony, Microsoft, Nike and Coca-Cola are some of the notable ones. In fact, all large corporations in the various industries such as manufacturing, merchandising, automobile, electronics and pharmaceutical are represented everywhere in the world, with particular expansion into China and the newly emergent countries of Malaysia, India and others that offer cheap labor and resources. The argument for globalization is that it is a solution (some of its advocates would say it is the only solution) to world poverty — that eventually we shall all get rich together. We rely on the market economy to get us to the “promised land” but unfortunately, the system facilitates the accumulation of capital and drives the marginally less fortunate to poverty. There are also ambitious people whose only goal is to accumulate more and more money, even at the expense of other people and resources, as well as the health of the environment. Since the fall of the Soviet empire, advocates of the Western-style capitalist democracy have been celebrating its triumph, without considering that political democracy has no meaning for the poor because “democratic” expression is usually linked to the rich in countries with a greater disparity of wealth. The author recalls someone saying: “Corporations are ‘political capital,’ how are the poor going to enter government when they cannot even afford a meal? Would anyone listen to them saying: Get me into office, I will speak for you and work for you?” It will be the biggest joke in the world if a homeless person stands in Times Square and proclaims: “Vote for me for President, I will make you all prosper and rich.” Although the democratic system in Western countries emphasizes “one person, one vote,” political parties can influence how voters vote by feeding them with information that will influence their decision on whom to vote into

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Slavery trade + colonialism

A chain of companies operating under different national sovereignties but under the same management + the multilateral trade system

Globalization + free trade

Profit-driven motive in the name of investors interests continues in the pursuit of unlimited expansion by employing cheap slave-like labor and taking advantage of cheap and available resources in countries whose people need jobs

Fig. 6.3 The globalization family tree (B).

political office. Money has been a powerful tool used to influence voters and to put certain candidates in office. 6.3.2 Greed- and profit-driven economic expansion In a money-driven world, where politics is in alliance with economics in the interests of economic expansion, we may have a model such as that outlined in Fig. 6.3. From this viewpoint, globalization is the natural successor to old-style slavery and colonialism, exploiting the poor of other countries to produce cheap goods for the rich, who in turn get even richer. The International Monetary Fund provides its view on what has happened or what globalization entails: Trade: Developing countries as a whole have increased their share of world trade — from 19% in 1971 to 29% in 1999. But Chart A shows great variation among the major regions. For instance, the newly industrialized economies (NIEs) of Asia have done well, while Africa

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12 External Trade (as Percent of World Trade)

Asian newly1 industrialized economies

8

8

Asia2 Western Hemisphere

4

4 China Africa Middle East

0

0 1971

76

81

86

91

96

99

Chart A Developing countries as a whole have increased their share of world trade. Source: IMF, World Economic Outlook (May 2000), Direction of Trade. 1 Hong Kong SAR, Korea, Singapore, Taiwan Province of China. 2 Excludes China.

as a whole has fared poorly. The composition of what countries export is also important. The strongest rise by far has been in the export of manufactured goods. The share of primary commodities in world exports — such as food and raw materials — that are often produced by the poorest countries, has declined. Capital movements: Chart B depicts what many people associate with globalization, and sharply increased private capital flows to developing countries during much of the 1990s. It also shows that (1) the increase followed a particularly “dry” period in the 1980s; (2) net official flows of “aid” or development assistance have fallen significantly since the early 1980s; and (3) the composition of private flows has changed dramatically. Direct foreign investment has become the most important category. Both portfolio investment and bank credit rose but they have been more volatile, falling sharply in the wake of the financial crises of the late 1990s.

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5 4

Net Capital Flows: Private and Official

113

Composition of Net Private Capital Flows

5

Net private capital flows

4 3

3 Direct investment

2

2

1

1

0

0 Net official flows

−1

Portfolio investment

−1 Other investment2

−2 1971 76

81

86

91

96 99

1971 76

81

86

91

96 99

−2

Chart B Developing countries: net capital flows1 (in % of developing countries’ GDP). Source: IMF World Economic Outlook Databases (May 2000), Direction of Trade. 1 Excludes oil-exporting countries. 2 Consists largely of bank lending.

Movement of people: Workers move from one country to another partly to find better employment opportunities. The numbers involved are still quite small, but in the period 1965–90, the proportion of labor forces round the world that was foreign-born increased by about one-half. Most migration occurs between developing countries. But the flow of migrants to advanced economies is likely to provide a means through which global wages converge. There is also the potential for skills to be transferred back to the developing countries and for wages in those countries to rise.

The staff report of the IMF was prepared in 2000. Six years later, in the early months of 2006, the United States were in the process of clearing out the problem of approximately 13 million illegal immigrants. Illegal immigrants and their supporters held a protest about their status on the first of May in several large cities, including Los Angeles and New York.

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At the same time, Canada deported 13,000 residents who had worked there for years and paid taxes, with some of them raising their children as Canadians. In one particular family, the father had to return to one country and the mother to another, with their five-year-old Canadian-born son caught in between. While these are not easy issues to resolve, it does illustrate that in some cases, globalization is not as great as claimed. 6.3.3 Globalization and global poverty While we agree that some people (in some places, most people) live in a state of poverty, it is a difficult word to quantify in an accurate way. For the purposes of this book, the author shall consider poverty to be a state where an individual or a family has just enough, or less than sufficient, provisions to meet basic needs, with no residual for the following day. More often than not, persons in a state of poverty are unable to participate in the market as a buyer of any needed provision. In today’s wealthy world, it can be reasonably said that poverty is created by humanity or, more specifically, by the privileged and powerful “market economy.” The mechanism of the market economy is the product of human intelligence. On the positive side, the market economy is an elegant way to facilitate the flow of resources. However, as the story of yin and yang goes, while everything has a good side, there is also a dark side to it. The basic market economy model (Fig. 6.4) reflects the origins of human needs and wants. Human intelligence can make use of the resources provided by the Earth to innovate and create sufficient new combinations for everyone. The challenge is to maintain a level of satisfaction that is able to meet everyone’s needs and wants, and yet allows everyone to live in peace and harmony. What we should be wary of is how greed is induced by the market system we have created, as greed causes disequilibrium and poverty. To attain any level of stability, equitable distribution and sustainable economic growth, the market economy must be governed. 6.4 Governance of the Market Economy Governance of the market economy lies in the hands of the government. Perhaps this is the reason why people attempt to link the market economy with democracy. In an ideal world, elected representatives set the

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Human needs and wants For self-interest to satisfy them

115

Innovate and create; the making of different combinations

The law made by humans to govern market behavior

Marketplace: makes possible the exchange of goods and services, performed by humans as sellers and buyers.

Satisfies more than self-interest, needs and wants. Residual for exchange of other things to satisfy different wants

Fig. 6.4 The basic market economy model.

laws and enact them, and hope to create an environment for the creation and distribution of wealth that is in the interests of all consumers. Unfortunately, this is hardly the reality; almost without exception, the governance of the market economy is founded on money, and money is governed by greed. Those with money are also those who influence governance most, consequently, the market system seems to function to facilitate the accumulation of more money. Sadly, the poor do not have the money to be a part of it. Globalization is also a money game; those in the game are primarily interested in cheap labor and resources. For those of us who are interested in globalization, either as a businessperson, policy-maker, academic or just as an ordinary human being, it is important to remember that everything has its cost (sacrifice). Globalization, in theory, is all well and good, but there are non-reported costs. In fact, there are countless unrecognized sacrifices. Business expansion and unlimited globalized operations affect us in many ways, not only in increasing physical poverty but in poverty of the soul as well. Increased emphasis on consumerism and the attaining of more and more material possessions come at the expense of a balanced view of life, as the market economy comes to dominate life (Fig. 6.5). Religion and philosophy, sadly,

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$ Accounting profession

$

Judgment of the individual within the framework of the law and requirements by the accounting profession

The law

Needs

$

Wants

Market economy at work

Greed

$ $

Fig. 6.5 The governance of a market economy (the Loop). In the ownership-based market economy, money is the dominant factor that governs the life of every individual. Every single movement within the loop is governed by $, or money. Money is used as a vehicle to induce “substance to fulfill” needs and wants; laws are made to protect the establishment (so long as it is legal); the accounting profession may have its own interpretation and purpose of the profession, but the entire process is based on dollars and cents.

cannot compete with the relentless pursuit of materialism, which may satisfy one’s needs and wants but does nothing to enrich the mind or soul. 6.4.1 Government intervention for the rich or the poor? Those who are interested in business expansion seem to believe that globalization is the solution to the world’s problems — by helping to improve living standards and promoting efficiency through competition and the division of labor. Division of labor is the act of specialization that allows people and economies to focus on what they do best. Globalization offers businesses greater opportunity to tap into more and larger markets around the world. This means they can have access to more capital flows, technology, cheaper imports, and larger export markets. However, markets do not necessarily ensure that the benefits of increased efficiency are shared by all. Countries must be prepared to embrace the policies needed, and the poorer countries may need the support of the international community as well. Hence, government intervention is necessary.

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On the other hand, previous discussion has indicated that no government is there just for the poor because all governments, especially in a democracy, consider their re-election as their top priority, and alienating the rich in favor of the poor will not help to achieve that. To look after those who are unable to look after themselves is part of the government’s responsibility. However, we must remember that although governments can print money, they are beholden to those who make money. A politician once told the author: “Let’s face it, government-budgeted spending comes more from the rich than the poor.” He is right — how much can the poor be taxed to support the sending of troops to Iraq and Afghanistan? More importantly, how much money can the poor contribute to an election war chest? How does a government govern without the support of the rich? The largest source of revenue received by the government comes from income tax, and the poor do not pay income tax. It is illogical then to expect the government to do nothing but take care of the poor. Society needs growth for stability. This means that if there is no economic growth for a reasonably long time, a shift of power structure will take place. Old systems and structures will be destroyed to make way for new growth. Schumpeter’s idea of “constructive destruction” seems to fit in well here. In order to attain positive results, the old needs to be wiped out so that the new can be created. Perhaps this is the reason why some ruthless and mindless mine operators, urban planners and resort and hotel builders would simply raze everything to the ground, so that they can build anew from the flat ground. Some are also of the opinion that if they do not take the minerals found underground and raze the trees, these resources will simply go to waste, and how will they have money to donate to society? Not much has been said about the accounting profession in respect of its role in the governance of the market economy or, more specifically, the exchange system. In fact, accounting is all about exchange. Input, output, debit or credit, cash inventory, assets or liability, revenue, cost or profit — all of them are represented by numbers reflecting dollars and cents. From the accounting point of view, there are no transactions of real goods or services. Rather everything in the market place once transformed into monetary terms is in effect a transaction. The system therefore governs all transactions, and accounting is a powerful tool used to

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control market behavior. It is the money moving around in the market economy that is at work, and nothing else. The government is more of an instrument that is largely based on a fully functioning accounting system in the market place. Therefore, it will not be an overstatement to say that if the market system is the power source of the market economy, then accounting is the lubricant that makes the engine work. Regrettably, neither money nor accounting, but only humans, can feel the pain of humanity. So long as we allow ourselves to be at the mercy of the system, there is little hope that the challenge of eliminating or lessening the problem of poverty will be met. Since we cannot live without either the market system or money, we will have to find other avenues that work within the two to help lessen poverty. 6.5 The Multi-functioning Market System Most of us are aware that the market system is a system of exchange, but not so much that it is also a system of distribution with other functions as well. The multi-functionality of our market system suggests that we cannot merely consider it as having only an exchange function; we need to recognize that it also has a distribution function. John F. Kennedy once Greed

Market economy triangle Ownership

Money

Fig. 6.6 Market economy triangle — ownership-based.

Stewardship accountability

Selfinterest

Market economy triangle

Common good

Fig. 6.7 Market economy triangle — stewardship-based.

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Market Economy

Exchange function

Facilitate the exchanges of goods and services

Poor

Poorer

Distribution function: a) Facilitates capital Accumulation for the Rich, so that personal wealth can continue with no limits

b) Redistribution results in the poor becoming poorer

Fig. 6.8 Multi-functioning market system.

said: “All our problems are caused by people… there is no problem that we cannot solve.” Unless we consider ownership as a God-given right, greed as an unchangeable human trait, and economic expansion and the accumulation of capital as the right of the individual, we have the choice to continue with either the ownership-based model or shift the course to a stewardship-based model (Figs. 6.6 to 6.8). It is only through the latter that the problems of poverty and resource depletion and destruction can be solved. Questions for discussion 1. Accounting, which provides the most important service to the market economy, has its own professional standards to guide its practice. With the numerous criticisms directed at it in recent years, particularly at the way it reflects economic reality, if you are the chief financial officer of an oil company, how do you think the company’s revenue should be recognized and how should the cost be allocated? Give reasons to support your answer. 2. In your opinion, is it fair to say that the market economy is the cause of global poverty? Why?

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3. Compare slavery in the 17th and 18th centuries with today’s use of cheap labor in developing countries that receives below subsistence wages. Give your comments and suggest how corporate expansion can justify a slavery wage policy that forms the backbone of globalization. 4. We want to eliminate global poverty, but we also continue to let competition drive the market economy, so that the rich and strong can prosper, while the weak and less fortunate struggle to elevate their position, and the poverty-stricken have nowhere to go. Do you agree with this picture? Why? 5. Bill Gates is an institution unto himself — he is like a government collecting tax from every computer that is working in the world. What is the difference between this form of taxation and the government taxes that people pay? Perhaps we should have more of Bill Gates’ kind of government because he is actively helping the poor globally. Discuss. 6. The function of the market economy is to facilitate capital accumulation. In your opinion, can capitalism work in the interests of humanity?

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Chapter 7

Distribution and Sharing

“What we do for ourselves dies with us. What we do for others and the world remains and is immortal.” Albert Pine, “Healing the World,” Prevention, November 2006, p.192 7.1 Introduction All the different areas of economics are interrelated, and are indeed inseparable. Here, as we explore the subjects of distribution and sharing, we shall start with three simple examples: 1. A bowl of rice. Chapter 1 provided an example where the distribution and sharing of resources have no economic significance because resources are so limited that a distributive system would not have been able to accomplish any economic objectives in the human environment. The only meaningful distribution would be to award the resource to the one who would benefit from the resource and find more for all the others who are in need. 2. Consider now the same situation, except that there is now enough for one bowl of rice for each person in the group. Clearly, there is still not enough food for everyone. Nevertheless, the group could decide that equal resource distribution, i.e. a bowl of rice each, is an effective and sensible decision, which is better than fighting among themselves. 121

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This way, the community as a whole can engage in a search for food in the days ahead. 3. Consider the second situation again, but now one member has decided to take all the rice for himself. He may be powerful or strong, or for some reason be in a position to make the decision to take all of the only resource available. This is similar to the first situation in that only one person benefits, but in this case, the decision is forced upon the others. This individual may then be strong enough to search for new food resources for an extended period; however, it is unlikely that he will share them with the others. He can easily rationalize this — as the strongest and “most important” member in the group, it is most important that he is well-fed and able to continue searching for more resources, and “eventually” he will share them with everyone. In the meantime, it is possible that some, if not all, of the others will die, or be too weak to search for food themselves. Assuming this continues, at some point, the strong individual will be unable to find any more food, and the end-result will be obvious. These three examples illustrate three different important scenarios. First, if there is nothing to distribute, then there will be no distribution problem. Second, as soon as there are resources to distribute, distribution becomes a problem. One solution is equitable distribution — this allows individuals to work together for the benefit of all. Another solution is inequitable distribution — this may temporarily lead to “success” among the ones benefiting from the inequality, but it will eventually lead to disaster. In the market economy, where the system of distribution is based on law, we know how to claim our rights, but we are less adept at learning our responsibilities. We often fail to appreciate the meaning of sharing because we do not value the fact that civilization is built on love and passion. The three simple scenarios above take into consideration the economics of both distribution and sharing. 7.1.1 From poor to the rich Over the years, many concerned groups and individuals have given and made many sacrifices to help the poor, and they are still doing it. Therefore,

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it is difficult to believe that politicians, business leaders and economists have so eagerly pushed the ideas of free trade and globalization in the belief that the free movement of goods, services, technology and capital without global pay equity, and the free movement of labor will enable the world to become the ideal global village. This has not turned out to be the case. We may not want to believe it, but we have gone so far from our original society, where people could share and enjoy life, while working towards the fulfillment of their natural purpose to build a sustainable economy to meet the challenge of continuity for mankind. There are many forces at work, which attempt to correct the imperfections of our distribution system and reduce the inequalities in wealth distribution. The World Bank, International Monetary Fund, governments, charitable organizations are just some of them, but unfortunately, the forces working against them are stronger. For example, one assertion states that, in comparison to the approximately US$50 billion per annum in economic assistance given to the very poor countries, ten times that amount is estimated to flow from these countries back into private hands via money laundering.1 The author recalls a saying, “his hand is in your pocket,” which means when someone has his hand in your pocket, it does not matter how often you fill it, he will always empty it. This is the fault of the market system — the invisible hand is always there, ready to remove what is in the pockets of the poor to put into the pockets of the rich. The tool used to further the gap between the rich and the poor is none other than our distribution system — the system that is supposedly based on the “justice” of the law. To punish a hungry child for stealing a loaf of bread may be in the course of the law, but not justice. 7.1.2 Do we really know the cause of poverty? Many respectable efforts have been made to try and identify the cause(s) of global poverty. People have blamed overpopulation, irresponsible governments, the lack of will and motivation to struggle for life (i.e. laziness), the lack of education, and poor health. Disease and war in alliance with 1 J. Kingston, “Money Laundering and Global Debt,” Japan Times, March 12, 2006 (http:// www.capitalismsachillesheel.com/money_laundering_and_global_debt.htm).

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overpopulation lead us back to Malthus’ population theory. Only Karl Marx was bold enough to point out to the world that poverty is caused by the rich and powerful, who take greedily from both the resources of the Earth and the poor working class. History has shown us that his thoughts, while enormously influential in certain circles, have not earned a following among most of the powerful and influential, or even middle-class individuals. Of course, they appeal more to the poor working class and the economically repressed public. A century-long struggle has apparently shown the superiority of the capitalist ideals which he opposed. While it is true that Soviet-style communism has shown itself to be unsustainable, it is not true to say that the reverse is true — that the triumph of American-style capitalism is proof of its sustainability. 7.2 Lakeshore, Oceanfront and Rainforest The lakeshore, oceanfront and rainforest are all national and international treasures; they are nature’s gift to mankind and exist for their own sake. Should these be for sale if the price is right? Some 50 years ago, in the north of the Canadian province of Ontario, the Canadian government owned extensive “crown lands,” although these did not have the status of national or provincial parks. They are not only scenic but also environmentally important. For example, Lake Temagami and its surroundings are among the few extensive areas of untouched wilderness in the world. Pressure to exploit these lands is strong, and they are slowly being converted by logging, and the privatization and sale to developers. Development in these areas of great natural beauty is becoming extremely popular, thus making the landholders very rich. Their gains are further increased by capital gains tax incentives which reduce the amount they pay to the government. Over the last 15 years, the author has, on several occasions, visited a Costa Rican village in a rainforest area, which is framed by beautiful hills and overlooking the ocean. The combination of rainforest and oceanfront, two of the most attractive places for holidays and resorts in the tropics, is simply unbeatable. Often viewed as national treasures, these designated places are protected in some manner, for example, as national parks, but with some leeway given to local residents to continue their lives in the area. Because such areas seldom decline in value,

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investors and developers, particularly well-to-do foreigners (Americans, Canadians, Germans and others) are always looking for such places for investment. Driven by the need for foreign exchange, the pressure on the locals to sell these lands is great. The locals are tempted by the lure of money — more money than they have ever seen — to sell their land or they get pushed out. What they receive is generally less than what the developers anticipate getting in a few years’ time. The forces at work are immensely powerful, and unfortunately, this fits the pattern of a system of distribution that allows the rich to get richer, and the poor to become poorer. Not too long ago, the author saw many changes in his well-remembered bit of rainforest. Once relatively untouched, the one-time green forest had started to turn bald. The vegetation had been cleared away, leaving a few unhealthy, brown-tinged patches, which were staked with signs with lot numbers, indicating house-building sites and the dates of future construction. Now, in 2006, the same site has no rainforest; it is dotted with highrise condominiums mixed with resort residences and a few bits of greenery, which look more like an urban park. Costa Rica has one of the best records in the world for its efforts at conservation and establishing national parks. Nevertheless, the country needs greenbacks, and selling some of its rainforest lands to developers is not a matter of choice but an inevitability, at least in the context of American-style capitalism. In the words of an old song from Cabaret, it is “money (that) makes the world go around.” Gone are the birds, the rainforests, and the wildlife. What can we expect under the circumstances? The sale of national park land reflects how government-linked business activities can facilitate the inequitable distribution of wealth. Wealth often comes from the exploitation of either nature or people, or both. The exchange system facilitates this by functioning as an effective tool for capital accumulation as well as income and wealth distribution. If the exploitation continues, we must accept the verdict of Malthus — as we run out of resources, there will be more suffering caused by wars, disasters, famines and disease. Eventually there will be no one left, though greed will undoubtedly continue even until the end. Finding an alternative to capitalism is therefore not just an option, but also imperative.

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7.3 Differences Between Distribution and Sharing Distribution and sharing are related to the way we live and our perception of the meaning of life. Distribution, for the purposes of this book, is about ownership. Distribution based on ownership rights results in an orderly society, nonetheless greed continues. Sharing, on the other hand, is about the heart and passion. If we can have a system based on sharing, we will have a meaningful life and peace among men and with nature. A short discussion on distribution and sharing The issue of distribution versus sharing was the subject of discussion among a group of the author’s students. Below is a transcript of the discussion based on the author’s memory. Tracy: I know the difference — sharing involves something I already have, but there is more than what I need or want. When my needs or wants have been satisfied, I can give the rest to others who need it. Mike: I think I have a better example. I recall a movie I once watched about a ship that was lost at sea. The rough seas tossed the ship about and it lost most of its crew, leaving only six survivors. The six struggled for days in the open sea with no land in sight. All the food on board had been consumed, with only one edible potato left. Everyone looked at the captain. He took a knife and cut the only potato into six portions, and asked each member of the crew to take a piece. The story may not be true, but the idea is clear — when resources are limited, we share. Mary: Back in the old days, in our Inuit society, the hunters would go out hunting. When they returned with their catch, they would distribute it to those who took part in the hunt as well as those who could not. The seniors who did not join in the hunt would place their hands on the animal in a symbolic act of participation.2 2

This is a system of distribution that is still practised in the Inuit community, whereby older hunters are provided for. All they have to do is to place their hands on the catch, and they will receive a share of the meat. This is not charity — in traditional societies, the elderly are rare and valued; they are considered a repository of knowledge and wisdom. Such a system does not exist in a society that is dominated by trade and uses money as a medium.

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Mike: Perhaps the difference is when people claim ownership, such as the hunters with their catch, then each of the hunters would have the right to his entitlement. Sharing, however, is based on the resources we have to meet our needs. The author concluded the discussion by stating that distribution is a system, whereas sharing comes from one’s heart. The society we live in is governed by law; ownership status is created by law. Under the law, there is a system of distribution. We often seek reasons why some people have a greater share than others. All the reasons are based on the law. Under the law, individuals engaged in the making of different combinations and productive activities deserve to have their share of the rewards. As such, some people will have more than others because the right to receiving a reward is based on the amount of effort put into the products or services that will be accepted in the market place. Such acceptance will be expressed in the commonly recognized medium — money. Although this reward system is somewhat justified, problems arise when the accumulation of riches leads to even greater accumulation. Then, reward is no longer based on contribution, but on what has already been rewarded. Sharing is not the same as distribution, even though it has the same effect. Sharing is based on the heart’s desire. While the two are related, their relationship is similar to that between ownership and stewardship — one is about the assertion of an individual’s rights, and the other is about the understanding of responsibilities. When ownership is being claimed, it may involve any of the following — taking, invading, disputing, discriminating, declaring war, criminal action, or senseless killing and destruction. When stewardship is assumed, it entails responsibility, care and love. God or nature did not give human beings the right to own, but has bestowed upon us what we need, not to satisfy our greed but for sustainability. 7.4 Distribution — Its Right and Entitlement in Practice Income distribution is normally grouped into five categories. Wages rank first, with net income or profit at the bottom. Labor contribution is considered to be of prime importance, while net income refers to the residual

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of the environment of the owner or shareholders, if the economic entity is a corporation. In this book, the author has included nature and the natural resources provided by, or taken from, the Earth as part of the distributive system. Planning cost is also included in the system although in practice, this may not be the case if no payment is involved. Under this revised proposition, the author has included the following categories. Category 1: Natural resources provided by, or taken from, the Earth It is a sad reality that decision-makers often fail to recognize nature’s contribution, as if whatever provisions available from nature are infinite and involve no cost or sacrifice. Natural capital provides valuable services but receives no return. Many concerned individuals, including Ronald Coase, the Nobel Prize-winning economist, have challenged the neglect of nature’s contribution. Coase advocated the installation of a missing market, which gives property rights to natural capital that will allow people who use (and abuse) it to bargain for its use. Michael Walker has said that everything should be privately owned.3 The problem here is that if ownership is a right, greedy people will abuse it, in the same way that any passing creature can grab bamboo shoots growing from the ground without any regard for others or the consequences for the future. Imagine if the private sector were to privatize the collection of rainwater in order to make a profit, where would the poor get their water to drink? It is not unreasonable to assume that we all love and wish our children well; we want them to enjoy the same if not better living standards than ours. Subscribing to the value of inheritance, most of us would leave what we have now to them so that they can benefit from our efforts. For those who are better off, a will is a necessity to list and quantify the assets and valuables they have. For the sake of our children and our children’s children, we must also consider what we leave behind for them to sustain the Earth and humanity as a whole. Effort must be made to ensure that this stock is properly quantified and its share of distribution maintained. This is a difficult task, but not impossible, and the only crime is in not attempting it. 3

From The Corporation.

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Although this challenge has been given to the accounting profession, it is not necessarily accepted by the profession, which will likely do so only under external pressure, such as from the government. For example, when former US President Richard Nixon decided to give Israel over two billion dollars in military aid, the OPEC nations announced a total embargo of oil to the USA, along with a 5% reduction in production each month until a peaceful solution was forthcoming for the Middle East situation. The price of light crude oil rose from US$1.35 a barrel to US$14.00, and later to US$40.00. These events triggered the United States Congress to ask the Department of Energy (DOE) for the size of domestic reserves and their costs. To their surprise, the DOE did not have an answer to their query. As a result of this and some other happenings, the Stock Exchange Commission was charged by Congress to impose a requirement for all filing companies to report both their reserves and costs. However, such reporting considers only a fraction of our sustainable resources in question. Still, the efforts of the American Congress, DOE and Stock Exchange Commission, along with those of the accounting professionals and academics in the field, have not been totally in vain. Efforts have been made to push for a uniform accounting standard for oil and gas exploration and development. In the late 1960s, Ranger Oil Limited, in an empirical report, provided an example to deal with the challenge of two difficult accounting problems — cost allocation and revenue determination.4 However, Gorton’s careful analysis in 1991 showed how the uniform standards that were established then were more the result of political maneuvering than reasoning.5 Difficulties aside, this specific example, while instructive, cannot be modeled on for general practice, nor form the basis for a change of standard accounting reporting practice. What it does suggest is that it is possible; what we need is broad-minded standard setting and the governing bodies’ understanding of the nature of the problems and their willingness to deal with it. 4

Ranger Oil Limited, 1968 Annual Report. D.E. Gorton, “The SEC Decision Not to Support SFAS 19: A Case Study of the Effect of Lobbying on Standard Setting,” Accounting Horizons (1991), pp. 29–41.

5

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The attempt to recognize revenue and cost allocation in the oil and gas industry takes into consideration only a small portion of the total cost that needs to be accounted for. Besides air, water, and the cost to biodiversity, there are also other more visible costing considerations. One of them is the ozone layer — if there were no ozone in the atmosphere, there would be no life on Earth. Global warming, as environmentalists have warned us, can be catastrophic. Pollution caused by all sorts of activities, including agricultural, automobiles and aeroplanes incurs costs in money terms of US$900 billion a year globally. In the words of the Costa Rican-based Earth Council: “The world is spending hundreds of billion dollars annually to subsidize its own destruction.” If we consider the available food supply, we may find there is less land for agriculture, less fish in the sea, less grazing land, etc. The rich may blame the problems on overpopulation, but these problems are created by the greedy, not the poor, yet there is no costing system to recognize this. How would it be possible to leave sufficient resource sustainability for our children and our children’s children? It would not be wrong to say that if we do not account for these costs, what we claim to be profit from economic undertakings would be nothing but merely our taking what belongs to the future and calling it “legalized profit” to fill the bottomless pit of present day greed. Category 2: Soft cost Soft cost is a term used frequently in the construction industry to recognize informal planning and preparation efforts that have no proper records. Under current practice, a creative and innovative idea is usually the result of a service contracted to others rather than the principal self. A payment could be made and treated as a sensible legitimate cost, which is processed in the distributive system and deducted from the revenue received. On the other hand, if no payment is made, or if there is no recorded transaction based on reasonable assumptions, recognition will be given to the contracted individual. The “owner” or principal decision-maker must recognize the contracted individual’s time and effort spent on planning and preparation, and records must be kept for an opportunity-based cost, which is recognized for audit purposes.

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Category 3: Human efforts, wages and globalization6 This is an important part of the distributive system because it includes virtually all human contributions such as the wages paid to all those working for an economic undertaking. In a broad sense, it includes every human contribution to an entity that receives recognition in monetary terms such as the workers in laboratories, computer room, offices and on the assembly line, individuals on the road (sales personnel, drivers), managers, executives, etc. It is also a very comprehensive part of the distributive system because of several factors. Before the issues involving workers’ remuneration are explored, it is necessary to illustrate how these are related to cheap labor and globalization. (a) Labor Unions. In a Western society, most labor unions have a mandate to represent their members in negotiations or in bargaining for a fair or just share of income for their members. From the point of view of a business entity’s management, the bargaining process is a challenge to their decision-making rights. Consequently, disputes and disagreements often occur over a range of labor-management issues including hiring and firing, layoffs, discipline (such as deduction of wages and suspension of work) and benefits. A powerful union is able to negotiate a role in the decision-making process on matters that relate to the entity’s future. It is also possible for the management of an entity to pressure its workers to meet the entity’s terms by using various strategic measures permitted by the law. Both the management and union may make deals that are not necessarily in the best interests of its members or the entity. (b) The question of labor and labor value. One of the greatest injustices in the ownership-based market economy is that wages for workers are deemed to be governed by supply and demand. When the labor supply is plentiful and demand is low, there is pressure for lower wage rates. If workers insist on higher wage rates when there is no demand for labor, there will be no jobs for them and hence no income. If there is no other subsystem, 6 Globalization is noted in this section because it is the differentials in wage rates that have prompted the development of branch operations and globalization, and the issue of movement of labor.

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Labor supply in home country

a b

Labor demand

Wages paid: equilibrium points represented by broken lines

$

High labor supply is always chosen. When a business entity is able to pay the bottom rate for any value of labor, why would it want to pay more when it can pay less? A cost-cutting strategy with a net effect of job loss in point “b” (high wage) moves to point “a” where labor supply is plentiful (low wage).

Fig. 7.1 How slave wage rates are paid when there is high labor supply in a country that is in need of jobs.

for example, unemployment insurance, to deal with the situation, they could starve and be in poverty all their lives. Figure 7.1 shows a simple supply and demand curve to illustrate this point. Figure 7.1 illustrates why business entities driven by cost minimization and profit maximization tend to take advantage of the situation. Consequently, even now, there are business entities that still practise slave labor trade. They pay their workers a legal but criminally low wage rate (less than US$0.50 per hour), when the minimum wage could be US$10 per hour in the home country. Paying workers less than a reasonable wage is a shameful practice, even though some business entities have “profitsharing” or some other form of pay incentives. However shameful it may be, the drive for more profit will always tempt some companies to pay the lowest possible amount for labor, facilitating the branch-plant mentality and globalization. The combination of powerful unions and worker protection legislation in the developed countries, together with the ability to shift goods and services on a worldwide basis, makes globalization not just an option, but also the obvious choice to maximize profit (Fig. 7.2).

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Fig. 7.2 Globalization — a quick fix for profit.

Free trade and globalization have been on the rise for many decades. Since before the end of the Second World War, there have been negotiations to reduce the trade barriers among nations. The General Agreement on Tariffs and Trade (GATT) led to a series of negotiations whereby a country would open its market more, if the others reciprocated. The eighth round of these talks, known as the “Uruguay Round,” which began in 1984 and ended in 1995, resulted in the formation of the World Trade Organization. With the expansion of services, manufacturing shrunk in importance. This led to the development of trade liberalization and a further increase in free trade, and got some people into thinking and pushing for the idea of globalization. However, these are mostly US efforts in the interests of the American economy. Among other happenings, the Seattle riot in December 1999, which protested against the WTO ministerial conference, is a clear statement that has brought discredit to globalization, at least in some circles.

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Globalization and free trade can be effective and good for the economy. Both China and Costa Rica have benefited from the trade between the two countries, as can be seen in the following slightly frivolous but very real example. Chicken feet are residual from chicken farms, but they are considered a delicacy in Chinese Cantonese cooking. The Chinese eat them in such great quantities that their own poultry industry is not able to meet their high demand for chicken feet. On the other hand, Costa Rica has plenty of chickens, and as far as the Costa Ricans are concerned, the chicken feet might as well be dog food. The result — Costa Rica is a major exporter of chicken feet to China, to the benefit of both. Nonetheless, free trade is truly equitable only when the nations involved are roughly similar in sophistication and economic status. The best example of this is the European Union, particularly among the founding members. Otherwise, globalization can be just a fancy label that allows people in wealthy nations to take advantage of cheap labor, which in turn takes away jobs in the buyer’s country. This actually creates more poverty in the country doing the buying without really improving poverty in the country where the jobs are. It does, however, increase the profits of the company doing the selling and provide some cheap goods for the buyers. This unfair trade practice is reflected in the government subsidies that are needed for some to survive. Protectionism is also very much alive still; the frequent disputes associated with it keep the WTO trade tribunal busy, and its existence justified. (c) The Labor Standards Act or minimum wage law. We are living in a world driven by money, greed and ownership, where immoral practices take advantage of the weak. Hence, this is where a responsible government has a role to play in providing protection for the helpless. The Labor Standards Act and the minimum wage law are just two examples. Most industrialized nations have such a law, which stipulates that workers must be paid an amount based on their living needs. Although the amount is important, what is more important here is the intent to recognize human contributions. (d) Wages for child labor. To involve a child below the legal working age in the workforce is generally considered illegal. However, if a child is

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being paid for the work done, it is no different from paying wages to an adult. This may happen in a family business, where parents are also the decision-makers in the business. Income inequality can be viewed from several perspectives. With a slight modification to an expression borrowed from a pharmaceutical company, there are at least three different kinds of inequality: legal and morally justifiable; legal, but immoral; and illegal and also immoral. Income inequality that is legal and morally justifiable As long as the parties involved agree on how every contribution is recognized and rewarded, it is justifiable under the law when human efforts are differentiated in status from one category to another in a capitalist society. Thus, paying a million dollars per minute to a movie star for his work is justifiable, since the income is directly based on the willingness of the public to see his work. Wages of US$400 per week paid to a computer worker in a laptop assembly plant may also be legally and morally justifiable if it is sufficient for a reasonable living standard and the payment is based on the simple law of “exchange” — supply and demand. Inequality that is legal, but immoral The law recognizes the inequality of income. Humans are rational, sensible and passionate, possessing the ability to make moral judgments. Consequently, applying pressure and taking advantage of a contractual judgment may be legal, but not morally justifiable. For example, in some countries, prostitution is legal, but immoral. A corporate executive taking advantage of a difficult situation to receive more than a fair remuneration or an unreasonable bonus is legal, but immoral. There are other practices whereby individuals take the “law” into their own hands and justify their behavior based on their own moral judgment. For example, an elected representative, in the interests of the party he or she belongs to, may support the legislation of a bill to increase a low personal income tax rate. This is legal, but may be immoral because the poor are not major contributors as they spend every cent they have on their minimum living requirements. Similarly, for government MPs, paid to represent

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their constituents, absenteeism from a legislation debate is legal, but could be considered as morally wrong. Inequality that is illegal and also immoral Accountants may be responsible for making an adjustment so that the CEO and others can get a higher pay.7 Elected representatives may miss voting on a bill of vital interest to the public to take care of personal business interests. Government officials may take payoffs or kickbacks for their support of a legislation that helps the payer. Unauthorized business trips for the purpose of giving friends and relatives a holiday using public funds — this and all the examples before it contribute to “pay” that is both illegal and immoral. Category 4: Occupancy-rent According to the order of payment, occupancy cost or rent is the most important distribution of income; as long as rent is due, it must be paid. However, in the ownership-based economy, the Earth’s contribution is usually not recognized. The purpose for the recognition of cost or expenses is to compensate the “giver” for his contribution to the productive undertakings. Such recognition is in part meant for consumption, while also acting to restore the source that provides the service. For example, in fishing, fish stock in the sea must be replenished; in farming, the farmer must allocate an equitable portion of what has been taken from the land to be returned to it, as with other nature related resources. There is always the question of whether this should be the government’s responsibility. The answer is “yes,” but only as a last resort because no government is in effect productive, creative or innovative, but it is responsible for helping others to create, innovate and be productive. Rent paid to a property-owner is a form of 7

J. Stiglitz, The Roaring Nineties (Penguin Books, 2003), p. 10: “Bad accounting provides bad information, and part of the irrational exuberance was based on this bad accounting information. We knew that the accounting system had a major flaw, that of CEO compensation, which provided incentives to take advantage of the limitations in our accounting information.”

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reimbursement for the cost of executing his ownership accountability, with provision for his portion of self-interest. Rent, as a payment, has always been recognized as a cost. Category 5: Money suppliers — interest Interest is paid to money suppliers, for example, for a bank loan. Money suppliers are like a godsend to creative individuals who need money to help turn their ideas into reality, and they are often willing to pay high rates of interest for the money. Business entities also borrow money from the bank. Such consumer borrowing has given the banks a very important position. Instead of living and spending in the present, and saving for the future, people have taken from the future for consumption in the present. Theoretically, we can consider the following two interrelated models: A business entity borrowed an amount of US$1,000,000 from a bank on a ten-year repayment plan. The loan, taken for financing a creative and innovative venture, is secured on the entity’s plant and equipment, and a personal guarantee on the payment of interest and principle as per the repayment schedule. The borrowing scheme with an expectation of favorable result Net borrowing of US$1,000,000 + US$2,500.000 (discounted present value) = US$3,000,000 (net income generated from the undertaking) + US$500,000 (residual value) The better than average Net income plus residual value generated from the undertaking is greater than US$3,500,000. Interest is a term used by the money supplier, the lender and the borrower. It is a very powerful tool used by the government (central bank) to regulate short-term economic activities by manipulating interest rates. This, along with other banking, government and financial matters, will be explored in a later chapter.

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Category 6: Residual or profit Except for category 1 (since nature’s input receives no return from its contribution), all the other four categories are a part of the income distribution system in our economy, although in an ownership-based economy, it is questionable whether it is really distribution (“It is mine, and mine to take”). What is most important here is that this is where capital accumulation takes place, and the line drawn between the rich and the poor. Profit also divides the world sharply. Without profit, no one would wish to be in business, and some would claim that there would be no creative and innovative activities. More aggressive individuals may link profit with life — no profit, no life; no profit, no children, for how would they feed them if the future has no residual left for them. What is profit? Profit is the residual left after all creditors have been paid for their claims and entitlement. A simple word says it all — distribution. Government service or disservice rendered has no prime claim, but it will still take a percentage of the profit. The most challenging issue here is the determination of the entitlement of the “owner.” This is part of the reason why war often breaks out, and there are so many homeless and helpless children born to families who subsist on a penny a day or less. Global poverty is blamed, yet the disparity in wealth between the richest and the poorest has grown from an approximate 5:1 ratio in 1800 to more than 200:1 today. And the cause for it? Despite all the talk about profit, it comes as no surprise that we can never really determine what the real profit is. If we do not have any idea of what our real profit is or where it comes from, we will never be able to resolve the issues of distribution or solve the problem of poverty. Profit is residual, not for distribution, but for sharing. Many businesses are now actually sharing their residual, for example, many corporations have profit-sharing schemes. The basic issue here is that as stewards of resources and the trust of people, can we continue to exploit others with no regard to their needs just because we want profit, and more profit.

7.5 A Summary of Net Income or Profit Distribution An ownership-based economy encourages consumer spending, which leads to overspending, over-consumption, over-debt, which are all supported by

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Amount

High risk, such as mining industry, if nothing is found

Royalty, but nothing is given back to the Earth

Fixed amount for royalty, but nothing for the owner of natural resources

Considered to be a soft cost, no record for cash disbursement

If planned business As part of shareBased on holders’ capital fails to start, and disbursement, investment no revenue is all costs are generated, then recognized if unrecoverable they are properly documented in quantity form

(3) Labor or human resources

Contracts are made and works are rendered

Time, period, work If revenue is less than recognized completed, in peace, or costs, job loss, contract failure, contractual may share the agreement risk

Wages, salaries, additional incentive

Based on current practice and share type, it will be a form of dividend

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Type

Amount

Take possession of a property owned by others

Day, week, month, year or any time period based on lease agreement

Mostly secured, with very little or limited risk

Rent

Fixed amount, may vary with revenue (sales)

(5) Interest

Principle received

Daily, weekly, monthly, annually, or other form of agreement

Some risk, can be secured

Interest

Fixed, a committed obligation

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End of a fiscal year

Mostly on a yearly basis

Risk of not having a profit

Dividend or complete amount

Self-determined

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(Continued).

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borrowing from the future. With system-governed distribution systems, where sharing is not part of the economic system, it would be difficult for the poor to see when and how they would be able to step out of the dark tunnel of poverty. There are also the issues of resources drain and environment deterioration. Projecting this into the future, one can get very serious about making a trip to Mars, even when there is no assurance of a return. 7.6 Conclusions Distribution is an important part of the overall economic discipline; it provides the opportunity for us to live in peace and share what nature has provided for everyone. At the risk of oversimplification, our challenges in the discipline of economics are manifold. We know we cannot eliminate the market economy and live from hand to mouth like our ancestors in ancient days. Hence we take what we need, share what we have in excess after meeting our needs, exchange for what we do not have enough of, and claim our entitlement under a lawful distributive system. In theory, everything works beautifully, but in reality, we do not have the heart or compassion to share what we have with those who have nothing. Of course, we claim it is not due to greed, because to take more than what is allowed under lawful distribution sounds almost inhuman. Because the law is not necessarily just, greed is not only illegal robbery but can be legal robbery as well. So long as we rely on the law to determine what is right, it will not matter if we have a dozen Earth charters, thousands of environmental agencies and human rights organizations, the distribution of wealth will continue to be inequitable. No individual has the right to take more than his share of resources, and sharing must include other humans (including the poor) as well as the natural world. A friend shared the following with the author: “I read that one reason why theft is so rampant in a country considered to be democratic is that thieves are prosecuted based on their economic status. People of lower wealth receive little punishment. Therefore, the poorest people are allowed to use violent means to rob tourists and people of higher economic standing, and are punished very lightly. It’s not clear, however, how they determine the economic status of a thief.”

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This illustrates that “laws” are made by men, and interpreted by men. In a similar fashion, it was once legal to have slaves. Justice, however, is in the hands, minds and hearts of men. Just like the form of “justice” illustrated above, the system of distribution is legally established, but it still needs decision-makers to do what they can to ensure that justice is carried out. Questions for discussion 1. Becoming rich is a result of creative and innovative human effort. On the other hand, greed is about those who assume and use resources as if they are unlimited. The greedy, but not the rich, will always exploit people for their own benefit. Do you agree with these statements? Give reasons for your answers. 2. Distribution and sharing are our greatest challenge. Although our legal rights entitle us to claim our share of the harvest, it is only through sharing via a passion for life, that we can expect the needed peace among mankind and a life that is in harmony with nature and the environment. Do you agree? Why? 3. In your opinion, what is the difference between distribution and sharing? Would it be possible for us to have a system that would guide us in sharing what we have? 4. To take advantage of cheap labor, a large number of corporate entities have moved to developing countries, where the wage rates are far lower than those in the home country. Would it be reasonable to elevate the wages of those in the developing countries to the same level as that in developed countries? Why? How? 5. Globalization is more of a dream than a reality, since it is not that easy for workers to move freely from one country to another without having to go through the tough immigration process. Do you agree? Why? 6. Should natural capital have a share of the “net income” or “profit?” How do you account for the contribution made by natural capital or nature? Why are accounting professionals reluctant to recognize natural capital? Explain.

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Chapter 8

Capital, Capital Accumulation and Diseconomy

Enron, the energy company that went from almost nothing to an enterprise with annual reported revenues of US$101 billion to collapse in bankruptcy, all within a few short years, has become emblematic of all that went wrong in the Roaring Nineties — corporate greed, accounting scandals, public influence, scaremongering, banking scandals, deregulation, and the free market mantra, all wrapped together. Its overseas activities too are an example of the darker side of US globalization, crony capitalism, and the misuse of US corporate power abroad. Joseph Stiglitz, The Roaring Nineties, p. 241 8.1 Introduction Capital is the vital fuel for economic activities. Many economists have contributed to our understanding about its source, usefulness, accumulation and augmentation. Marshall’s Pure Theory of Domestic Values illustrates the traditional approach: The whole of a man’s income is expended on the purchase of service and of commodities. It is indeed commonly said that a man spends some portion of his income and saves another. But it is a familiar economic axiom that a man purchases labor and commodities with that portion of his income which he saves just as

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Stewardship-Based Economics much as he does with that he is said to spend. He is said to spend when he seeks to obtain present enjoyment from the service and commodities which he purchases. He is said to save when he causes the labor and the commodities which he purchases to be devoted to the production of wealth from which he expects to derive the means of enjoyment in the future.1

Capital is the result of postponed consumption in whole or part from earnings, which is saved for investment. Burton Keirstead viewed capital as a “tool” that is to be further used for production in the interest of further enjoyment, consumption or creative and innovative purposes. Figures 8.1 and 8.2 illustrate two situations, the first with no sacrifice and no loss (and therefore no gain), and the second illustrating the requirement of the need for sacrifice to accomplish capital accumulation and therefore gain. Figure 8.2 represents the basis for economics. 8.2 The Sacrifice: The Unaccounted Cost of Capital 8.2.1 Cost of natural capital The ownership cost of capital accumulation has been linked with sacrifices associated with human activity, such as the postponement of current

The earning of income

Spend all income on the purchase of goods and services for present consumption and enjoyment A

No savings, no capital B

Fig. 8.1 No savings, no capital. Savings remain untouched, which means keeping it in the pocket with no further investment, and therefore no gain. 1

A. Marshall (1879). This text is quoted from J.M. Keynes, The General Theory of Employment, Interest and Money (MacMillan, London, 1964), p. 19.

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Earning of Income The birth of capital and Invest… Consumption +

The accumulation of capital, further invest Repeat the process...

Residual

Partially for better living

Partially for a luxurious living Residual

+

Residual

Fig. 8.2 The birth of capital and capital accumulation. Capital comes from the sacrifice of present consumption for future consumption, Sacrifice, savings, investment and expected gains constitute the circle of the beginning of economics.

consumption for future use. This common practice facilitates the function of banks in the market economy. Savings are turned towards productive purposes or into deposits for future use. The same, however, is not done for nature. Moreover, natural capital is generally not accounted for due to the problem of quantification. How do we keep account of the amount of air provided to us to sustain life? The loss of rainforests, home to almost 80% of the world’s biodiversity, species extinction of up to 100 a week due to human activity, resource depletion, air and water pollution, and global warming — these are all examples of the degradation of natural life support systems with opportunity costs that are unaccounted for. While businesses take profit and governments show concern, nothing much happens.

8.2.2 Cost of capital as economists see it In an ownership-based economy, cost is a term directly associated with what can be earned. One of the commonly used means to determine cost is marginal analysis. The identification of where marginal cost intersects marginal return is commonly used for capital budgeting and measuring profitability (Fig. 8.3).

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Stewardship-Based Economics X Marginal rate of return Cut-off point Gain Loss Marginal cost of capital

Y

Fig. 8.3 Marginal cost, marginal return and “profit.”

The analysis is simple enough to understand in human terms. Cost is a sacrifice that is justifiable only if there is a return exceeding the cost. Pure sacrifice will be considered a loss. Yet this is not applied to natural costs, or nature’s sacrifice in the interests of humans. Figure 8.4 illustrates capital accumulation. Items 1 to 8 are based on human efforts, through savings from personal sacrifice or debt, which reflect what is happening in our market economy. What is significant about this form of capital formation and accumulation is that it does not account for natural capital. This is the arrow that embraces everything, over and above all human capital from items 1 to 8, and includes both resources and the natural environment. Some resources can be quantified if there is a cash disbursement. 8.3 The Accumulation of Money Capital 8.3.1 Real capital and “money” capital The definitions that economists use for capital can be quite fascinating. For example, one definition considers capital to be the savings from present consumption deferred for future use. This is not how capital is commonly viewed. In traditional definitions, which are now obsolete, capital is instead considered a tool used for future production, which can be repeatedly used until it can no longer be used. In this case, the only form of capital is “money” capital, a common language used in the money market, labor market and the market where goods and services are traded.2

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Natural capital: resources and the natural environment 1 2 3 4 5 6 7 8

Balloon-breaking bankruptcy

1. Personal sacrifice, saving from residual 2. Personal borrowing, e.g. from parents and friends 3. Money suppliers, i.e. banks 4. Mortgage loan from personal property 5. Moneylenders, venture capitalists 6. Government 7. Loan sharks 8. Going public

Fig. 8.4 The accumulation of capital — the balloon.

It is this “money” capital that enables people to accumulate; the accumulation of capital is nothing more than the accumulation of money. It is not money that is used to purchase daily living essentials, but rather what is available for production, reinvestment, or simply as a loan to someone in need of money who will be charged interest for the use of it. It is through money capital that people are able to accumulate personal worth. In fact, real capital is cumbersome to accumulate. Can anyone imagine a person wanting or needing hundreds of mansions, personal jets and luxury automobiles? Some people do own such possessions, which is made possible only by the existence of money. 2

A. Marshall, Principles of Economics, 8th edition (MacMillan, London, 1952), Appendix E, p. 647.

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In ancient Sparta, the reformer Lycurgus was said to have wanted to ensure that his people would not be corrupted by the accumulation of wealth. His solution? To ban the use of any form of money other than cast iron bars that are of little value (one three-feet long bar was worth approximately half a day’s wages for an unskilled laborer). There is a limit, which is self-determined, to what one can have for real capital, whether it is for production purposes or not, but outside of Lycurgus’ system, one can accumulate “money capital” without any limit. The reality is that money capital has no substance. Money, whether in the form of notes or gold coins, cannot be eaten as food, but as a tender of exchange, money is invaluable for capital accumulation purposes. Money determines whether a person is rich or poor. In some cases, it can even cause the collapse of a government. For example, the downfall of the Chinese Nationalist government in the 1940s and the triumph of the Communist-led People’s Liberation Army was the result of the people’s will for change. But the seed for this event was already planted in the poor monetary policies of the Nationalists. Around 1943, the Nationalist government, in an attempt to control rising inflation, decreed a devaluation of the “reserve money” that was in circulation during the Japanese Occupation. It pushed the people into abject poverty and despair. The Nationalist government would never be able to recover from this blow to the people’s trust. The circumstances made it impossible for the Nationalists to continue governing the country, and the result was the beginning of a new era in Chinese history. The big balloon Less than a decade ago, the Asian miracle was in full swing. The future looked bright and prosperous for Southeast Asia. Thailand was the rising star, having successfully developed an open market economy based on a free enterprise system. However, from the middle of 1995, Thailand’s economic growth started showing signs of pressure after a serious flood. Still, Thailand’s economy experienced continued growth, largely due to the expansion of sales to ASEAN (Association of Southeast Asian Nations) countries and a finance and property boom that attracted shortterm money from abroad (putting air in the balloon). As volatility in the

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money markets grew, any dampening efforts made by the central bank affected the sensibility of money flow, particularly the short-term foreign capital. This led to problems in the property market, which caused even more pressure (more unwanted air in the balloon). Consequently, 16 finance companies, led by the multi-billion dollar Finance One, closed down. Soon after, the Thai finance minister removed the Thai baht’s long-standing peg to the US dollar. This was in fact a de facto devaluation, for as soon as the baht was floated, it headed steadily downwards. The balloon could no longer hold any air. Of course, the IMF made a deal with the Thai government, so Thailand’s economy could once again hold its balloon without the possibility of it breaking in the money market. In another corporate “balloon” story, Enron’s collapse shocked the world. Its founder Kenneth Lay was convicted of six counts of fraud and conspiracy, one count of bank fraud and three counts of lying to the banks in a separate, non-jury case stemming from his personal banking. Enron executive Jeffrey Skilling was convicted of 19 counts of fraud, conspiracy, insider trading and lying to auditors, although he was acquitted of nine counts of insider trading. The sudden death of the then Enron CEO, which occurred just before he was put on trial, meant that he was never brought to justice, but neither could he take any of his ill-gotten gains with him. The little balloon Fifteen years is generally not considered a long time, but to a small business development, many changes could happen during this time. Some 15 years ago, a naturalized Canadian citizen moved to eastern Ontario, Canada, and started a small venture that prepared pre-cooked food for Chinese restaurants. Both he and his wife worked hard. In a matter of five years, their business, which included delivery, cooking and financing, rose from one with an insignificant amount of capital to one with a value of several million dollars. A few million dollars is already a lot of money, but the couple wanted more, so they ventured into property development. In a matter of another five years, under the name of Win-Win Property, they bought 16 condominiums and 15 other properties. Their total assets at market value was

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worth approximately CAN$100 million. Of course, they also owed money to the banks, to short-term borrowing, venture capital short-term debentures as well as personal loans of CAN$70 million. As the size of the company’s operations expanded, the engagement of professional expertise was deemed necessary. Lawyers, accountants and a sizeable staff meant a monthly cash outflow, just for administration costs, professional fees and interest payments to the banks and creditors, that imposed an unbearable pressure on Win-Win Property. Win-Win had mortgaged everything that it could at that point, yet it could not meet the monthly payments for the company car. Because of fluctuations in the property market, the company was not able to sell some of its condominiums to release some cash. The company’s creditors finally obtained a court order to step in and take appropriate action. The small balloon had its day. Bankruptcy put Win-Win out of business. The balloon economy — what if the balloon cannot hold any more air? Individual consumers are part of the balloon economy. Consumer credit, mortgages, credit card borrowing are also part of it. At least one consumer, whose monthly earnings were no more than US$2000, used his credit cards to pay for daily expenses, travel, medical bills, etc, and managed to borrow about US$120,000 with interest payments and monthly minimum payment amounting to US$1300. After paying for household utilities (about US$500), he was left with only US$200 for subsistence. In a bid to get out of this spiraling situation, he also spent US$50 per month on lottery tickets. In a deficit position, the family was at the mercy of the banks. Loan consolidations did not help, and the end-result was personal bankruptcy. Balloons, big and small, are filled with air. Borrowing as a source of capital build-up has always been, and will always be, an important factor of economic growth. The balloon build-up is a form of capital accumulation, as it is often said in business: “You don’t make money by merely using your own capital. Only by using the money of others, then you can make more and bigger money.” Like blowing up a balloon, the trick is not to blow it up too much, breaking the thin skin and bursting it. In this way, the entity (person or business) will be able to carry on. Alternatively, if there is insufficient air

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in the balloon, the investment will not be optimized. Moneylenders, banks, venture capitalists, and even loan sharks can be lifesavers to individuals and business entities, or even to the governments of some countries. Unfortunately, they can be merciless; if you do not manage your debt (balloon) properly, they have no sympathy. 8.3.2 Business expansion and real capital accumulation For people in business, the accumulation of personal wealth is a natural and rightful consequence. However, this may take many different forms. Some prefer to develop their business instead of accumulating money capital. “Honest Ed” Mirvish is a well-known retailer in Toronto, who has earned himself a reputation for selling goods below the market price. One of his promotional slogans read: “Only the floor is crooked, not the price,” meaning low overheads, no fancy building or store displays, just a simple old building filled with cheap merchandise catering to the low-income people. He shares his fortune by giving away turkeys at Christmas time. He has only one store since the early 1950s, and he still has the same store although it has expanded. He has invested his real capital in the arts and culture. Along with his son David, they turned a whole block of houses into an arts street. He bailed out the “Old Vic” (Victoria) Theater in the West End of London, England, keeping the “old lady” alive and earning himself a knighthood from the Queen in the process. Despite all his artistic and cultural investments, which include theaters and restaurants in Toronto too, he still keeps his one and only low-end department store. This is the way Ed Mirvish has accumulated his capital in a business that serves the community, promotes culture and increases his personal wealth. On the other hand, we have businesses like Wal-Mart, which has expanded its operations to become a global presence in a matter of a few short years. Even passing through small towns in a country as small as Costa Rica, one is able to spot Wal-Mart’s blue sign up there in the sky. Unlike “Honest Ed,” Wal-Mart’s ambition seems limitless. While both the retailers cater to the masses using a low price strategy, there is a difference between them. Honest Ed shares his fortune through the promotion of the arts and culture, complementing the local economy. Wal-Mart, on the other hand, acts in direct competition with the small shops in a way that has subjected Wal-Mart to accusations of destroying the local

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economy.3 It seems the “real capital” accumulation movement may change our civilization as well, one where the only mantra is “Shop until you drop.” 8.3.3 Interest as a source of capital accumulation In Chapter 7, interest is discussed as a part of the distributive system and as a reward for the use of borrowed capital. On the other side of the coin, interest from the point of view of the lender or money supplier is a source of capital accumulation. Most of us are aware of the high interest charged by credit card issuers on purchases. For example, a person owing US$10,000 would be charged interest at approximately 20% per annum of the balance. If the debt is paid off over a ten-year period, it would result in a total repayment of US$25,938. In other words, if this is the only transaction made by the lender, he would have more than doubled his capital within a decade, subject to a tax deduction. To give an idea of what this means, let us use a restaurant with 50 tables as an example. Assuming each table has a single sitting per day and earns US$200 per sitting, the total earnings of the restaurant for the day will be US$10,000. On the other hand, if each table has an average of four sittings a day, the total earnings for the day will be US$40,000. The moneylender works in the same way as a restaurant turnover, as most lenders will lend their money on a turnover basis. The difference, however, is that any payment received from borrowers will be lent out again for more interest thus furthering the accumulation of capital. In the restaurant analogy, this would mean that after each sitting, the restaurant owner would put money into buying more tables. Figure 8.5 illustrates the accumulation of capital through investment or direct lending. The augmentation of capital in effect comes from the borrower’s use of the money capital for investment purposes. It is used either directly or indirectly for production or to increase productivity. Each circle represents a new starting point for accumulation, for example, investment in a new venture; with each succeeding at differing degrees. This could occur in the interests of humanity as part of the economic process. However, if the users of capital make their gains through exploiting 3

See http://walmartwatch.com/home/pages/issues and Wal-Mart’s own webpage http:// www.walmartfacts.com/Wal-Mart-impact-on-local-business.aspx for their side of the story.

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Principle plus interest

Invest or lend

Capital

New capital = initial capital with interest compounded Further investment; the process is repeated

Fig. 8.5 Capital accumulation (net after taxes). An initial amount of capital (circle on the left) is invested in, or lent to, various growing endeavors (circles of varying sizes represent different levels of accumulation). These produce additional capital accumulation allowing for further investment and lending.

nature or bleeding labor value, then the money capital augmentation is the result of exploitation, and the accumulation of capital effectively amounts to theft. Although labor value can be accounted for, nature’s contribution is more problematic. This is an unfortunate reality. Even though we may not have an immediate solution to deal with the challenge, gaining awareness is a first step in the right direction. 8.4 Capital Market The capital market, where corporations seek financial backing, encompasses virtually all public sources of financing. It includes all the significant ones that are in a dominant position to affect the overall market, such as the stock exchange, bond markets and the banks. 8.4.1 Stock exchange The stock exchange, where the value of a corporate entity is transformed into dollars and cents and traded on the market, has always been one of the prime means of financing. The exchange is an extremely powerful institution. Governed by the Stock Exchange Commission, much of it

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relies on accounting information. Words like “disclosure,” “public auditing” and “corporate reporting” refer to how a corporation presents itself and what it is worth to the market. The market will then determine what it is really worth through the “invisible hand.” Bear in mind that the figures in accounting information are based on a simple system of balance (left equals to the right). Assets and expenses are on the same side; if expenses of US$100,000 can be changed to assets with a single accounting entry, it will add US$100,000 to the bottom line or profit. This suggests that figures can be changed, if not manipulated, to provide readers with a completely different profile of the entity concerned. Some methods are legal, but others may be doubtful. In the interests of the public and the invisible hand, it is extremely important that figures are reliable and in accordance with the generally accepted accounting standards. All costs must be based on objective evidence, be measurable and quantifiable, so that the financial matters of a company are accurately described; only then can a corporation assume its stewardship responsibility to meet the requirements of its shareholders. This principle can be simplified as shown in Fig. 8.6. Stock Exchange Commission, the watchdog of the stock exchange which is created by the law in accordance with the interests of public investors

Stock Exchange

Professional accounting bodies such as the Institute of Certified Public Accountants Power and politics and the Institute of Chartered Accountants No direct links between the accounting profession and the Stock Exchange Commission. To prevent the erosion of its professional status, accounting practices will have to be in line with the requirements of the Commission. The accounting profession has the right to maintain its professional independence.

Fig. 8.6 Stock exchange and its governance in relation to accounting.

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Figure 8.6 illustrates the dilemma of the accounting profession. The accounting profession has the right to maintain its professional independence; there are no direct links between the accounting profession and the Stock Exchange Commission. To prevent the erosion of its professional status, accounting practices must be in line with the requirements of the Commission. Unfortunately, the power and political game between the accounting profession and the stock exchange watchdog is a sad reality for those who think, talk and teach about profit as well as those who are engaged in profit-making activities. There is no profit, unless the contributions from both human effort and nature can be recognized. Even environmentalists, who may have been strongly advocating protection of the environment, are drawn into the game. Stewardship responsibility cannot accommodate our greed. It is greed that gives us profit and more profit, and we have yet to find a way to stem it. 8.4.2 Bond market Bonds are the “princes” in the lending market. As part of the money capital trading system, bonds and their lending system can destroy both private borrowers and the government’s credibility for future borrowing. In the public sector, bonds are one of the loan instruments used by the International Monetary Fund and the World Bank to fulfill their noble function of helping countries whose currencies are in trouble. Both Thailand and Malaysia learnt their lessons the hard way, however, with the financial help from these two bodies, their economies managed to recover. A major borrower, China’s economic success has surprised many. It is ranked third in US cash holding, behind only Germany and Japan. It borrows to further its economic development, particularly in the rural and less developed regions. Nevertheless, if borrowing is for the purpose of supporting a failing economy or bailing out a decline in currency value, there can be serious consequences. The success of the IMF and World Bank, as well as similar organizations in the European Union, has been encouraging. Borrowing from the IMF or World Bank can be an effective way of promoting economic growth and regional development. Support from these two bodies suggests their confidence in the borrower’s ability to manage its economy, which builds up public confidence and consequently strengthens the borrower’s position

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in the bond market. On a smaller scale, if the founder of a small venture succeeds in securing government assistance, more often than not, the bank will match the government support. 8.4.3 Banks Banks are the suppliers of money capital. Virtually everyone living in today’s developed world uses them, unless the person is in extreme poverty or has been unemployed for a long time and has no regular income. As a supplier of money capital at interest rates that are usually fixed at the time of contract, banks do not share in either “profit” or “loss.” These transactions, commonly called loans, enable the borrower to use the money as borrowed capital for capital augmentation purposes, production, investment or trade in stocks, or for any other purposes. As part of the money capital market, banks make their profit by charging higher interest. The bank receives deposits that require it to pay the depositors a percentage of interest. This varies from country to country. The deposits can then be used to generate higher interest from those who are in need of money (for consumption) or money capital (for business). For example, a depositor (supplier to the bank) may only receive an interest rate of about 4% per annum. The bank can use the money as a loan of any kind, charging around 8% to 10% interest for a business loan and 20% for a credit card loan. Large corporations are able to borrow large sums of capital for a short term to finance their cash flow because the bank will match their loans with the funds from short-term depositors, at rates arranged to suit both the depositors and the borrowers, with the difference going to the bank. Although this is not a bond market, it functions much the same, only on a shorter term. For example, if a depositor with US$500,000 asks for 10% interest for a deposit period of 30 days, the bank can accept the request and match it with a corporation who is in need of such capital and is willing to pay 18% for its use for 30 days. The bank benefits from the difference of 8% or just over US$333. Banks claim to be the first and the last source of financing. This is true inasmuch as their role is to facilitate the flow of money as monetary middlemen, making money for themselves in the process. The bank’s scope of business has broadened recently, with most of them expanding

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into “financial groups,” which are capital markets in themselves that include investment, insurance, mortgage loans, and anything else to do with money. 8.4.4 Venture Fora Venture Fora are informal money capital markets, less popular and less well known, except among people who are in need of venture start-up and early development financing. They are typically sponsored by law and accounting firms, consulting innovation and business information centers, development banks and municipal governments. Fora are membership-based capital markets. Currently, they do not seem to be governed by any particular institution or rules, so they are only regulated by contract law. They have a long history as private arrangements between those who supply capital and those who are in need of capital. The more formalized Venture Fora date back to 1981 when the Alumni Association of the Massachusetts Institute of Technology (MIT) formed its first enterprise forum, which was designed to give its alumni and investors an opportunity to bring out spin-off technological enterprises into the market. Subsequently, the undertaking spread to several other countries where MIT has its alumni chapters. The idea has been modeled on and further developed into networking sites where money capital suppliers meet with those venture founders who are in need of money capital. 8.4.5 Venture capitalists Unlike Fora, venture capitalists can be formal organizations incorporated as financial institutions providing financing for venture start-up and development needs. Venture capitalists play an important role in helping new ventures to mature, usually with the hope of their becoming publiclisted companies, with their stocks traded in the stock market. People who are in this kind of undertaking typically consider themselves risktakers. To venture capitalists, banks are money capital suppliers, whereas they consider themselves business partners. While venture capitalists do support business start-ups, most of them prefer to invest in firms that are already in the development stage because

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of the greater risk attached to new start-ups. Despite the fact that they make their case about supporting venture start-ups and development, one must never forget that they do so with the motive of making as much money as they can. Making a deal with a venture capitalist can be quite an eye-opening experience. While the critical element is the sum of money capital involved, there may be several conditions and provisos attached to it such as: (a) US$400,000 of capital in exchange for a 40% share of the company. (b) US$200,000 for ten years in a long-term bond secured by the company’s land and building, and bearing cumulative interest of 10% per annum. (c) US$400,000 as a short-term (three-year) loan bearing interest of 15% per annum with a fixed monthly repayment of US$10,000 principle plus interest. (d) At the end of eight years of operation, the company must go public. If it is unable to do so, the company’s board of directors has to agree to redeem the 40% share at four times the value of the initial investment of US$400,000. (e) The venture capitalist will be represented on the board as a director drawing a remuneration of US$60,000 per annum. In addition, the board has to agree to secure the approval of venture capitalists for the following undertakings: (i) Any capital spending over US$10,000. (ii) Initiation of any additional borrowing over US$20,000 from any source. (iii) Any contractual agreement made with a third party. (iv) Any increase in the remuneration of executives, including salaries, bonuses or any other additional benefits. (v) Any change in key decision-makers (those who report to the CEO). (vi) Any change in accounting practice, disclosure requirement or inventory system. Violation of any of the above would be considered an action against the interests of the venture capitalist, and as such, the venture capitalist

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may recall any outstanding loans or debentures, and may exercise the right to remove any or all of the executives in the company. The above is only an illustration; the relationship between a venture capitalist and the company’s board of directors or its management may vary from case to case. The important thing is to appreciate the important role played by venture capitalists in supplying needed venture capital throughout the various stages of the venture’s operations. In the market economy, venture capitalists are only interested in how the company management’s decisions affect their bottom line, which is to secure the highest return on their investment. Those who engage in business transactions must realize that they are not really subject to human decisions but to invisible ones. In other words, it is always the numbers that do the talking. 8.5 Diseconomy Economy or diseconomy? That is the question. Adam Smith was the founder of classical economics, outlined in his great work, An Inquiry into the Nature and Causes of the Wealth of Nations. Smith believed that though humans are selfish, it is unnecessary (and indeed counterproductive) to attempt to regulate their selfishness; the invisible hand will guide price to its natural value because the price is based on a full valuation of the costs that go into any item. Based on his understanding of the nature of supply and demand, incorrect pricing will lead to a natural, market-based price adjustment, instigated by the interactions between the producer and the consumer via the vehicle of competition. Unfortunately, this argument requires the transaction to occur as a contest between equals — this may hold, for example, between a butcher and a buyer, but may not hold for the pig that is being sold. The problem is graphically illustrated by the war in Iraq. At the point of writing (September 29, 2006), 100 Iraqis on average were dying every day, yet if one were to follow the US news media, it is only the American body count (2711 of 2942 Coalition deaths) that really matters. Because the choices that count (at least to George W. Bush) are those of the American people, the invisible hand puts a differential value associated with the life of American soldiers and that of the Iraqis. Like the voice of Earth, which is not heard in transactions that exploit her rainforests, her oceans and

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her atmosphere, the voice of the Iraqi people is not heard in America. Just like the animal which goes under the knife of the butcher, the Iraqis might ask: “What if we do not want what you have to offer?” Borrowing from Maslow’s needs theory, democracy is considered as only a high need by the poor, whereas food, shelter and the desire to live without violence are basic needs. Unfortunately, powerful politicians are backed by the rich, and the well-to-do cannot appreciate this simple reality, for example, that in Iraq, the desire for democracy would most likely take second place to that of being able to walk out the door without fearing a beating. Because humans have ignored a full accounting of nature’s contribution and human costs such as the fruit of labor, which, in effect, is a refusal to assume stewardship responsibility for the Earth, the exploitation of labor and nature continues to this day. Profits and economic growth are calculated and publicized as the growth of GDP and GNP. The achievement of higher and higher living standards hides the reliance on slave labor and the slow depletion of the Earth’s capital, which ultimately will not be of benefit to anyone. The strong win over the weak, and Nature, the silent partner, dies. Although this so-called “economic efficiency” is based on Adam Smith’s theory, he had never suggested that we ignore the full cost of labor and contributions from nature. We are responsible for doing it for our own convenience. Economics refers to the efficient and effective use of any given input from human or nature’s contribution to achieve its purpose. The purpose of economics is to utilize the resources available on Earth, including all natural capital, in such a way that the function remains intact and available for our children and their children’s use in the future. Everyone who has worked should receive a fair reward, not only of labor value, but also a portion of the fruits generated by his or her labors. If economics means “efficiency,” how is it possible then to achieve any level of economic efficiency if all the costs involved are not included? Furthermore, some have made the invisible hand into a manipulative tool, and along with the ideas of cost efficiency and profit maximization have turned the completely noble purpose of economics into a machine that serves the greedy. One may wonder if the Scottish philosopher is now turning in his grave at how his theory of efficiency is being used and at what has been done to his Wealth of Nations.

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The market economy that we have developed, together with the principles of modern capitalism that defend it, are now very much a part of our society. There are two unpleasant consequences to this — one to the value of labor, and the other to the value of nature’s capital. Until now labor unions have been the voice that spoke for the interests of workers. However, some labor unions have developed into gigantic organizations, which often make deals with the management and powerful dealers in politics that support politicians who speak for their interests willy-nilly. As such, it has become very difficult to challenge them. The fall of the Berlin Wall and China’s move away from pure communism to a communist market economy are events that have been touted to signal the triumph of capitalism, with socialism losing virtually all its credibility. There is no longer a dynamic voice for the poor and helpless; protests are no longer heard and massive strikes seem to be a thing of the past. Similarly, ignoring nature’s contribution as a cost factor is a serious offence, against not only nature but humanity as well, since nature is our life support (Fig. 8.7). The current market system has no measures to deal with the offenders against nature, such as those in the mining, automobile, pharmaceutical, steel paper, packing and tourism industries. Such offences,

Nature’s contribution unrecognized

Fruit of labor value Costs, recognizable, and quantifiable

System of exchange — invisible hand

Profit for the winner

Payment made to suppliers of goods and services based on acceptable and verifiable objective evidence

Fig. 8.7 Process of exploitation of the fruit of labor and nature’s contribution.

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which seem to have become a routine part of life, have resulted in problems such as climate change, global pollution and the loss of biodiversity. This is a clear warning that humanity may have to pay a high price for ignoring our stewardship responsibilities. Just imagine a day when the ice caps have melted so much as to cause the ocean levels to rise by a few hundred meters — what good will “efficiency” serve then? Will the invisible hand be able to save humanity from the powerful forces of nature? One response to these warnings of the future is that we cannot consider the future even though it is important if we do not have what we need and want at present. We may be aware of the problems, but we may not have the answers. Will we give up our hard-earned high standard of living? We know that the market economy is imperfect, yet it is here to stay, although we do not know for how long. Are there other options? Since we have only one life to live, are we not entitled to take what we want as long as it is within our legal right? Certainly, the future of humanity is important, but what is wrong with letting the future take care of itself? The underlying problem here is that humans as well as other living beings are living in both the present and the future. The imperfections of the market economy can be corrected to some extent, although it can never be perfect. Because imperfections are created by man, improvements can be made, not just for any individual but for the common good as well. Questions for discussion 1. Economics is about the utilization of resources to satisfy human needs and wants, which, when summarized in one word, is about “greed.” Discuss. 2. Comment on this statement: “I have earned my position as CEO of the company. There is nothing wrong in taking a few million dollars as my year-end bonus because what I am taking is the fruit of my own labor. The rest of the employees receive their paycheck regularly according to contractual agreement. Besides, they do not have to take risks in making important decisions like I do.” 3. Greenpeace and the other environmentalists have had their say. How do they justify their own lifestyle of living in high comfort and

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driving a car much like anyone else? Why is it wrong to take some acreage to develop a six-star hotel to give tourists the luxury holidays they deserve? Besides, tourism provides jobs and helps the poor nations to earn “greenbacks” to ease off the pressure on their own local currency. Discuss. Economics is all about making money. Discuss. Stewardship responsibility and accountability are words that seem to be frequently used by people who believe in God. Is there any difference between ownership and stewardship? Discuss. Discuss the following statement: “The market economy is a symbol of civilization and is intrinsic to the democratic process.” From the point of view of resource utilization, to mine deposits from the ground is to make good use of these important resources for human benefit. It is about making different combinations, a creative and innovative necessity for human consumption. Why then must we consider putting them back? How would we do it? Assuming you are a professional accountant, do you think you have the responsibility to improve accounting practice to include the recognition of nature’s contribution? Why? If you think it can be done, make a recommendation to the accounting standards authority to state your case. Globalization is an attractive idea. Is it possible to globalize everything that affects the global economy except for the free movement of labor? Better still, do away with the immigration requirements in the countries that belong to the United Nations. Do you agree? Give reasons to support your answer. State what you know about the imperfections of the market economy. Is there anything that can be done to make the market economy less imperfect? If you think that the market economy is already a perfect model now that will serve human beings indefinitely, explain why and how. Assuming you are a parent and would like to teach your children to appreciate the difference between stewardship and ownership. How would you go about doing it? A well-to-do individual tells you that he would do everything to help his children make as much money as possible because money is about getting what one wants. Comment on this.

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13. In the name of more efficient and better utilization of resources, mergers and acquisitions are common happenings today. In reality, they are used as a ploy to eliminate jobs and to push stock prices up in the market, consequently allowing the newly merged company to resell and make a quick profit. Consumers may suffer as well because mergers and acquisitions usually mean new promotional schemes, which are often at the expense of quality, or big cosmetic changes with no real change. What would a labor union’s position be if a merger entails the loss of jobs for its members? Do you agree that mergers and acquisitions are proprietary decisions of the shareholders and are none of the union’s business? Discuss. 14. To take into account the fruit of labor is a socialist idea to discredit capitalism. Do you agree? Why? 15. Human costs that cannot be quantified and environmental deterioration such as global warming lie outside of the market economy and the reach of the invisible hand, which is blind. To say otherwise is to have no regard for the reality of economics. Do you agree? Why?

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Chapter 9

Two Plus One

The Government, Philanthropists and Social Entity Inc. “Democracy is only a word, only people who stand behind the word could make a difference.” (Anonymous) 9.1 Introduction Two plus one: three subsystems of which the first two, government and philanthropic organizations, are a part of human efforts to support the market economy in our society; besides assuming the function of distribution of wealth, they are the engine that moves people, goods and services, and motivates people to create and innovate. The government and its funded agencies exercise their administrative power to make adjustments in the distribution function of the market economy, while philanthropic organizations, often established by concerned individuals, typically seek to repair damages caused by the blind actions of the invisible hand to both human beings and nature. The “plus one” component is the purpose of our deliberation. It refers to the creation of a legal entity, designated here as Social Entity Inc., as a subsystem for the transfer of some of the responsibilities of dealing with human and Earth issues generated by the private corporate sector, instead of relying only on government intervention and charitable undertakings from the general public (Fig. 9.1). 165

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Government and government-funded agencies Philanthropists

Social Entity Inc.

Market economygenerated damages to humans and nature

Fig. 9.1 Two plus one. Social Entity Inc. shifts poverty relief and the responsibility of environmental care to corporations that act as a subsystem to the market economy along with the contributions from government and philanthropists for the betterment of the world and the human and natural environment.

9.2 The Government 9.2.1 Price of democracy While Iraq was under the rule of Saddam Hussein (executed 30 December 2006), it was believed that on average, his actions resulted in the deaths of 30,000 Iraqis a year. Following the invasion by the American-led allies, which started the “war against Iraq,” which then became the “war in Iraq” and finally, the “fight for Iraq” (as CNN labeled it consecutively), the highest published estimate was a death toll of at least 100,000 Iraqis in the first year.1 Although the current estimates of Iraqi deaths are highly variable, they range in the tens of thousands per year. What is the difference? Saddam Hussein was a dictator who killed his own people, while George Bush claims, at least after the discovery that no weapons of mass destruction were likely to be found,2 that the allied invasion of Iraq was justified on humanitarian grounds to establish a democratic government under allied (primarily US) supervision. It might as well be said that in the market economy, everything is for sale; the only difference is in the price. Here, the price is the blood of the Iraqi people, who may not be able to understand why they have to pay for a democratic government with blood and an “imported” civil war. 1

L. Roberts, et al., “Mortality Before and After the 2003 Invasion of Iraq: A Cluster Sample Survey,” The Lancet 364: 1857–1864 (2004). 2 “Dead Wrong: Inside an Intelligence Meltdown,” CNN, August 21, 2005 (transcript), http://transcripts.cnn.com/TRANSCRIPTS/0508/21/cp.01.html.

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9.2.2 Democracy may not be for everyone A democratic government is elected by the people and for the people. Unfortunately, democracy is often for the rich and not the poor. India claims to be the largest democratic country in the world. However, the caste system still exists, whereby members of each of the four different classes or Varnas, belong to one of the hierarchical castes or Ja-tis. Under this system, a person born into a lower Ja-ti could never excel or follow his or her dreams. Although the caste system is now illegal and changing, it is happening very slowly, especially in rural India. “Positive discrimination” policies have been instituted to reserve a certain proportion of government jobs and university places for the lower castes, but this is not without its problems. In any case, the communities that are low on the caste hierarchy generally remain equally low in the modern social order. Despite the appearance of democratic structures, the sad story of India’s continuing caste system goes to show what happens when people are being discriminated against based on cultural and financial status. Although recent developments in commerce and entrepreneurial undertakings have improved living standards in India, massive numbers are still being hampered by the system. What the government is doing to educate the masses and to alleviate their economic situation remains a mystery, and any commitment to protect the environment and the Earth is unlikely. Although India has the 12th highest GDP in the world, it is ranked 135th on a per capita basis.3 Nevertheless, it is the fourth largest in terms of military expenditure.4 The poor are left to be poor, and violence is used against members of the lowest class, the untouchables or Dalits, to suppress the expression of their rights.5 In some ways, refugees are of even lower status than the untouchables in India. June 20 has been designated as World Refugees’ Day. Some of us may not be aware that there are an estimated nine million children who are refugees. There is no count of the total number of refugees worldwide, 3

IMF, 2005 (http://www.imf.org/external/data.htm#data). “World Military Spending Topped $1 Trillion in 2004,” Reuters, June 7, 2005. 5 Justice Dr. K. Ramaswamy, Member, N.H.R.C., “Casteism, Intolerance, and Instruments of Law,” in People’s Union for Civil Liberties (PUCL) bulletin, December 2001 (http://www. pucl.org/reports/TamilNadu/2001/Casteism.htm). 4

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but one would assume that it is significantly greater than nine million, with Africa being the largest source of them. Although refugees are also subject to “governance,” they have no say in it as a people without a voice. Assuming that Smith’s theory of the invisible hand fully determines our economic life, then it should work perfectly without any need for government intervention. This is, however, not the case. The invisible hand is more like a puppet that requires someone to pull the strings behind it, which is the government. The strings can refer to the taxes collected by the government and its manipulation of money and interest rates through the central bank. Taxes collected can be redistributed to various sectors of the economy and used to build a harmonious relationship among its people and with the environment. Expenditures are outlined in the budget. If they are rejected by the democratically elected “assembly of people’s representatives,” the government has to call for another election. However, once the budget is passed and the money is in the hands of the decision-makers, it becomes difficult to track who controls it or where it really goes. We have approximately 5.6 billion people living in this world, and only a very small percentage of these 5.6 billion people could ever hope to hold political office. Even in a country like Canada or the United States, one usually has to have financial means in order to be a political candidate. For example, if one were to examine the list of individuals who have made it in the Canadian political scene in the past 30 years, the top dozen big names would be linked one way or another with a conglomerate-owned newspapers, insurance companies or mutual fund firms. These individuals, including four former prime ministers, a provincial premier, two federal ministers and a senator, were all supported either directly or indirectly by one powerful Montreal-based corporation. Similarly, if one were to look at the United States, one would be hard-pressed to find anyone in political office without either independent wealth or financial support from businesses. In short, one needs money to enter the election race. In fairness, however, some politicians have dedicated themselves to social issues and the interests of the poor and the disadvantaged. Pierre Trudeau, the late Canadian Prime Minister, pursued the idea of a just society and worked on the north/south dialogue throughout his political career. Similarly, the former premier of Ontario, Bob Rae, has always been known to the people of Ontario for his ideas on the social contract

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and his stand on workers’ rights (at the time of writing, he is running for the federal Liberal leadership). The fact that he maintained his stance despite it costing him votes should also be noted. 9.2.3 Environment and natural resources Issues on the environment and resources have caught the attention of concerned individuals globally. While the governments of individual countries may have the apparatus for governing the environment and resources, neither of these concerns tends to be a priority in government spending. Instead, the continued exploitation of nature and her resources seems to be the norm. The exploitation of fossil fuels is an example. Since 1973, there have been several oil crises. The 1973 crisis began in earnest on October 17, 1973, when members of the Organization of Arab Petroleum Exporting Countries (OAPEC), which consists of the Arab members of OPEC plus Egypt and Syria, made an announcement. As a result of the ongoing Yom Kippur War, OAPEC would no longer ship petroleum to the nations that had supported Israel in its conflict with Syria and Egypt (i.e. to the United States and its allies in Western Europe). About the same time, OPEC members agreed to use their leverage over the world price-setting mechanism for oil to quadruple world oil prices, after earlier attempts at negotiation with the “Seven Sisters” failed. Due to the dependence of the industrialized world on OPEC oil, these price increases had dramatic inflationary effects on the economies of the targeted countries, while suppressing economic activity at the same time. The targeted countries responded with a wide variety of new, and mostly permanent, initiatives to contain their further dependence. Despite these warning signs, of both the vulnerability of the Western nations to foreign, oil-producing countries and the upcoming depletion of oil reserves, their dependence continues to increase (though per capita usage has gone down slightly from the 1970s).6 Meanwhile, governments receive very high revenue from taxing oil consumption. In Canada, nearly 50% of the retail price that consumers pay at the pump goes to the government. Governments also receive 6

http://www.eia.doe.gov/neic/infosheets/petroleumproducts.htm.

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payments from oil companies, not for the oil extracted from the ground, but for leasing the property. In April 2006, National Geographic published a one-page feature, “The Selling of Alaska”: Some see Alaska’s North as a lush ecosystem worth protecting. Others see it as a storehouse of oil — up to 48 billion barrels — waiting to be tapped. The latter view is gaining ground… Both the federal government and state can issue leases, which range in size from a few hundred acres to nearly 15,000. Since 2001 in the NPRA alone, energy companies have paid 120 million dollars to lease nearly two million acres. If the sites prove promising, oil and gas wells may spill farther across the slope — and the lost wilderness may be remembered as the cost of doing business.

Obviously, the world and the US in particular need oil, but the 120 million dollars received by the government will never be reinvested back into the ground. There will certainly be further investment. From the government’s point of view, this means jobs and economic development. From the business point of view, this means profits and the accumulation of capital. From the environment’s point of view, this means more cars and that more oil and other resources will be required to fuel and maintain them. The decision-makers in government are constantly weighing the odds between short-term needs — which may appear as demands from the people and the possibility of being re-elected to office — and the long-term sustainability for humanity. The outcome is not difficult to predict. Like the old British saying, “Selling the silverware for groceries,” we will continue to take the oil out of the ground until there is nothing left. What about our commitment to the environment and nature? How can there be any profit given that the whole process involves extracting and using, resulting in the depletion of capital? To understand this, we must appreciate the nature of profit or income. J.R. Hick noted: “The purpose of income calculation in practical affairs is to give people an indication of the amount which they can consume without impoverishing themselves. Following this idea, it would seem that we ought to define a man’s income as the maximum value which he can consume during a week, and still expect to be as well-off at the end of the week as he was at the beginning…”

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Applying the above to the oil business, we will never be as well-off at the end of the week after taking petroleum deposits from where it has been for a long time without putting anything back. Where then does the profit come from? It must be noted that Hick’s notion of income makes no reference to waste or the accumulation of resources for accumulation’s sake. In other words, maximum value consumption must not be interpreted as greed. Greed does not mean one cannot consume since consumption has its limits. Greed occurs when waste is generated among other things; greed affects resource allocation causing social illness and resource misallocation. The main function of any government is to govern, ideally in a stewardship role to care for its people. It is, however, not the government’s role to engage directly in production or trade except for distribution. Thus, anyone who works for the government, whether as an elected representative or employed as a decision-maker, should ideally subsume his personal interests into that of the people, for the present as well as the future. Moneymaking should never be an objective for those who are involved in working for the welfare of people. Unfortunately, greed and personal ambitions motivate some individuals to take advantage of their position to build personal wealth by exploiting other people. However, there are also many dedicated individuals with a vision for sustainability, who serve and care for others diligently. The word “vision,” which is frequently used in government, business and the discipline of economics, should be applied to all decision-makers. A vision should take into consideration long-term objectives, not just short-term ones like a re-election. 9.2.4 Power of the SEC and the accounting profession In Chapter 8, the Stock Exchange Commission is perceived as a watchdog overseeing the operations of “exchange” to ensure they are in accordance with the law. The accounting profession is seen to provide the necessary reliable information for interested players and observers to enable them to make intelligent and informed decisions that will steer the blind invisible hand in the right direction. The marriage between the Stock Exchange Commission and the accounting profession is therefore the powerhouse that drives the ownership-based market economy.

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The economy, which is designed to facilitate capital accumulation, results in dividing people into two streams, the rich and the poor, with too few in between. 9.2.5 Key words are “interest rate” Interest rates constitute one of the “strings” that the government can pull to steer the invisible hand in the direction that it wants it to go. Chapter 7 discusses interest as a form of distribution, while Chapter 8 focuses on interest as a source of capital accumulation. These two functions of interest enable the government to influence short-term money flow through the central bank. In general, there are two types of interest rates — the short-term interest rate, which is used by all banks including the central bank, and the long-term interest rate. While the short-term interest rate represents the going rate and tends to follow market trends, the long-term interest rate, on the other hand, depends on a number of factors. These include: • •

• •

normal interest for the service rendered by capital for a longer period of time; economic factors of the future including the increasing value of scarce resources such as land, the presence of large bodies of water, mineral deposits underground, the natural environment and places of historical or scenic value; possible risk; and government borrowing.

Taking all these factors into consideration, the long-term interest rate could be established in a straightforward fashion. The government has the right to issue paper money based on what is required in the marketplace. The supply of paper money printed by the government has a direct impact on the rate of interest in addition to the temporary measures used by the central bank to move rates up and down depending on market conditions. The printing of money is a serious matter. It must be backed by evidence of tangible yield from economic performance, such as GNP, GDP, favorable trade and substantial foreign currency reserves (US dollars, British

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sterling, Japanese yen or euros), as well as other factors indicating the country’s overall economic performance. These include the rate of unemployment, stability of currency value and ultimately the trust of people. There is a line engraved on the US coin which reads: “In God We Trust;” the currency of any other country could also read: “In People We Trust.” It is that trust that holds the value of the currency, and the government must earn that trust. 9.2.6 Are we at the mercy of the central bank? The accounting profession serves the market economy by providing consistent information on corporate performance, which is the means by which the invisible hand operates and allows the stock exchange to function. There is also the hand of the central bank, which acts on behalf of the government to move the markets by varying the interest rates (Fig. 9.2). The short-term interest rate is a powerful tool in generating immediate results. The minute an announcement is made that interest rate will increase, say by half a percent, lending rates will immediately go up, funds will shift swiftly from short-term stock investments to short-term bank notes or deposits, and consumers will pay more for credit card purchases. If the interest rate continues to climb, then words like “overheated” or

Government

Issues paper money

Central Bank

Short-term interest rate

Regulates market activities

Long-term interest rate

Public borrowing and borrowing + from World Bank and other countries

Indirect impact on longterm stability and growth; attempts to stabilize currency value and curb inflation

Fig. 9.2 The role of the central bank. The central bank is the instrument used by the government to control the state of the market economy by varying the short-term interest rate for immediate effect, or the long-term interest rate to impact long-term stability.

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“inflationary” will be used to indicate that further government or central bank intervention is necessary. This may take the form of adjustments to the long-term interest rate or the issuing of government bonds to ease off the heat. Continuing with the previous analogy of the puppet on a string, if the person holding the string does a good job, the show goes on. If the string becomes entangled or is not played well or breaks, the puppet collapses and there will be no more show. In the short term, government adopts what is mainly a fire-fighting approach to governing — varying interest rates, controlling inflation, ensuring unemployment rates are as low as possible and trying to keep the large corporations happy. In the longer term, government spending is an important economic driver. Former US President Eisenhower in his farewell address coined the term “military-industrial complex,” when he warned of the reliance on interactions among the “iron triangle” of government, the army and industry: A vital element in keeping the peace is our military establishment. Our arms must be mighty, ready for instant action, so that no potential aggressor may be tempted to risk his own destruction... This conjunction of an immense military establishment and a large arms industry is new in the American experience. The total influence — economic, political, even spiritual — is felt in every city, every statehouse, every office of the federal government. We recognize the imperative need for this development. Yet we must not fail to comprehend its grave implications. Our toil, resources and livelihood are all involved; so is the very structure of our society. In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist. We must never let the weight of this combination endanger our liberties or democratic processes. We should take nothing for granted. Only an alert and knowledgeable citizenry can compel the proper meshing of the huge industrial and military machinery of defense with our peaceful methods and goals so that security and liberty may prosper together. US President Dwight D. Eisenhower, Farewell Address, January 17, 1961

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While Eisenhower was the first person to use the phrase, which usually refers to the United States, in reality, similar relationships have existed since Victorian times, when Britannia ruled the waves with the help of Britain’s industrial might. It should come as no surprise that the ownership-based economy tends to focus on arms build-up, military spending, engaging in war or preparing for war, although the extent of the relationship is perhaps surprising. Here is an extract from a research report released by the Stockholm International Peace Research Institute: United States spending in Iraq and Afghanistan is expected to help push global military expenditure further up in 2006 after hitting US$1.12 trillion a year earlier, a research body said. The Stockholm International Peace Research Institute (SIPRI) said in its latest yearbook that the United States was behind 48% of total world arms spending in 2005 and had accounted for most of the year’s 3.5% overall gain. Several states, including Saudi Arabia and Russia, have used a sharp rise in oil prices to boost military spending. The biggest increase worldwide was in the ex-Soviet state of Georgia, which surged by more than 140% to US$146 million. “Looking ahead, increasing trends in world military expenditure show little sign of abating in the near future,” the Swedish government-funded institute said. The United States, France and the United Kingdom were all involved in costly overseas operations while China was carrying out a modernization of its People’s Liberation Army. Arms spending in Iran also rose in 2005 by around 3.9% to US$7 billion. Elsewhere in the world, the institute noted massive arms spending rises in the Caucasus, with Georgia leading the region with 143%. Azerbaijan came next with 51% and Armenia with nearly 23%. The institute said that the official explanation for Georgia’s large rise in spending was a wish to join NATO, while others argued that

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Stewardship-Based Economics Tbilisi wanted to regain control over the renegade regions of Abkhazia and South Ossetia.7

Under ownership-based economy management, military spending seems to top the list in many countries, while poverty and the environment are at the bottom. The military speaks with the powerful voice of industry. On the other hand, the poverty-stricken and the environment have only the voice of a few dedicated individuals, and certainly cannot speak for themselves. 9.3 Privatization Some well-to-do individuals are of the opinion that everything should be in the hands of private individuals, including the entire allocation of resources that support human life. Such a system, taken to its logical conclusion, would give the poor nothing. With no money, they can only be consumers not buyers, as they cannot even afford to pay for essentials. Hence, they rely on charity or the government’s help. If a government is thinking along the lines of privatizing everything, it is in effect disenfranchising the poor. For example, if basic or compulsory education is privatized, it will be quite impossible for children of the poor to receive a basic education and be rightful citizens in a country dominated by the market economy. Public transportation and health care are two essential functions for safe and affordable living. If these are privatized, the private companies that run them will be motivated by nothing but profit-making, cutting services, asking for government subsidies and cheating the public through accounting manipulations. “Users pay” systems are workable if the country and the decisionmakers for resource allocation are able to appreciate the meaning of the function of the government and its responsibilities to both the rich and poor. The privatization of essential services is not an entirely bad idea, provided those who need the services can afford to pay for them. The function of any government includes the responsibility to ensure that resources are fairly distributed and essential services are provided to all those who may be affected by any of its decisions. 7

“Global Military Spending Hits US$1.12 Trillion,” Reuters, June 19, 2006.

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9.4 Philanthropists Charities offer a means for the average citizen to give back to society, feel connected to a common cause and even do some socializing, or, in some cases, social climbing. For celebrities, philanthropy offers all of the above, plus the potential for major image and career enhancement. Bill Gates has dedicated one third of his personal worth of US$25 billion to help the unfortunate in the world. What does he get in return? The study of human resource management puts forward two theories of management: theory X, which assumes everyone is lazy and unmotivated, and theory Y, which assumes everyone is fundamentally self-motivated and ambitious. In truth, both are part of human nature — sometimes man may be selfish, greedy or lazy, other times, he may be filled with kindness and compassion. To care and to share with others are part of human nature, therefore under the right circumstances, we would like to give back to both society and nature. However, not all giving comes from the same motivation. Here are a few variations: 1. Give when one is able to get something back in return, for example, donations to charities in return for income tax deductions. 2. Give to an institution or a hospital, and negotiate to have a building named after the giver. 3. Give with the expectation that there will be something of added value in return. 4. Give so that one can sleep better at night with a clearer conscience. 5. Give in the hope of earning a place in heaven. 6. Give with no expectation of receiving anything in return. Categories 1 to 3 can be considered as business deals in the market economy. Categories 4 and 5 are for each individual to deal with, in accordance with his conscience and God. Only in category 6, when the giver is nothing but a giver, is the relationship clean and simple. There are a few individuals who had made their fortunes and initiated such giving. They include: • •

Bill Gates, founder of Microsoft — Bill and Melinda Gates Foundation Eli Lilly and family, founder of Eli Lilly & Co. — Lily Endowment Corp.

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Henry Ford, founder of Ford Motor Co. — The Ford Foundation J. Paul Getty, founder of Getty Oil — J. Paul Getty Trust Cornelius Vander Starr, founder of AIG Inc. — The Starr Foundation

Hollywood celebrities, such as Angelina Jolie, whose work as goodwill ambassador for the United Nations Refugee Agency is well known, have also been invaluable in generating attention to the plight of refugees around the world. Over the past few years, Angelina Jolie has made personal contributions of more than US$3 million (one-third of her earnings) to the UN organization according to a recent report. Historically, the “elite” have always played a major role in philanthropy by founding, sustaining and overseeing the non-profit sector. In the process, philanthropy has become a symbol of class status, which contributes to the maintenance of the boundaries of elite society. In most instances, elite philanthropy involves far more than monetary contributions. Giving does not occur in isolation, but is part of an overall involvement with a non-profit organization or cause. Fostering a sense of involvement is a strategy that is quite consciously incorporated into fundraising among the elite. 9.4.1 Business giving Business or corporate giving is in a class by itself. Business giving to charity is tax-deductible. This is a strategy for both sustainability and business. It is a marketing strategy as well because good publicity enhances corporate image, which helps to generate sales. Business giving has a long history. In recent years, public concern for the environment, resource depletion and poverty, particularly in Africa, has made giving to charities even more popular, at least as a trend. It is also good business practice. The combination of tax credits, good community relations and the development of a good corporate image is a potent inducement for large-scale charitable giving. 9.4.2 Charitable organizations Charitable organizations and “not-for-profit” organizations are usually lumped together as one group because of their income tax status. This has

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resulted in a very broad range of what we call not-for-profit organizations, which include the Red Cross, Salvation Army, Goodwill, amateur sports and trade associations, and other professional groups. How a charity may benefit depends on the individual’s feelings and passion for others and the environment. There are many organizations whose major task is to gather resources from the broadest possible spectrum for a particular cause. Even within such organizations, there are differences, with some of them relying purely on donations and direct giving to those who are in immediate need. Food banks can be considered to be in this category. There are also corporations that are essentially owned and operated by charitable organizations. For example, in Bangkok, Thailand, a chain of restaurants operate like any other restaurants generating income or profit, except that this income or profit is transferred to their parent organization, a charitable establishment. Similarly, Goodwill and the Salvation Army operate retail stores, which sell clothes and goods ranging from small appliances to furniture, with a gross margin or profit after deducting operating expenses. The remainder goes to the charitable works of the organizations. There is another variety of organizations that claim to be created for charitable purposes. They employ staff and operate like any other business. Their executives are paid in accordance with their responsibilities. The author recalls the case of an executive from a charitable organization who flew first-class and stayed in five-star hotels. When questioned by a reporter on the necessity of such lavish spending when he worked for a charitable organization, his reply was: “How do you expect donors to trust me if I do not give them the impression that I am a successful business executive?” He might be right in what he said, except his traveling expenses were not from his own pocket but the charitable organization that he represented and for which he raised funds. 9.4.3 Stewardship’s responsibility and accountability It is still questionable behavior when decision-makers who are in a position to make use of available resources decide that their own

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benefit comes first, even when there may be justifiable reasons. Not too long ago, the public responded to the 9/11 disaster by contributing to the 9/11 relief fund to the tune of over US$2.7 billion. However, a recent article8 suggested that distribution of the fund to the victims of the disaster was uneven, with some benefiting substantially more than others. While this may or may not be justified, it is a fact that charity fraud is an enormous problem (see http://www.ftc.gov/charityfraud/). What has happened to the responsibility and accountability of good stewardship? 9.4.4 Where do we go from here? Based on the above discussion, it is clear that the methods of redistribution of wealth are flawed — neither governments nor philanthropy do enough to help the Earth or the poor. The reasons for this are manifold; the fundamental one being redistribution is an afterthought for both governments and philanthropy. Governments act only after they have paid for new missiles or submarines, or after doing the things that ensure their re-election. Many people see philanthropy as something they might consider only after they have made their fortune. Despite the problems, the author is reminded of one of his favorite sayings by the late former US President John F. Kennedy: “All our problems are man-made, therefore they may be solved by man. No problem of human destiny is beyond human beings.” Man created the market system. Our system of economy is based on ownership; individuals are entitled to private property ownership. We need business to run our economy; we realize there is no real profit so long as we do not keep capital intact. We are aware that the excesses that result from the desire for ownership have led to war, which is waged regardless of justice. We understand that real economics is about the attainment of both efficiency and effectiveness, utilizing resources to attain long-term sustainability, yet we manipulate interest rates to manage the economy in the hope that short-term actions will lead to longterm sustainability. We recognize that non-renewable resources such as 8

K.P. O’Meara, “Are They Cheating on 9/11 Payouts?,” Insight Magazine, March 15, 2004.

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petroleum will run out, yet we continue to encourage the use of automobiles and the building of highways and super highways. We are aware of the consequences of our actions, yet everything we do seems to be against long-term sustainability and human interests, particularly those of our children and their children’s future. What is the reason for this? It is because we are fixed on the idea of the invisible hand, the “deaf and blind” pricing system. This is a problem created by man; the question then is: how do we solve it? 9.5 Social Entity Inc. It may not be completely fair to say that a government is there only for the rich and that politics is a rich man’s game. Even in good governments where politicians are there for the people, there are other priorities such as defense and war, employment, stabilizing the currency value, fighting against inflation and trying to keep voters happy. People who are living in poverty may need only very little, perhaps enough just to get by for the day and the opportunity to become selfsufficient. Where the environment and resource depletion are concerned, there is an old saying: “Water from far away is no good for putting out fires.” Governments have short-term goals — to get elected again within four years inevitably means short-term decisions, with some poorly defined hope that short-term success will lead to long-term sustainability. A longer governing term is not the solution. No matter how wellintentioned or good a system might be for governing, as long as there is money (financial links) and power (decision-making) associated with governing, corruption is inevitable. Given enough time, corruption will appear, as the old saying goes: “Power corrupts, absolute power corrupts absolutely.” Philanthropy is always important for both the relief of poverty and succor to nature. However, it remains a “band-aid” type of relief; a more systematic approach is needed to deal with the immense and growing challenges of the future. As the market economy is built almost entirely on corporate entities, they must assume responsibility. As corporations occupy a dominant position in today’s world, particularly in the democratic

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countries, strong legislation will run the risk of destroying what the market economy has built. A possible alternative is to provide corporate decision-makers with the opportunity to assume their stewardship responsibility, which is within the framework of the law and in accordance with accounting practice, and acceptable to the stock exchange. In the author’s earlier publication Entrepreneurism, he suggested that corporate earnings after tax and shareholders’ entitlement be set up as an allotment without disbursement until the need arises. The difference here is that legislative support could make the challenge easier for decision-makers to assume, instead of leaving it entirely to their discretion. Social Entity Inc. is a legal entity within the Companies Act. The special status of a company will only be legally recognized when it has the mandate to designate its earnings after the deduction of income tax and shareholders’ opportunity cost to allocate unallocated earnings for designated purposes such as the following: 1. Recognition of opportunity cost of human efforts. 2. Justifiable provisions to redistribute fruit of labor. 3. Justifiable provisions needed to meet payment for stakeholders’ contribution. 4. Provisions needed to return “natural capital.” 5. Provisions for additional contribution to relieve pressure of global poverty. 6. Provisions needed to repair environmental damage. 7. Provisions needed to mend over-taxed resources of earlier operations. 8. Provisions for making contributions of any other nature to make good social and environmental debts. These eight areas of provisions are for illustrative purposes only, and are neither mandatory nor complete; they illustrate the important point that any series of designates may be included as they arise. Social Entity Inc. is a corporation, which enjoys no specific tax benefit, since all provisions are allocated from after-tax earnings (net financial income after tax). Table 9.1 is a comparison between Social Entity Inc. and corporations under the Corporations Act within the context of a legal framework,

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Table 9.1 Comparison of Social Entity Inc. and other types of corporations. Social Entity Inc.

Not-for-profit organization

Tax status

Tax levied on net income

No levy on surplus

Disclosure

Full disclosure as required by the law and certification

Audit

Statutory audit

Special requirement

None other than required by the law

Liability

Limited liability for shareholders. Officers of the corporation are liable for damages caused to others if they have provided false information or acted against the public for self-interest

Tax levied on operating residual after allocation for social and environmental costs Full disclosure as set for limited liability corporations plus allocation for social and environmental costs Statutory audit in two parts: financial audit and social entity audit Declaration of corporation mission in reference to its commitment to serve social costs. Such request may originate from any individual who has an interest in the corporation Same as limited liability company. If any officer of Social Entity Inc. violates the ethical code or knowingly misuses provisions for other purposes without just reason, he will be personally liable to make good and be barred from future service

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Full disclosure as required by professional audit and government Statutory audit Two Plus One

No special requirement in current practice

Same as Social Entity Inc.

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should Social Entity Inc. be added to the other entities that are already in place.

9.5.1 Proposed model for Social Entity Inc. Based on the economic reality of the new model, the word “ownership” will be replaced by “stewardship,” and the model will adopt the corporate name of “Hope.” Incorporated under the Social Entity Inc. section of corporate law, its investors are its shareholders and other stakeholders. Hope Social Entity Inc. has issued and fully paid for ten million non-par shares with a traded value of US$1 per share. The following is a summary of the company’s operating results for the financial year of 2015 and financial position as of 31 March 2015:

Hope Social Entity Inc. Operating Statement April 1, 2014 to March 31, 2015 000 omitted Revenue

US$10,000,000

Variable costs

4,000,000

Contribution margin

6,000,000

Fixed costs

2,000,000

Operating residual (or financial income)

4,000,000

Income tax (46% corporate rate)

1,800,000

Net operating residual

US$2,800,000

Note: The company uses a variable costing system, consequently, inventory of all materials, work in progress and finished goods contains only variable costs. If deemed necessary, unit fixed cost will be applied to the inventory value and a reconciliation of the difference between the two methods of inventory value will be disclosed.

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A short balance sheet before making adjustment entries for the allotment of operating residual will be as follows:

Hope Social Entity Inc. Provisional Financial Position as of March 31, 2015 000 omitted Assets

Liabilities

Total current assets US$ 620,000 Total current liabilities US$ 5,000 Cash 20,000 Equity Others 600,000 Common share 1,000,000 Total capital assets 3,000,000 Unallocated residual 815,000 Add: Residual 2014 Total assets

2,800,000

US$3,620,000 Total liabilities and US$3,620,000 equity

Year-end adjustments of entries will be made to the allocation of social costs and the costs associated with the company’s operations. As much of these costs are based on the best estimates, they may be supported by research findings or the description by corporate executives in charge of specific functions. All provisions are made with no cash disbursement although disbursement may be made in due course. All provisions made are subject to a five-year review. In the event that no disbursement is made, any of these provisions may be reversed back to the unallocated residual. The board of directors will then decide how this will be made available for reallocating to whatever justifiable cause. An additional dividend for shareholders will also be included. All provisions will be placed under the trust of “Hope Social Entity Stewardship Responsibility Trust.” The trustees must approve any transaction involved in the allocation of the trust. Membership of the trustees will be selected from Hope Social Entity Inc. If necessary, additional members may be added to the trust, but the number should not constitute

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more than 20% of the total number of trustees in the trust. All transactions will be subject to public audit; an audit report will be appended in the annual corporate reporting. Assume that the following is a set of accounting entries to record a transaction. First, to recognize the entitlement of shareholders to a return on their investment, assume that US$6 per share is to be allotted as shareholders’ capital charge: Dr. Operating residual US$60,000,000 Cr. Provision for shareholders entitlement US$60,000,000 Based on research findings, guidelines from government publications, and the company’s own experience or field investigation, one-half of total unallocated residual earned in 2014, before shareholders entitlement (one-half of US$280,000,000) or US$140,000,000, is to be allocated as provisions for various stakeholders’ rightful claim, should such claims materialize. Dr. Operating Residual US$140,000,000 Cr. Provisions for stakeholders’ rightful claim US$140,000,000 Schedule for stakeholders’ rightful claim: – – – – – – – –

recognizing opportunity cost of human efforts provisions justifiable to redistribute fruit of labor provisions necessary and justifiable to meet payment for stakeholders’ contribution provisions necessary to return “natural capital” provisions as additional contribution to relieve pressure of global poverty provisions needed to repair environmental damage provisions needed to mend overtaxed resources from an earlier operation provisions for making contributions to make good to society and the environment

No specific amount is assigned to each of the eight provisions. For example, repair to environmental damages such as cleaning up a polluted

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river caused by the company’s discharge of liquid waste is based on the best estimate of US$500,000. An entry such as the following can be made: Dr. Provisions for stakeholders’ rightful claim US$500,000 Cr. River pollution clean-up claim US$500,000 All other provisions may be made in a similar manner. A question, however, arises in respect of the accounting. For example, cleaning up a polluted river can be charged as a corporate expense. Consequently, the company is able to claim income tax deduction for it. This defeats the whole purpose because the company should be held completely responsible for polluting the river, and no part of it should become public responsibility. If it is the desire for an expense of this nature to be considered a justifiable claim for income tax deductions, this can be done by charging, for example, US$500,000 as an ordinary expense and deducting it from revenue. Consequently, the company will be able to pay a lesser income tax of US$500,000 × 46%, or US$230,000. Assuming that cleaning up a polluted river is a simple operation and the company is able to monitor the undertaking, then the above is a straightforward process. However, there are situations where close supervision is not readily available, for example, in the case of a contribution of US$1 million to help homeless African children. Although there are other international organizations available to accept such a donation from a company, it will be difficult to monitor and measure the results. The company will have to monitor the process itself or coordinate directly with existing agencies. Such operations can be charged to the trustee of the company’s “Residual Appropriation Trust,” a non-paid unit organized by the company with reporting responsibilities for the undertaking. 9.5.2 Flexibility of the residual allocation system The flexibility of the residual allocation system is seen in the allotment of operating residual to various accounts for the purpose of the entity in fulfilling its stewardship responsibility. Over a period of time, the residual account of certain allocations may indicate that there is no need to stand for service. The corporation can always reverse the allocation back to the unallocated residual and include it for redistribution to its shareholders.

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It may also be used for other purposes such as a return to natural capital or global poverty. 9.6 Conclusion The Social Entity Inc. concept provides those who are willing, a means to introduce the idea of stewardship responsibility to a system that works to relieve poverty and help the environment. The idea is not new, but this system allows business to take an active part in making the idea more effective. Because the provisions are made after income tax and the allocation of shareholders’ entitlement to the residual, corporate executives can decide how best to make the allocation. Full disclosure in corporate reporting is required; the form of disclosure is no different from other disclosure requirements. There is already such a requirement in corporate reporting in practice. The only difference is that shareholders and all the other stakeholders must be aware that stewardship responsibility means being accountable not only to shareholders but to all stakeholders. All of us are stewards of the Earth. Questions for discussion 1. In your opinion, what should be the government’s role in the market system? 2. The poor do not pay income tax because they do not have any income. They do not pay much sales tax because they are consumers rather than buyers. In the market economy, should the poor be entitled to government services? Should tax dollars be spent on creating jobs or helping businesses to make more money so they can create more jobs? 3. What is the role of charitable organizations? To what degree should charitable organizations be entitled to take a cut of the funds they raise? 4. Is it justifiable for a fundraiser to live in style on money that has been donated to charities? Discuss. 5. The environment and natural resources are the property of all living things. What right does a mine operator have to take what is underground without any regard for the natural environment? Discuss.

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6. Is the development of wilderness areas for the pleasure of tourists in the name of earning tourist dollars and helping with regional employment justified? In such operations, what should be our concerns in relation to the sustainability of nature for future generations? 7. Do you agree that financial income, which is not an economic profit but leads to redeemed cash and capital accumulation, should belong to shareholders? If so, why is it that shareholders do not always receive the full amount of a company’s annual earnings? 8. As an individual, what are your responsibilities, if any, as a steward in response to greed? Do you feel that the sky is the limit? 9. How do we deal with the ongoing challenge of depletion of oil reserves? Do we ignore it and continue to build more roads and cars until the oil runs out? Or should we be more proactive by making choices that may have a high short-term cost but are ultimately better for the environment and ourselves? 10. Comment on the idea of legislating business in the following three categories: limited liability corporations, Social Entity Inc. and charitable organizations. 11. If Social Entity Inc. becomes a law, many companies may want to improve their public image by restructuring as Social Entity Inc. What problems in the accounting process do you foresee given that everything is based on discretionary decisions? 12. Do you agree that wars are caused by ownership? Give reasons for your answer. 13. If we eliminate ownership in favor of stewardship, how do we motivate people to innovate and create? 14. What is the function of a government in managing a nation’s economy? A conservative view would be that a government should not have anything to do with business. As such, the idea then is to privatize everything, including education, defense and social welfare. Do you agree? What would the impact be for the people in that country? 15. Based on the premise that privatization is a good thing in the market economy, should a government contract private corporations to issue “money” and control its circulation? Why? 16. Discuss the possible reasons for a government’s attempt to privatize health care or social medicine.

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17. Should the collection of rainwater be privatized? Give reasons for your answer. If you think it should be privatized, suggest how it could be done. 18. Discuss the premise that current democratic practice is primarily for the benefit of the rich and not the poor. If you think the practice of democracy should be redefined so that it benefits everyone economically, how would you do it? 19. Would the concept of stewardship help those in a governing position to be more responsible and accountable? If you think it would be helpful, elaborate how. If not, give reasons for your answer. 20. Discuss two systems of taxation: taxing those who can afford to pay, for example, income tax, and taxing those who are in the marketplace such as the buyers and sellers of goods and services. How would each of these tax systems affect the poor, environmental health and resource conservation? 21. If you are preparing to run for political office, what would be your platform? How would you seek support to run for office? 22. A young ambitious businessperson told the author: “All I want to do is get rich, and then I shall worry about poverty and environmental problems. Without money, I cannot do a thing for anybody.” When asked at what level he would consider himself rich enough, he replied: “I guess the sky is the limit.” Comment on this exchange. 23. Under what circumstances would you consider giving instead of taking?

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Chapter 10

The Candle of Hope

On Christmas Eve, 2005, the author received a card from his former MBA student, Catherine Joing Gu. Along with her season’s greetings, the card included a message entitled “The Story of Four Candles.”

The Story of Four Candles The four candles burned slowly. Their ambience was so soft you could hear them speak... The first candle said, “I am Peace, but these days, nobody wants to keep me lit.” Then Peace’s flame slowly diminished and went out completely. The second candle said, “I am Faith, but these days, I am no longer indispensable.” Then Faith’s flame slowly diminished and went out completely. Sadly, the third candle spoke, “I am Love, and I haven’t the strength to stay lit any longer. People put me aside and don’t understand my importance. They even forget to love those who are nearest to them.” And waiting no longer, Love went out completely. Suddenly... A child entered the room and saw the three candles no longer burning.

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The child began to cry, “Why are you not burning? You are supposed to stay lit until the end.” Then the fourth candle spoke gently to the little boy, “Don’t be afraid, for I am Hope, and while I still burn, we can re-light the other candles.” With shining eyes, the child took the Candle of Hope and lit the other three candles. Never let the Flame of Hope go out. With Hope in your life, no matter how bad things may be, Peace, Faith and Love may shine brightly once again. The card then went on to say: “It is our one and only wish this Christmas Eve of 2005 that there will be no human being living in this world without ‘Hope.’” We can benefit from this simple wisdom and appreciate how nature works for mankind. It is the author’s conviction that a synthesis must emerge from British-rooted classic economics based on Adam Smith’s ideas of private property ownership and Karl Marx’s theory of social justice. It is inevitable if we allow it to happen and work towards it; if we oppose it, just like the Marxist-based communist states that failed, we too will fail. We must appreciate the fact that ownership can only be associated with the individual’s finite life, and it is our responsibility as stewards to work beyond our finite lifespan so as to help the generations to come. Love and passion are part of who we are, but as the story of the four candles shows, they can only survive with hope. To bring sustainability to this world and for people to live in harmony are a far greater challenge than economic equilibrium, with cultural and social barriers to overcome that are beyond the author’s capacity, but he continues to hope. 10.1 The Emergence of Private Property Ownership and Social Justice Classic economics, which is rooted in Adam Smith’s Wealth of Nations, lies at the foundation of the economies that run most Western countries.

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To some people, this system of capital accumulation is the only system. Many, especially those who have benefited from this system, believe that poverty is common, natural, and inevitable. Poverty is only inevitable if: • • • • •

•

•

•

Greed continues to be the sole motivation of the rich. The market economy continues to function as a form for exchange and wealth distribution. The rich and powerful prefer to start a war instead of seeking solutions for peace. The political system favors only the rich. We continue to pursue globalization, which, in fact, is economic expansion supported by the exploitation of cheap labor without the free movement of labor. We continue to practise under the assumption that profit is the ultimate goal without providing a return to the capital used to generate revenue. We assume ownership is permanent, consequently making decisions in resource allocation for personal interests without any regard to the future. We rely on the law for determining the distribution system without considering justice.

Poverty has nothing to do with nature. Although it is natural for some to succeed and others to fail, without the implementation of monetary systems that allow the massive accumulation of wealth, the disparity between the waste of the rich and the despair of the poor would not have arisen. This is the result of a market economy, which serves as a mechanism for exchange as well as distribution. Back in 1776, when Adam Smith’s Wealth of Nations was published, the power of free trade and competition as stimulants to innovation and progress was scarcely understood. Governments granted monopolies and gave subsidies to protect their own merchants, farmers and manufacturers against “unfair” competition. The guilds operated stern local cartels; artisans of one town were prevented from traveling to another to find work. Local and national laws forbade the use of new, labor-saving machinery.

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Adam Smith, for one, was against this restrictive, regulated, “mercantilist” system, and showed convincingly how the principles of free trade, using competition as a stimulant for innovation and creation for self-interest and the common good, were scarcely understood. He saw how choice would spur economic development, reduce poverty, and precipitate the social and moral improvements of humankind that were the principles of his treatise on wealth. That was more than 200 years ago. Smith’s idea was that free trade was intended to spur economic development and reduce poverty. Poverty was as much a challenge then as it is today. Karl Marx, on the other hand, stressed the economic factor in society. His analysis of the class structure in class conflict has had an enormous influence on history, sociology, and the study of human culture, although his expectations about the future course of the revolutionary movement had failed to materialize. Both Smith and Marx had in mind the welfare of humanity. It is only with later developments that economics, and in particular microeconomics, focused on the “profit–making” agenda. What is ironic about the whole idea of profit, both in its meaning and as a economic reality, is that what we seem to work and live for is not profit at all, but rather unqualified residual derived from accounting conventions, which may have very little to do with real profit at all. The profit-making motive has painted some dark pages in history as a result of some twisted economic reasons. This has caused a polarization of attitudes — either completely in favor of free market capitalism (the “Right” of capitalism) or completely against it (the “Left” of communism). However, some have come to the realization that the issue of concern is not so much about the left or right, but rather poverty and the social and moral development of humankind. Figure 10.1 illustrates how the reconciliation of the right and left can become a reality. The presentation begins with Adam Smith, the father of economics. It is the author’s view that after centuries of struggle and endless bloodshed, we must come to realize it is time for us to reconcile differences in order to build a better world for ourselves, our children and their children. There are signs that such reconciliation can take place. The right have gradually moved to recognize the importance of wealth distribution,

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Fig. 10.1 The emergence of two extremes.

while the left have moved rapidly to adopt the idea of creation and innovation as being fundamental to improving economic performance and the standard of living for their people. This hope for reconciliation can only happen if it is the desire of everyone, particularly those who have the power and money to change the world.

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10.2 The Hope There shall be pay equity worldwide, with free movement of labor. Every individual is a buyer as well as a consumer, and every family has some form of residual and hope for a better life. China has suffered through centuries of hardship, including foreign military invasions, political unrest, and poverty. Having impressed the world with her recent economic growth, China could become the next great player on the international stage. The recent history of China shows that she is attempting to introduce the best elements of capitalism into her economy without having to undergo the traumatic destabilization that followed the collapse of the Soviet Union. Although there is much to criticize about China, we can still hope that things will change. We can hope that China will improve her poor human rights record to meet with UN standards, and for her commitment to the reduction of industrial waste and the preservation of the environment. We can also hope for her future cooperation in dealing with emerging health problems such as SARS and the pandemic flu. It is easy to criticize; the harder part is for us to learn from China, this oldest and most resilient of civilizations. Ultimately, we can only “hope” that decision-makers, individually and collectively, will work together with nature’s gifts to humanity, to encourage and develop stewardship responsibility, not only for the present but for future humanity as well. Isaac Newton’s Principia Mathematica changed our view of the physical world, and Charles Darwin’s Origin of Species changed our view of life. Their counterparts are Adam Smith, whose Wealth of Nations changed our understanding of the economics world, and Karl Marx, who gave us the opportunity to rethink class conflict and examine the principles of social justice. We must come to terms with the fact that the world is not ours to own, rather it is a place for us to live and enjoy life with others, and to see that life continue in the interests of mankind. Poverty, the decline of the natural environment and the depletion of natural resources are symptoms of an overarching problem, which is rooted in the belief that the market economy and the invisible hand are all that are needed to build a healthy human environment. In reality, ownership and profit are at best rough approximations to stewardship and residual. A fundamental change is required to facilitate a shift in attitude, and that means education at all levels.

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In ancient Greek mythology, there is a story about Zeus, the supreme god who was about to take the nymph Thetis for his wife, when he was warned of a prophecy that Thetis would bear a son more powerful than his father. Neither Zeus nor any other god was then willing to have her, for each feared to be overthrown by his son. So, they decided to give her in marriage to the man Peleus, for it was said that, unlike the gods, men dreamt of their sons being greater than themselves. From Thetis and Peleus, Achilles, their son, was born. He is the greatest warrior the world has ever known, who will always be remembered because of his fame, even though he died young before the walls of Troy. It is natural and right for us to want the best for our children and to give them more that what we have. However, the world will never have peace, if we continue to have this mentality: “When I was a child, I never had anything like what is available in the world today; I want my children to have everything that I did not have.” To want more for our children, to teach them to want more than what we have and that happiness and security come from greater wealth accumulation is a mistake we cannot afford to make. To teach them to want a better life than ours and to help create a world that is sustainable and watched over by the best of human instincts will be the best gift that we can ever give to them. 10.3 Stewardship-Based Education At the risk of being considered naïve or of not having sufficient material evidence to support his case, the author has devoted this book to seeking possible solutions to meet the challenges of an unresolved reality left to us by the market economy, which is built on the basis of production and distribution being supplied by the same functional unit when both are effectively at odds with each other. We cannot replace the market system and force people to see there is no real profit if the capital that generated it is impaired. This happens when we deny the fruit of labor or discount the depletion of resources and the assault on the environment, all of which lie behind the calculation of “profit.” There is no use preventing corporate executives from taking higher bonuses for themselves because they are already receiving more income than anyone else. Nevertheless, without changing the system, we can shift, in part, the responsibilities for poverty relief and environmental needs to the corporations,

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which constitute a vital and powerful sector of the economy. The proposed Social Entity Inc. idea fulfils this function, with the suggested residual as an added distribution subsystem to the market economy. The more fundamental initiative for change still remains with education; stewardship responsibility and accountability must be taught in our school curricula from kindergarten to university level so as to make that change a part of our every fiber. The poor appreciation of stewardship-based education is not a mere casual observation. Lifelong education is critical, particularly in early childhood. James Heckman, the Nobel-prize winning economist who devoted considerable effort to education, particularly economics, argued that good early childhood education is fundamental to preventing severe disadvantaging of the underprivileged. He does not mention stewardship responsibility and accountability though. 10.3.1 Stewardship-focused education system Having taught for more than 40 years at the post-secondary level, including five universities in four different countries, the author has not come across any clear educational objectives being outlined. From his vast personal experience, he draws up the following: a. To develop an individual to be a good citizen. b. To develop an individual who is able to contribute to society. c. To develop an individual in a specific area of discipline so that he is able to serve society with his skills and talents. d. To develop an individual’s capacity to realize his growth potential. Educational objectives are of general interest; the United Nations Decade of Education for Sustainable Development (ESD) has released a document that contains the following objectives:1 • • 1

facilitate networking, linkages, exchange and interaction among stakeholders in ESD foster an increased quality of teaching and learning in ESD United Nations Information Service.

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help countries make progress towards attaining the millennium development goals through ESD efforts provide countries with new opportunities to incorporate ESD into educational reform efforts

While the range of activities may vary widely, stakeholders can still apply the following seven strategies in their own institutional frameworks as well as the networks and alliances in which they function: – – – – – – –

vision-building and advocacy consultation and ownership partnership and networks capacity-building and training research and innovation use of Information and Communication Technologies (ICTs) monitoring and evaluation

Unfortunately, stewardship accountability and responsibility are not included. Since the subject is economics, the educational objectives of the Centre for Economic Education of Indiana State University are listed here for illustrative purposes: • • •

•

•

Help raise the level of economic understanding in West-Central Indiana in particular and the State in general. Develop programs, materials, and evaluation instruments to facilitate instruction on the American economy and its role in the world. Conduct and promote workshops, pre- and in-service training programs and other training to teachers and educational administrators from all grade levels to improve both the quality and quantity of instruction of economic concepts in the standard curriculum. Cooperate, whenever possible, with schools, educational agencies, business labor, agricultural and community groups, which seek to expand sound and objective economic education programs. Conduct and promote workshops and other programs for members of clergy of all faiths in order to improve their understanding of economics.

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Assist schools and personnel from the state and local educational communities in the evaluation and implementation of available economic educational materials. Assist individual school systems in designing economic education programs to meet their particular needs and purposes, in line with their available resources and their stated interests in formal K-12 economic education programs. Develop financial support to implement these objectives and deposit funds with Indiana State University for these purposes.

After a review of approximately 200 university courses in entrepreneurship and small business management, in which development and growth are important concepts, it is regrettable that stewardship was not noted in any of them. Although the term stewardship has been popularly adopted in corporate mission statements such as that of General Motors, it is usually used only in the interest of shareholders. Stewardship is also a common theme among philosophers and especially in religion. Examples include the following from the Judaeo-Christian Tradition: Woe to the shepherds of Israel who only take care of themselves! Should not the shepherds take care of the flock? You eat the curds, clothe yourselves with the wool and slaughter the choice animals, but you did not take care of the flock! You have not strengthened the weak or healed the sick or bound up the injured. You have not brought back the strays or searched for the lost. You have ruled them harshly and brutally. Ezekiel 34:2-4 From Buddhism: Rajah Koravya had a king banyan tree called Steadfast, and the shade of its widespread branches was cool and lovely. Its shelter broadened to 12 leagues... None guarded its fruit, and none hurt another for its fruit. Now there came a man who ate his fill of fruit, broke down a branch, and went his way. Thought the spirit dwelling in that tree, “How amazing, how astonishing it is, that a man should be so evil as

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to break off a branch of the tree after eating his fill. Suppose the tree were to bear no more fruit?” And the tree bore no more fruit. Anguttara Nikaya iii.368 From Confucius: If you do not allow nets with too fine a mesh to be used in large ponds, then there will be more fish and turtles than they can eat; if hatchets and axes are permitted in the forests on the hills only in the proper seasons, then there will be more timber than they can use... This is the first step along the kingly way. Mencius I.A.3 The presence of stewardship concepts in the fundamental teachings of major religions implies that stewardship is in our consciousness and needs only to be expressed. To institute a change in the education system at any level from primary school to university is a long process, particularly if it involves a fundamental rethinking of what education should be. Nevertheless, this does not mean it is impossible, especially if there are responsible and willing individuals. Education could begin at home, as home education builds the foundation for a person’s future. Where possible, a child should be taught responsibility and to appreciate nature’s gifts. Stewardship, which has not been included in general education curricula in the past, should now be taught as part of the discipline. In view of the diversity of learning, it would be difficult to provide a comprehensive guideline, and it is not the intent of this book. However, a few key areas should be considered: •

•

We have only one Earth, and everything on it is meant for everyone. Some are strong, others may be weak, but everyone is entitled to his share of what Earth has to offer. The number of countries with their diversity of people, culture and background makes it difficult to generalize. Nonetheless, it is clear that no individual can live alone, and no one should take resources ruthlessly just for his personal use. The sharing of resources should be a way of life.

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Resources are finite. The challenge lies not in deciding who should or should not have them but rather in finding more sustainable and renewable resources through creation and innovation. As stewards, everyone has the right to make proprietary decisions while he is in control of the resources. Stewardship responsibility must, however, be exercised during decision-making, and there must be accountability for the consequences of actions taken based on any decision.

10.3.2 Entrepreneurial education — a need for changes Because resources are finite, every individual must realize that living standards can further improve only if everyone is aware of the need to continue innovating and creating for both self-interest as well as the common good. This includes high-level educational programs, where it is vital to be aware of the necessity of teaching individuals how to be entrepreneurs and leaders, that is, to be creative and innovative rather than just be followers. We must also learn from what others have done, not from slavishly following old methods, but using them as a springboard to do something new and different. For example, the case study method should not be taught as a means of following what has been found, but rather as an example of the principles of behavior in action, which would encourage individuals to think out of a familiar environment and discover new frontiers for themselves. The same applies to research. Empirical research in the social sciences has been around for a very long time. Empirical elements of reality are in the end just observations, which do not necessarily lead to a change; the change is in the individual. 10.4 Wrapping Up the Beginning This book and the work of Stewardship-based Economics are only a beginning. The first step is to realize that we may be part of planet Earth, but we do not own it. Most of us would want a life of peace, to enjoy meaningful relationships with others and to live in harmony with the environment. No matter how much wealth and power one may create

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and accumulate, no one is able to escape the final justice of mortality; our role as stewards will one day end. Nevertheless, we can still live happily with one another, appreciating what is available for us now and in the future, and leave a legacy that can be enjoyed by our children’s children. To sum up what has been discussed so far, stewardship-based economics essentially requires a change in mindset to recognize that though we may be legally entitled to make proprietary decisions, we must also assume stewardship accountability and responsibility. Figure 10.2 summarizes what has been discussed in the last ten chapters. There are no questions for discussion in this concluding chapter, but there is a hope, the hope for mankind to continue living in harmony with one another and with the environment. There shall be no wars, but peace. The market economy will be managed by people in the interest of humanity as a whole. It should not merely be a tool for

Ownership-based economics provides the incentive for individuals to expand their personal ambition to accumulate wealth and power beyond the margin of the marginal theory in economics.

The deception of unlimited resources has led to the deterioration of the environment and the draining of resources.

The deception of profit derived from an accounting process that does not take into account all costs. When not all costs are accounted for, there is no profit.

The deception that the invisible hand will distribute wealth equitably. What justice needs is human intervention.

A remark the author once overheard: “Conservation never works.” More appropriately, it should be: “Taking your personal wealth to the grave would never work.”

Fig. 10.2a Summing up: the deception of ownership-based economics.

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Stewardship-Based Economics Stewardship-based economics

The fundamental mindset change

Individual assuming stewardship role for all of Earth’s resources has the right to make proprietary decisions for self-interest and the common good.

As an academic in the field of teaching, research and policy: to stress our role, individually or collectively, as stewards in assuming stewardship accountability and responsibility for the future of humanity. Following the trend for survival, make changes in order to attain sustainability.

As a government decision- and policymaker: short-term survival strategy employment and economic development along with fiscal policy to secure short-term equilibrium; pursuing legislation to enact Social Entity Inc., which allows corporate decision-makers to assume social responsibility.

As a corporate decision-maker: 1. appreciate the fact that resources are limited. 2. recognize all costs and use residual concept for accounting and reporting. 3. price may be blind and deaf, but human decision prevails.

Economic growth strategy Fig. 10.2b Summing up: the hope or stewardship mindset and redistributive system to the market economy subsystem.

individuals to accumulate personal wealth, generating poverty and environmental disasters in the process. Instead, it should be an instrument of justice for humankind and nature, in the present and the future.

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Index

abject poverty, 148 absenteeism, 136 accountability, 73 accounting, 70, 88, 94, 129 accounts, 136 audit, 183 information, 69 manipulations, 176 model, 91 profession, 117, 129, 155 standards, 69 system, 118 actual cost, 33 Adam and Eve, 30 administrative decree, 66 Afghanistan, 53 Africa, 25, 102, 104, 110, 111 slave trade, 103, 104 age distribution, 12 age of reason, 103 aging, 62 population, 12 agrarian-based system, 22 agricultural modernization, 105 AIDS, 3

air pollution, 44 American civil war, 103 people, 125, 159 soldiers, 159 animal, 160 waste, 46 Asia, 25 miracle, 148 asset management company, atmosphere, 160 automobile, 161, 181 axis of evil, 13, 14, 65 bad loans, 11 Baker, James, 13 balloon economy, 150 band-aid, 181 bank, 156 credit, 112 loan, 137 bees, 66 begging, 7, 8 Berlin Wall, 2, 161 Bible, 23

205

11

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biodiversity, 161 black gold (petroleum), 13, 52, 54 black holocaust, 104 blind justice, 96 blood, 166 Bohm-Bawerk, 93 bond market, 155 borrowing scheme, 137 bottled drinking water, 45 Brazil, 44, 104 British merchant, 104 bubble economy, 11 Buddhism, 64, 200 Buffet, Warren, 2 Bush, George W., 13 business and government, 72 expansion, 116, 151 giving, 178 partners, 157 butcher, 159 knife, 160 buyer, 159 Cabaret, 125 Cabot, 10 Canada, 45, 54, 66, 71, 168 Athabasca tar sands, 52, 53, 55 Battleford, Saskatchewan, 46 Beckwith, Ontario, 46 Canadians, 125 Quebec, 71 Toronto, 28 Walkerton, Ontario, 46 cancer, 89 capital, 32, 91–94 accumulation, 96, 119, 125, 138, 146, 147, 152, 153

augmentation, 152 flow, 15, 107, 116 future, 95 gain, 93 market, 153, 156 movement, 112 ratio, 11 capitalism, 2, 31, 37, 96, 97, 124, 125, 194 American-style, 125 crony, 143 modern, 161 capitalist, 3, 66, 73 capitalist-based system, 22 ideals, 124 capitalize expense, 70 carbon emission, 41 Caribbean Islands, 104 cash disbursement, 146 flow, 156 caste hierarchy, 167 Catholic, 23 CBC, 47 Central American, 68 Central Asia, 53 central bank, 168, 173, 174 CEO, 136 Champlain, 10 charitable contribution, 7 organization, 58, 123, 178 chemical waste, 45 Cheney, Dick, 61, 72 Chevron, 47 chicken feet, 134 Children of Israel, 23 China, 14, 27, 30, 31, 44, 48, 53, 66, 101, 110, 134, 196 Chinese, 30, 47

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Index Chinese nationalist government, 148 market, 11 rise, 47 Christian, 104 christianize, 23 church, 104 context, 75 sect, 64 values, 103 church and state, 72 climate change, 44, 88, 89, 161 Clinton, Bill, 72 CNN, 166 coalition, 14 Coase, Ronald, 128 Coca-Cola, 110 colonial market system, 105 master, 105 period, 101 system, 106 colonialism, 111 colonization, 23, 105 Columbus, 10 common good, 6, 76, 80, 83, 162, 202 commonwealth, 14 communism, 2, 4, 161, 194 companies act, 182 competition, 106, 116 compulsory education, 176 Confucius, 16, 31 conglomerate-owned, 168 conservation, 13 constructive destruction, 117 consumer, 85 credit, 95, 150 consumerism, 28, 75, 115 consumption, 20, 74

207

contribution, 127, 160 margin, 184 corporate crime, 40 decision-maker, 39 refugee, 83 reporting, 154, 188 scandal, 71 corrective, 40 corruption, 71 cosmetics business, 62 cost, 87, 128 allocation, 130 cutting, 11 determination, 87 minimization, 132 Costa Rica, 134, 151 costing, 87, 88 system, 130 counterproductive, 159 creative, 43, 136, 138 credit card, 150 crown lands, 124 crude oil, 129 cryptosporidium, 46 Culkin, Macaulay, 12 cultural, 167 currency, 14 Curtis, Adam, 61 cycle of life, 85 Darwin, Charles, Origin of Species, 196 theory of natural selection, Dawkins, Richard, 83 deal, 158 death, 64 debentures, 159 deforestation, 52 demand, 54

58

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democracy, 114, 117, 160, 167 government, 166 price, 165, 166 structure, 167 system, 71, 110 vote, 71 Denmark, 104 department of energy, 129 despair, 148 destruction, 174 direct foreign investment, 108 labor, 87 lending, 152 materials, 87 disclosure, 154, 183 full, 188 requirements, 90 discount theory, 95 disease, 123, 125 diseconomy, 153, 159 disequilibrium, 114 dissatisfied homemaker, 83 distribution, 20, 74, 121, 126, 127, 141, 171, 172 system, 28, 123, 125, 131, 193 downsizing, 11 E. coli contamination, 46 Earth, 27, 36, 40, 43, 77, 78, 90, 124, 128, 159, 160, 167, 180, 201 capital, 160 council, 130 resources, 3 ecological footprint, 27 impact, 41 economic cost, 92 education, 200

efficiency, 160 growth, 70 growth strategy, 204 power, 14 reality, 6, 7 status, 141 superstate, 108 economics, 66, 88, 92 modern, 1 newly industrialized economics, 111 ecosystem, 47 education, 201 effectiveness, 180 efficiency, 106, 160, 161, 180 Egypt, 169 Cairo, 28 Ehrlich, Paul, 28 Eisenhower, Dwight D., 174, 175 empirical research, 202 employment, 44 Enron, 40, 70, 143, 149 entitlement, 127 entrepreneurial education, 202 spirit, 5, 82 entrepreneurism, 182 entrepreneurship, 80 environment, 40, 70, 167, 169, 181 offence, 47 environmental degradation, 68 needs, 197 services, 46 stewardship, 75 equilibrium, 4, 42, 85 equitable distribution, 122 estimated value, 69 Europe colonization, 102

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Index European Monetary Fund, 109 European nations, 101 European Union (EU), 108, 134, 155 eviction day, 24 evil, 65 exchange, 20, 74 surplus, 103 system, 4, 56–58, 66, 86, 117 value, 69 exploitation, 193 of the earth, 52 extended warranty, 62 Exxon, 47 Exxon Mobil, 88 Ezekiel, 200 farming, 136 fear, 61–64 of failure, 63 fertilization, 49 financial center, 106 group, 157 status, 167 finite life, 15, 192 fire-fighting, 174 fish, 51, 66, 130, 201 stock, 136 fishermen, 49 food, 31 bank, 28, 179 fossil fuel, 3, 41, 45 France, 101, 104 French, 10 free enterprise, 72 world cup, 76 free market, 2, 3, 42 economy, 42 society, 73

209

free movement, 123 free trade, 3, 123 Freedom of Information request, 72 fresh water, 45 Friedman, Milton, 10, 39, 40, 77 fundamental mindset change, 204 gas industry, 130 Gates, Bill, 2 Gates, Melinda, 21, 59 Gaza, 24, 25 GDP, 44, 70, 160 general agreement on tariffs and trade, 50, 133 General Motors, 11 General Schwarzkopf, 13 Germany, 53 German, 125 global expansion, 107 market, 32 pay equity, 123 pollution, 161 poverty, 26, 114, 123 terrorism, 61 village, 3 warming, 41, 130 globalization, 32, 102, 106, 108, 110, 112, 114, 115, 119, 123, 134, 143, 193 family tree, 108, 109 GNP, 160 God, 177 command, 64 gold mining, 68 goodwill, 179 governance, 114, 115 governing apparatus, 62 government, 42, 66, 165, 180 and business-linked scandal, 71

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borrowing, 172 business activity, 125 control, 5 intervention, 116 grazing land, 130 Great Wall of China, 31, 61 greed, 44, 66, 74, 111, 119, 126, 128, 130, 141, 171, 193 Greenland, 45 Grewal, Sam, 69 ground water, 45, 47 Gulf, 52 Halliburton Energy Services, 72 Hamilton, Bill, 83 Harris, Mike, 46 health care, 12 Hick, J.R., 170 high need, 160 highways, 181 HIV, 3 home depot, 35 Hong Kong, 102 Hope Social Entity Inc., 185 human and economics, 31 behavior, 69 capital, 32 cost, 160 health, 88 right, 4, 196 humanitarian, 166 humanity, 36, 128, 161 pain, 118 welfare, 194 hurricane, 42 Hurricane Katrina, 4, 26, 45 Hussein, Saddam, 13, 166 hybrid-powered auto-mobile, 54

immigrant, 82 authority, 9 illegal, 113 officer, 9 immoral, 135, 136 imperfections, 162 In God We Trust, 173 income and wealth distribution, 125 calculation, 170 inequality, 135 tax, 117, 182 India, 27, 44, 48, 110, 167 indirect manufacturing or production cost, 87 individual right, 16 Indonesia, 28, 48 industrial chemical trichloroethylene, 46 industrial pollution, 47 inequality, 136 that is legal, but immoral, 135 infant mortality, 3 inflation, 109 inflationary, 174 information exchange, 108 informed judgment, 87 inhabitant, 77 inheritance, 128 innovation, 43, 110, 136, 138 insurance industry, 62 intellectual legacy, 81 interest, 14, 137, 140, 152 rate, 15, 172 International Monetary Fund (IMF), 50, 109, 111, 113, 123, 149, 155 international treasures, 124 invisible hand, 2, 56, 57, 154, 159–161, 168, 181

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Index Iran, 14, 52, 62, 65 Iraq, 14, 23, 24, 52, 65, 72, 166 fight for, 166 Iraqi people, 159, 160, 166 war, 159, 166 irresponsible government, 123 islamic movement, 53 Israel, 24 IT industry, 11 Japan, 53 Japanese, 108 Jesus Christ, 29, 64 job loss, 11 job-cutting, 11 Jordan, Michael, 63 judge, 40 just society, 37 justice, 40, 123, 193 for humankind, 204 Kennedy, John F., 118, 180 Kfar Darom, 25 kickbacks, 136 King Solomon’s wisdom, 65 Kuwait, 13, 52 Kyoto accord, 44 Labor and Conservative Parties, 71 labor cheap, 33, 107 child, 104 cost, 90, 160 division of, 1, 106, 116 efficiency, 35 fruit of, 70, 90, 160 market, 147

resources, 139 rights, 32 standards act, 134 union, 131 unrest, 90 value, 131, 153, 161 Lake Como, 48 lakes, rivers, soil moisture, 45 lakeshore, 124 land use, 89 lavish spending, 179 law, 193 Lay, Kenneth, 149 lebensraum, 23 legal but immoral, 68 entity, 165 governance, 67 right, 161 system, 62, 67 legalized, 130 system of distribution, 73 Lenin, 93 liability, 183 limited, 183 life, 85 expectancy, 3 support system, 43 loan, 159 loan shark, 151 long term interest rate, 172 objectives, 171 sustainability, 181 longevity, 62 lottery, 15 lower caste, 167 lowest class, 167 Lycurgus, 148

211

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macro, 85 Malaysia, 51, 110, 155 Malthus, Thomas, 21, 22, 124, 125 population study, 21 management, 177 responsibility, 75 manipulative, 40 mankind, 124 Maori, 23 marginal cost, 146 rate, 15 return, 146 market place, 118 system, 118, 123, 161, 180, 197 market economy, 4, 28, 56–58, 110, 114, 115, 117, 118, 122, 161, 162, 166, 182 communist, 161 crime, 29 basic model, 114, 115 triangle, 118 Marshall, Alfred, 143 martial arts, 65 Marx, Karl, 73, 124, 192, 194, 195 Das Kapital, 93 Marxist-based communist, 192 Maslow hierarchy of needs, 64 needs theory, 55, 160 Massachusetts Institute of Technology (MIT) Alumni Association, 157 Master of Business Administration (MBA), 68, 69 Matthew Effect, 42 maximize profits, 46, 103

Mencius, 201 metaphor, 13 Mexico, 52 micro, 85 Microsoft, 110 Middle East, 45 migration, 113 military expenditure, 167 military-industrial complex, 174 mindset, 203 minimum wage, 103 law, 134 mining, 161 mirvish, 151 misdirection, 71 misuse, 71 Model for Social Entity Inc., 184 money, 66, 118, 147 capital, 146, 148 laundering, 123 manipulation of money and interest rate, 168 money-driven market economy, 71 moneymaking, 39, 171 moral governor, 67 primacy, 67 mortgage, 150 motivation tool, 63 movement of labor, 109, 123 of people, 113 multi-functionality, 118 National Geographic, national park, 124 native people, 10

90

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Index natural capital, 128, 145–147, 160, 161 equilibrium, 42 gas, 54 resources, 128, 139, 169 nature, 139, 204 capital, 161 contribution, 161 needs, 161 progression, 56 net operating residual, 184 New France, 23 New Orleans, 26 new world, 10 New York Times, 39 New Zealand, 23 Niagara falls, 61 nightmares, power of, 61 Nikaya, Anguttara, 201 Nike, 110 nirvana, 64 Nixon, Richard, 129 non-reported cost, 115 normal interest, 172 Nortel, 71 North Atlantic Treaty Organization (NATO), 175 North Korea, 14, 62, 65 not-for-profit organization, 183 O’Hare, 8 objective evidence, 154 occupancy, 140 rent, 136 ocean, 159 oceanfront, 124 offenders against nature, 161 offshore contracting, 107

213

oil,

13, 130 crisis, 169 field, 53 reserve, 94 Old Vic, 15 operating residual, 184 opium, 101 trade, 102 war, 103 opportunity cost, 145 Organization for Economic Co-operation and Development (OECD), 53 Organization of Arab Petroleum Exporting Countries (OAPEC), 169 Organization of the Petroleum Exporting Countries (OPEC), 129 overfishing, 55 overheated, 173 overpopulation, 22, 28, 31, 40, 52, 123, 130 overseas empire, 101 owner, 130 ownership, 4, 10, 16, 24, 61, 63–66, 73, 78, 82, 84, 93, 119, 127, 180 breeds greed, 15 permanence, 66, 193 right, 64, 67 ownership-based, 71, 72, 118, 119 doctrine, 4 economics, 4, 16, 74, 94, 138, 203 economy management, 176 market economy, 116 Palestine, 23 Palestinian,

24, 25

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palm oil, 51 passion, 126, 192 pathogen, 46 peace, 8, 101, 203 and harmony, 114 of mind, 62 pension provision, 12 people, 32, 55 and resources, 36 People’s Liberation Army, 148 People’s Republic of China, 93 Shanghai, 47, 105 petroleum, 52, 53, 169, 171, 181 deposit, 94 sales tax, 12 pharmaceutical, 161 philanthropy, 177, 180, 181 organization, 165 philosophy, 65, 115 Pine, Albert, 121 planning, 139 plantation, 104 political capital, 110 democracy, 110 office, 168 system, 193 pollution, 4, 13, 55, 130 drinking water, 47 industry, 68 pollutant, 48 Polo, Marco, 30 population, 30 geometric growth, 22 profile, 12 portfolio investment, 112 positive discrimination, 167 poverty, 16, 22, 29, 51, 52, 62, 117, 123, 128, 161, 180, 193, 197 poor to become poorer, 125

poorest countries, 28, 112 reducing, 40 relief, 181 powerful, 124 practical capacity, 33 prevention, 40, 121 principle of people’s livelihood, 93 of population, 21 private capital flow, 112 ownership, 8 property ownership, 10, 16, 192, 195 privatization, 176 product and business costing, 91 production, 20, 74, 86 profit, 44, 69, 70, 104, 128, 138, 140, 145, 146, 171, 193 distribution, 138 maximization, 107, 132 mentality, 66 profit-driven, 72, 107, 111 profit-making, 194 real, 180 sharing, 132, 138 promised land, 110 property market, 149 ownership, 192 proprietary decision, 61, 62, 64 rights, 66 prostitution, 104 Provisional Financial Position, 185 public auditing, 154 funds, 136 good, 1

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Index puppet, 168 on a string, Qing Dynasty,

174 101

Rae, Bob, 168 rainforest, 51, 124, 159 rainwater, 128 Ranger Oil Limited, 129 rate of return on their investments (ROI), 46, 49, 66, 68–70 real capital, 146, 148, 152 accumulation, 151 Red Cross, 179 redundant worker, 35 re-election, 171 refugee, 82, 167 reincarnation, 64 religion, 115 reproduction, 48 residual, 73, 103, 138, 140 allocation system, 187 resources, 30, 55, 86 depletion, 4, 15, 181 distribution, 4, 121 finite, 202 free flow, 109 marketable, 58 non-renewable, 12 renewable, 49, 55 responsibility, 73, 199 Restore Iraqi Oil (RIO) contract, 72 revenue, 130 Ricardo, David, 93 rich, 64, 117, 124 countries, 28 to get richer, 125 rightful owner, 93 risk, 172, 174 risk-taker, 157

215

Robin Hood, 77 Rome, Italy, 21 Rumsfeld, Donald, 61 ruthless and mindless mine operator, 117 sacrifice, 128 sacrosanct status, 66 salvation, 64 Salvation Army, 179 Saudi Arabia, 52 school dropout, 82 Schumpeter, Joseph, 80, 117 Scottish philosopher, 160 Seattle riot, 133 Second World War, 23 second-rate colony, 102 self-generation, 48 self-interest, 46, 80, 83, 107 self-remuneration, 67 selfish gene, 81, 83 selfishness, 84 September 11th disaster, 180 relief fund, 180 seven sisters, 169 sex, 31 shareholder, 69, 88, 154 entitlement, 182 share, 122 sharing, 6, 121, 122, 126, 127 of resources, 201 short-term depositor, 156 interest rate, 172, 173 silent partner, 88 silkworm, 31 Six-Day War, 25 slave economy, 36 labor, 107

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trade, 102, 103, 105, 119 wages, 76, 104 slavery, 32, 111 small borrower, 15 Smith, Adam, 1, 102, 159, 160, 192–195 social contract, 168 issues, 168 justice, 192 objective, 40 order, 167 responsibility, 39, 46, 75–77 Social Entity Inc., 165, 181–183, 188 socialism, 161 socio-economic growth, 48 soft cost, 130 Sony, 110 Soviet Union, 52, 53 Bloc, 32 communism, 31, 58, 93, 124 Spain, 104 Spanish, 10, 23 system, 106 Sparta, 148 special requirement, 183 specialization, 116 sponsorship, 71 stable equilibrium, 36 stakeholders’ rightful claim, 186 standard accounting reporting practice, 129 capacity, 33, 34 Standard & Poor, 95 standard of living, 161 standards laws, 103 state-owned oil company, 54

statement of basic accounting theory, 87 steel, 161 steward, 49, 59, 202 stewardship, 61, 65, 66, 73, 75, 77, 155, 171, 201 accountability, 78, 179, 199, 203 responsibility, 44, 76, 160, 161, 179, 182, 188, 202, 203 stewardship-based, 42, 118, 119 economics, 15, 16, 74, 203, 204 education 197, 198 Stiglitz, Joseph, 143 stock exchange, 153, 182 Stock Exchange Commission (SEC), 129, 155, 171 stock market, 4 Stockholm International Peace Research Institute, 175 stopgap measure, 51 subsystem, 165 successful business executive, 179 Suharto, 72 supply, 54 supply and demand, 86, 131 survival, 84 instinct, 82 sustainability, 127 permanent, 42 sports utility vehicle (SUV), 41 Sweden, 104 Syria, 169 tai-chi, discipline of, Taliban, 53 Taoism, 65, 70 tax status, 183

65

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Index taxing oil, 169 technological progress, 110 technologically based society, 22 Thailand, 155 Bangkok, 179 Phuket, 6 The Netherlands, 104 theft, 153 theoretical capacity, 33 cost, 33 theory X, 177 theory Y, 177 Thoreau, Henry David (Protestant), 75 Three Rivers Dam project, 66 Time Magazine, 52 Times Square, 110 tobacco company, 42 trade, 1, 103 and financial flow, 110 trading system, 103 traffic congestion, 13 transporting, 53 Treaty of Nanking, 102 Treaty of Rome, 108 Treaty of Tianjin, 102 tribal war, 104 Trihatmodjo, Bambang, 72 Trudeau, Pierre, 168 tsunami, 42 unemployment, 109 insurance, 132 unethical behavior, 69, 70 United Kingdom (UK), 32, 71, 101 English, 10

217

United Nations (UN), 198 organizational structure, 109 standards, 196 United Nations Decade of Education for Sustainable Development (ESD), 198, 199 United Nations Educational, Scientific and Cultural Organization (UNESCO), 45 United Nations Food and Agriculture Organization (FAO), 50, 52 United Nations Population Reference Bureau, 27 United Nations Refugee Agency, 178 United States Congress, 129 United States of America (USA), 23, 32, 53, 72, 81, 113, 168 University of Michigan, 75 Statement on Stewardship, 67 unpaid cost, 70 unrecognized sacrifice, 115 urban housing, 49 industry, 106 planner, 117 Uruguay round, 133 users pay, 176 Venezuela, 52 heavy oil deposits, 55 venture capitalist, 157–159 fora, 157 village market, 106 vision, 171 von Hayek, 93

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wages, 90 child labor, 134 earner, 11 Wal Mart, 110, 151 Walker, Michael, 128 want, 161 war, 8, 13, 53, 101, 123, 125, 193, 203 chest, 71 leader, 63 on terror, 63 water, 3, 44 pollution, 48 quality, 89 wealth accumulation, 84 wealth creation and distribution, 115 wealth of nations, 1, 102, 160, 193, 195 wealth redistribution, methods of, 180 weapons of mass destruction, 63 West Virginia, 90 western world, 63

western-style capitalist, 110 wisdom, 30, 192 wolves, 66 worker pension, 11 protection legislation, 132 rights, 169 working class, 124 World Bank, 50, 123, 155 world poverty, 110 world refugees’ day, 167 World Trade Organization (WTO), 50, 133 trade tribunal, 134 Worldcom, 40, 70 write-offs, 70 Xerox,

71

Yat-Sen, Sun 93 yin and yang, 65, 70 Yom Kippur war, 169 Zedong, Mao,

93