Capitalists Arise! – Book Review

 

 

The Book Review Series

 

 

“For the past four decades, capitalism has been slowly committing suicide.”

 

THAT is how Peter Georgescu, author of Capitalists Arise, begins his book. OK, I’ll bite.

Actually, I found out about this book from another source (I can’t remember who/what) and knew I had to read this short book. I’m glad I did.

What follows is a review of the book, some of my favorite lines, accompanied by my own personal thoughts. Let’s take a deeper look into this timely piece.

 

Introduction

I include the introduction because there are so many juicy tidbits contained in it – like the one this whole book review led with.

Moreover, he spends a few pages laying significant groundwork for the rest of the book. This is something good introductions do: lay the foundation and leave you wanting more. Well done, Mr. Georgescu.

He ends the introduction with these pointed words:

“The reality is that the current shareholder-primacy model is a disaster, and it is also not sustainable. Society will soon demand change through the ballot box or in the streets.” – Page 4

Robert Kennedy Jr., talking with Glenn Beck, made the same observation, which you can watch below:

This book – and what it points out – is serious business.

 

Capitalism on the Brink

 

The author begins the book with a position I’ve thought about previously but never articulated, here: that if we continue our current trajectory, the entire economy will come to an inflection point, and the fallout is unfathomable. Here is how he writes it:

“While some celebrate how stock prices are still booming and productivity is still increasing at modest rates, the majority of Americans feel left out and know they have less and less ability to buy the things they want and need. At some point, the choke point of this economy, the middle-class pocketbook, will quit opening. What follows won’t be pretty. We need a different sense of how to do business as a whole – a way that takes into account all stakeholders, not simply those who own stock in the company.

First of all, and most importantly, employers need to raise wages. Wages would be rising already if our private sector were devoted to long-term profits rather than short-term gains” – Pages 5, 6

This chapter has conversational tones to it, where he talks to a close friend about what he sees. What’s more, he even notes something else I’ve said numerous times: the more you understand about a problem, the more effective the solution. This means getting down to the root of our economic woes, and this author does.

And what is his conclusion?

That inequality of opportunity is driven by income inequality, and that “When an inequality crisis gets too severe, it solves itself in one of two ways: society redistributes wealth through taxation, or poverty gets redistributed through revolution.” – Page 10

For my part, I believe he’s right. I’d only add this current economic model (shareholder value-focused) has worked for as long as it has because of increased debt – both public and private.

At the end of the chapter, I have a handwritten note worth sharing here: Wealth creation vs. wealth extraction. The first is what we used to have; the latter is what we currently run on.

 

The Dangerous Inequality

 

This chapter builds on the previous one with a lot of data and good analysis. The numbers don’t lie, as it were. And what do the numbers say?

“Let me restate what the chart shows: nearly 60 percent of the US population – more than half of all American households – add thousands of dollars to their debt load every year. Many of these households are headed irrevocably toward default. If they all get there, our free-enterprise capitalist system shudders to a halt. Mounting debt is the flip side of the wealth accumulation among the top 20 percent. It can eventually lead to one form of bankruptcy or another.” – Page 18

He rightly points out the debt machine this country runs on – which is, by all accounts, wealth extraction. It’s an insidious model that, if carried out too far (which is what Georgescu, RFK Jr, and others predict) there will ultimately be a revolution.

Moreover, the author points out just how widespread the inequality is – and here is what he writes:

“It’s been established that four out of every five Americans will at some point sink beneath the poverty line throughout their lifetimes…Except for the top 20 percent, almost no one has the ability to save; almost no one has an emergency fund for an unexpected drain on the budget.” – Page 20

 

The Outcome of Inequality

 

Opening this chapter, he points out that business leaders seem mystified as to why inequality is discussed in the business realm. After all, the author notes, “They see it essentially as something outside their field: their job is to make a profit and grow the business, not be a steward of the larger society.” – Page 26

Do you know the economist who advocated for business to ONLY focus on profit – other stakeholders and ultimately society be damned?

Milton Friedman.

You can read this from the New York Times back in 1970, where he advocated that companies have no social responsibility – their only focus should be on making money.

Moreover, what’s particularly devious is how American businesses decry any governmental regulation that holds them responsible for anything that will cost them.

Followed to its natural conclusion, you see exploitation, environmental pollution, stock manipulation, and outright oppression naturally stemming from such an economic model.

And, if we are honest with ourselves, we can see it. We can see it in the data Georgescu provides. We can see it reflected in our family relations, neighbors, friends, and economic inequality that has grown substantially over the past four decades.

What’s more, it has been the economic model that corporate America has fully embraced – which is why the author encounters business leaders who do not understand why they should be concerned with it.

But they should be concerned.

“Business leaders are first of all citizens of their native country, which in the case of the United States has bestowed plentiful tax breaks that encourage growth, profit, and loyalty when it comes time to locate production facilities. When the question of higher wages comes up, why are we unable to link a business, and its ever-higher profits, with the people and the communities that help create those profits?” – Page 27

Once again, the author is spot on.

 

He also points out something I think gets lost in translation for many in their rush to defend this particular type of capitalism: the amount of money you earn directly corresponds with how much time you are able to spend with your family. I find it ironic that many people connected to business talk about the decline in morality and the nuclear family when their business practices – stemming from their economic model – are partly responsible for that same decline. This point deserves more than a paragraph, but for now, realizing that both parents have to work, often long hours, to simply make ends meet takes them away from their family, and the less time you spend with your family, the less influence you have.

Georgescu also talks about something else I find interesting: the lack of social mobility. He writes,

“The middle class, whose spending fuels free-market capitalism, keeps getting smaller and smaller. As a result, opportunity itself becomes an elite privilege, rising increasingly to the highest levels, where social mobility isn’t even needed. The end game is that Americans are locked in place, economically and socially. We have developed an economically determined caste system, much like India’s social one. It’s nearly impossible to escape it” – Page 33 (Emphasis mine).

Once again, the author is right. I’ve discussed this, too: Middle-Class Vs. Working Class. You can read the article here or listen to/watch the podcast episode to explore this deeper.

For my part, I believe most Americans are distracted and fail to notice what’s taking place. And the mainstream media doesn’t help, either. Georgescu rightly points out that,

“The media is diverted mostly by other news: we know more about Palestinians on the West Bank than we know about the ‘other America.'” – Page 35

For example, did you know that “Alabama has the worst poverty in the developed world,” according to a U.N. official?

Or did you know that just this year, Empower Retirement said 37% of Americans could not cover a $400 emergency expense?

Or that nearly half of all Americans have NO RETIREMENT SAVINGS?

We could go on, but the point has been made. We have an economic model that only works for certain people, and leaves a majority of Americans in the lurch.

The author ends the chapter by noting that,

“America is pleading for help. And the system we already have, with some shifts towards a more inclusive sense of responsibility to a wider set of stakeholders, will enable it to thrive once again. Shareholder primacy is what’s holding us back. Eventually, it will destroy us.” – Page 36

 

The Perfect Storm

 

In discussing “the perfect storm,” the author talks about what has taken place since the 1970s.

“Instead, we kept boosting profits by cutting jobs here at home…That’s the core of our crisis – fewer jobs and low wages – and it radiates outward into all the other forces that cluster around it.” – Page 39

A race to the bottom, as it were, has been happening since the mid-1970s. And everything is affected: technology, education, family, and, of course, the entire economy.

Here are a few quotes I found noteworthy in this chapter:

“While tax breaks have been justified as a way to encourage wage and job growth, our political system has become so inbred that the wealthy use that good-spirited willingness to create incentives to warp the tax code for purely self-serving ends.” – Page 47

“Vlad Signorelli, of the conservative think tank Bretton Woods Research, recently pointed out, ‘Both Democratic and Republican parties have long since abandoned a commitment to stable…income growth for those at the bottom of the pyramid.'” – Page 48

“Free enterprise doesn’t offer the opportunity it once did for all our people. Lifting regulations has helped those at the top, leaving behind too many others. Unintentionally, we’ve stoked the greed of those who can take advantage of looser regulations and make incomparable wealth on Wall Street through arcane financial instruments, high-speed trading, and banking laws that mix consumer and investment banking. It’s unsustainable. We keep riding bubbles that give us the illusion of growth until they burst, and then we wonder why we seem even worse off than eight or ten years earlier. We’ve forgotten the wisdom in the phrase ‘too good to be true.'” – Page 48

He ends the chapter with this nugget: “Is free-market capitalism obsolete – is it destined to destroy itself, as Karl Marx predicted? Or has something else happened to twist capitalism into something it didn’t need to be?” – Page 50

It’s worth noting that Marx made that prediction because he understood human nature: greedy, selfish, and exploitative. There would be people who would take advantage of a system and operate at the lowest common denominator, essentially distorting the economic model into what we have today. To that end, Karl Marx has proven to be correct.

The capitalism of the 50s and 60s – creating the middle class and the largest economy in the world – has been destroyed – or, if you prefer a lighter touch, highjacked. In its place, we have the exploitative leviathan that increases for the haves through wealth extraction, not wealth creation.

 

Shareholder Value Gets Lean and Mean

 

He opens this chapter with a story about the tier of responsibility a company/corporation has: to customers, employees, the communities we serve, and finally, the stockholders.

“Shareholder value came last in time – one needed to be patient to see that return – but not least. All the other factors added up to shareholder value, given time to come together in the creative synergy of new products and new markets, generated by these fundamental principles. It was a moral vision, but more importantly, it was a practical one – it was what enabled a capitalistic enterprise to thrive in a way beneficial to everyone it touched” – Pages 53, 54 (emphasis mine).

Of particular interest is the response most business leaders have when told what’s happening in the economy as a whole: “The market will solve the problem. The market will take care of it.” – Page 55

No, it won’t. It’s actually the opposite: the economy has created systemic problems in America and left them to its own devices; it will NEVER solve the problems; it will only exacerbate them. Roughly five decades has demonstrated this.

Georgescu takes shots at the economic model Milton Friedman lauded in this chapter, too; highlighting a bevy of things short-term economics has brought about.

Case in point: he notes an essay found in the Harvard Business Review, written by economist William Lazonick:

“Corporations routinely devote 91 percent of their earnings to shareholders, not to research, development, new business initiatives, or adequate cost-of-living raises for ordinary employees.” – Page 59

Yes, you read that right: 91 percent.

He continues:

“Despite the extraordinary rise in income and wealth for the top income quartile in America, the median household income today [written in 2017] is less than 1 percent higher than it was in 1989. And since the 2008 financial crisis, 91 percent of income growth has gone to the top 1 percent. Flat wages have taken a serious bite out of far too many people’s standard of living.” – Pages 60, 61

Following a series of charts that paint a grim picture, he writes,

“Our public corporations are no longer generating as much new value – in products and services – to grow profit. Instead, they are increasing profit by allowing their core assets to languish while they engineer higher share prices through financial manipulation. Through stock buybacks, companies are reducing the number of shares and thus increasing share value. At the same time, executives are increasing dividends to shareholders, shunting profit into the accounts of stockholders, including themselves, and neglecting both employees and R&D.” – Pages 65, 66

He has hit the nail on the head once again.

What’s more, he isn’t alone in his analysis. Representative Sean Casten of Illinois talks about how stock buybacks used to be illegal – and for good reason. Joseph Stiglitz, author of People Power and Profits, and Ha-Joon Chang, author of one of my favorite books, 23 Things They Don’t Tell You About Capitalism, also discuss this.

Wrapping up the chapter are these two quotes I underlined:

“At this point, it may well be worth remembering Peter Drucker’s simple admonition: ‘The only valid purpose of a firm is to create a customer.'” – Page 70

“Shareholder value has been debased into a machine that rewards one stakeholder – the person who owns shares – at the tragic expense of all the rest: the employees, the customers, the communities, and the nation itself.” – Page 70

Well said.

 

The Way Forward

 

Aside from the chapter’s title, which is fairly straightforward, there are so many noteworthy sentences in this chapter that I have to prioritize what I include here.

Starting off, he writes,

“Creative power, or innovation, has become the superior driver of added value and wealth.” – Page 73

This echoes Joseph Stiglitz, who wrote:

 

“The true sources of wealth are the productivity, creativity and vitality of our people; the advances of science and technology that have been so marked over the past two and a half centuries; and the advances in economic, political, and social organization that have occurred over the same period, including the rule of law, competitive, well-regulated markets, and democratic institutions with checks, balances, and a broad range of ‘truth-telling’ institutions.”

 

In other words, what he is noting is actual wealth creation, instead of the wealth extraction we have today.

“The second critical principle that can pave the way to a revitalized capitalist system rests on a recognition of basic human values. They are becoming the core of a successful business strategy. Our obsessive commitment to the maximization of short-term shareholder rewards ignores these values: it’s corrosive and destructive in the long run. It undermines long-term growth and ultimately undercuts profitability. Many companies are beginning to recognize that their workforce, the common employee, is the source of their success, not simply another cost on the balance sheet. In many ways, top management has relegated human values to the personal realm – family, church, and memberships – while ignoring them in the workplace. The drive to increase short-term shareholder value has given us all permission to live this sort of bifurcated life: brutal with workers, kind and generous with those outside the realm of work.” – Pages 73, 74

If this is not an accurate picture of our society, I don’t know what is.

 

“Business has the most to gain from a healthy America, and the most to lose by social unrest or punitive taxation…Before the early 1970s, wages and productivity were both rising. Now, most gains from productivity go to shareholders, not to employees.” – Page 75

“To continue viewing employees  this way [biggest cost as opposed to the biggest asset] is a recipe for either economic collapse – the dramatic loss of demand for products that would follow mass insolvency – or social unrest.” – Page 79

Employees – not shareholders – are the key focus moving forward if you want to differentiate yourself and have others vested in the success of your business. I think Georgescu is right: we are teetering on the edge of an economic collapse or social unrest unlike anything we’ve ever seen – playing with fire, as it were.

 

“The objectives are simple and clear: to compensate and treat employees appropriately and to invest more aggressively in R&D…In addition, consideration should be given to the most efficient and effective way to improve compensation for employees outside the C-suite…There are two fundamental concepts for how we can do this in a fair and just way. The first is a fair wage: that means sharing the incremental value produced by the organization as a result of productivity and innovation. That is fair value. The second way to do this is through a living wage. This applies to the lower end if the pay scale. Individuals should take home enough in wages to pay their bills, pure and simple…The new normal should be decided on the basis of long-term economic growth, not simply short-term profit.” – Pages 80, 81

There isn’t much I could add to the author’s statements; for my part, I believe he is absolutely correct.

 

“Tie CEO compensation to long-term objectives, not short-term gains…Percentage increases for top management cannot be larger than the percentage increases for all other employees.” – Page 83

Imagine an economy where executives prioritized long-term growth and sustainability – where employees are compensated fairly and given their share of the productivity, where financial manipulation via stock buybacks and extracting wealth from one stakeholder to increase payouts to another were a nightmare of the past? Under our current operating model, executives are incentivized to do the exact opposite, though. For my part, I think Mr. Georgescu has outlined an economic approach that benefits all parties – not just those at the top.

 

“We need to create a new trade-school system as an alternative to college…We need a system of educational triage that directs students into the appropriate channels, based on aptitude and interest rather than the socioeconomic status of the parents.” – Pages 85, 86

All of this ☝️ – Couldn’t have said it better myself.

 

Stakeholder Value is Already Working

 

“The plea for business to abandon shareholder primacy many sound like an appeal to moral responsibility, but in reality it’s a warning that only by giving up shareholder primacy will companies be able to keep rewarding shareholders.” – Page 87

 

Jim Sinegal, speaking about Costco, said,

“One bad quarter doesn’t determine whether you’re a good or bad company. In our company we were all reading from the same sheet of music. That’s what matters.” – Page 92

In fact, when Jim Sinegal was CEO of Costco, he always attempted to prioritize stakeholders equally rather than focus on shareholders. This irked Wall Street, where one investor (Bill Dreher of Deutsche Bank, specifically) said:

“It’s better to be an employee or a customer than a shareholder.”

According to ABC News, “Sinegal is unfazed by his critics. ‘Wall Street is in the business of making money between now and next Tuesday,’ he said. ‘We’re in the business of building an organization, an institution that we hope will be here 50 years from now. And paying good wages and keeping your people working with you is very good business.'”

What we can read – and Georgescu rightly points out – is that in order for someone to break away from the current economic model of shareholder primacy, one must be intentional about it. This includes standing tall against the criticism from those who have benefited from this exploitative model, which is clearly what Sinegal had to do.

 

Related: Read The Principle of Leading By Example

 

Investors may cry foul, but the model the author promotes DOES work.

 

Here are a few more quotes that simply jumped off the page when I read this chapter:

“In business today, the maximization of shareholder value skews unreasonably to a privileged few. It’s not only morally perverse, but it also robs the business of its greater potential and contributes to income inequality.” – Page 95

“As we move away from shareholder primacy, the evaluation criteria will move more toward value creation as a measure of performance. Over time, CEO compensation needs to become less extreme and much more tied to stakeholder value based on long-term growth, fairer compensation for employees, and measures of a brand’s actual worth in the market.” – Page 96

“The purpose of business isn’t simply shareholder value, by any means: it’s a matrix of outcomes, not only for owners and shareholders, but also for employees, customers, communities, and the environment. A company has to benefit everything and everyone it touches. First and foremost are its employees. Their lives depend on being able to earn a fair wage, and our economy depends on their ability to keep earning those wages.” – Page 97

 

Lastly, I have one more nugget before moving on to the next chapter, asking/answering a rhetorical question:

“Why should we continue to support a failing and destructive system of free enterprise when better, more enlightened approaches can produce superior results? Simply, we should evolve away from shareholder primacy. That paradigm will change eventually, out of necessity – when we have no choice. But why not choose to run a company in a way that is demonstrably better right now?” – Page 104

The answer? Because greed – a byproduct of the human condition – operates at the highest levels, that’s why.

 

The Time to Act is Now

 

“Creative insight rarely flows down from the office of the CEO. It rises up from the factory floor, the cubicle warren, and the street. Main Street. Not Wall Street.” – Page 109

For those who are directly connected to the daily operations of the business, this makes sense. When employees are not fairly compensated, however, their loyalty wanes.

Case in point: Gallop tells us that in 2023, employee engagement in the US was 33%, and worldwide, it was 23%.

 

“To help, we need longer-term public/private partnerships to encourage job creation, improve education, ensure that education starts early for everyone, and rebuild our trade-school system – to provide the right training for new types of jobs and to acknowledge the earning power of the classic, fundamental trades, along with the dignity and creativity of what used to be thought of as ‘just’ blue-collar work” – Page 110 (Emphasis mine).

I’d say Georgescu has his finger on the pulse of a wider perception problem we have when it comes to the trades. It’s beyond time to challenge the narrative and the stigma against them.

 

“Individual CEOs feel comfortable with the way things are because no one else is turning against the tide. They’re sustaining themselves by living in denial. I think some of our leaders have actually given up on our future as a country and simply want to get the most out of the system before it falls apart. This is the most destructive system before it falls apart.” – Page 111

Sadly, I believe he is right. CEOs likely tell themselves that the corporation is multinational and there is nothing they can do – even IF they want to.

 

Economic inequality, which is a major factor in driving the inequality of opportunity, is the most dangerous current threat to our republic. Many other seminal issues need to be addressed in the twenty-first century – immigration, energy, sustainability, infrastructure, terrorism, and more. But none of them will matter if we don’t lessen inequality…Inequality is a cancer that has already begun to eat away at our compassion and ability to see clearly how precarious our economy has become. The comfortable assurance of making easy money at the top blinds us to the corrosion of job loss and debt throughout enormous swaths of our society. It intensifies our greed, narcissism, and hunger for power.” – Pages 112, 113

Another homerun observation by Georgescu. The unfortunate reality is that our current model demonstrates what many of us already know: The market will NOT fix itself; rather, it will exploit, manipulate, and dehumanize others.

 

Rounding out the chapter, here are a couple more quotes I found noteworthy:

“Democracy can only exist when the common good is part of our daily bread.” – Page 113

“As free-market capitalism has been hijacked, it has increasingly served smaller and smaller segments of the population while ignoring the rest.” – Page 114

This is clearly observable to those without an agenda.

 

Conclusion

 

Economics is not just an interesting subject – it’s also very important. There are so many real-world ramifications from purported economic theory and its applications. Coupled with the advent of the information age, one would think we’d understand more of this.

One would be wrong, however.

With the abundance of technology, Americans have never been more distracted. Freedom – true freedom – comes with responsibility, and the responsibility I speak of here? To be alert, awake, and aware.

For my part, I am reminded of something Benjamin Franklin is purported to have said in response to what type of government we would have after the Constitutional Convention:

 

“A republic, if you can keep it.”

His words ring just as true now as they did when he spoke them. The economy is inextricably tied to the American experience, who we are as a people, the freedoms we enjoy, the lives we live, and what we leave the next generations. We cannot separate the business world from society any more than we can separate the professional from the personal. When one part suffers, every part will suffer, too.

And this is where Peter Georgescu excels. His book, Capitalists, Arise!, is a voice in the wilderness, imploring any who will listen, to recognize what has happened – and certainly WILL happen – if we do not correct course. I applaud his work and highly recommend people read this book.

I’ll end with something from the introduction:

“This is the world in which shareholders have come to demand and get maximum short-term returns. A world where shareholders have dominion over all other stakeholders in a company. Nearly four decades of this version of capitalism have damaged the long-term viability of businesses and helped create a vast, unequal America in socioeconomic terms. Simply put, shareholder primacy has become a kind of cancer that needs to be eradicated before it destroys our way of life.” – Page 1

I couldn’t agree more.

This book is an excellent addition to my library – and you should have it on your shelves, too.