Money Redefined, Part III

THE SPHERE OF BUSINESS

 Redefinition Two:  Money is fully fungible only in the commercial world.  Its portability into the hands of individuals is limited.

In general, the commercial world in Postcapia conducts its affairs much the same as we conduct ours.  But there are differences.  Whereas their commercial banks take in deposits and from these make loans on which they charge interest, they are prohibited from any dealings with the National Bank-that is to say, with individuals.  Another, more arbitrary distinction, is that commercial banks can have only one physical address, reflecting the Postcapians caution regarding institutions that grow “too big to fail.”

 On the positive side, the commercial world is entirely tax free.  Since they view the free market as the primary means of achieving progress and prosperity, Postcapians do nothing to dampen its dynamism.  If a company is particularly profitable, they contend, then, for the sake of economic development generally, it should be free to take full advantage of its success without the state dulling its competitive edge.  In any case, profits earned in the commercial world eventually find their way into personal accounts where they are, as we have seen, taxed.

Postcap’s commercial climate can best be described by considering a few case histories:

 CASE I: A small business startup

CASE II: A medium size family business

CASE III: A large corporation

 CASE I:

The following vignette illustrates the relatively straightforward way by which Postcapians deal with the Chinese wall between their personal and commercial worlds.  Thanks to the manner in which their system is organized, much of the associated work, it should be noted, is done by computers.

Jane Arnold, after working six years for an architectural firm, decides to quit her job and open her own practice.  For an ambitious young person, starting a business venture is a common, albeit risky, path to prosperity.

In pursuit of her dream, Jane can take advantage of a provision in the law that requires every business to reward its workers annually with $2,000 worth of its common shares priced at book value.  The only proviso in this universal scheme is that the stock bonuses are not fully vested until the end of a worker’s fifth year of employment.  Once vested, the shares, along with any dividends they may have earned, accumulate in the worker’s name until, for whatever reason, he leaves the company.  At that time, his holdings are liquidated, again at book value.  The departing worker can elect to deposit his severance proceeds either in his liquid, taxable main account or in his illiquid, tax-free retirement account up to the aforementioned cap.  Short of leaving the company, however, a worker cannot withdraw his stock holdings, in part or in full, nor can he use them for collateral on a loan.

Jane, who needs funds for her business startup, has her $16,000+ stake ($12,000 in annual company contributions plus dividends and appreciation over the six year period) transformed into a loan to her proposed business entity triggering, of course, the inevitable shadow asset entry all hard assets require.  Hopefully her funds, once deposited in a commercial bank, will be enough to cover her interim business expenses until the new practice produces income.

It should be mentioned here that although Jane was free to quit her job at any time (and her employer equally free to fire her) one option she did not have was engaging in a part-time endeavor of her own while holding down her regular job.  Postcap law expressly forbids anyone from being employed by more than one company at any given time.

With her new Articles of Corporation and business plan in hand, Jane requests a loan from an officer at her commercial bank who is sufficiently impressed by her credentials and apparent industry to lend her enough to set up shop and cover her overhead expenses for one year.

Jane’s new architectural office acquires clients and, after a few years, enjoys enough cash flow to pay off her bank debt and self finance her modest capital requirements.  Since her business account is not taxed, it pays her to withdraw as little for her salary as possible. (Should she illegally attempt to pay for her personal expenses out of her company’s commercial account, the transaction would be immediately flagged and heavy penalties ensue.) Jane’s newfound prosperity allows her to take on larger jobs and hire staff.

Jane, as chief designer and majority stockholder retains her position as manager until she retires.  Out of consideration for her employees who wish to see the practice survive after her departure, she prevents the requisite liquidation of her stock from draining the company of essential capital by agreeing to an installment payout that transfers only a portion of the proceeds due her to her main account with the remainder entered into her shadow asset subaccount as a series of notes receivable.

CASE II:

The Ellinston Corporation is a family-run, 300 employee manufacturer of corrugated cartons.  The company has been generally profitable for over a decade, commands a solid reputation in its field, and boasts a roster of loyal customers. The book value of its shares, therefore, has increased dramatically through the years.  As a result, the majority of its stock is owned by the workers.

At this point, the question might well arise, “what about the outside shareholders?” to which the answer is “there are none.”  A cornerstone of Postcap financial law is that all businesses, from single ownership to giant concerns, have to be exclusively employee-owned corporations.  It goes without saying, then, there is no financial industry as we, non-Postcapians, would recognize it: no publicly-traded securities, no stock exchanges, brokerage houses, private equity firms, mutual funds, hedge funds, exchange-traded funds, and so on.

Postcaps defend their prohibition of passive ownership on two counts: one moral and one practical.  On moral grounds, they find it unseemly for one group to parasitically profit (or seek to profit) from the labors of others.  And on practical grounds, they deem it a waste of human resources to have an entire industry engaged in such a nonproductive activity as shuffling papers.  It is one thing, they feel, for an individual to achieve wealth on account of his exceptional industry, talent, and astuteness.  It is quite another for wealth to be acquired by merely researching stocks, pasting financial instruments together, bilking naive investors, blind luck, and/or profiting from inside information.  Needless to add, without a stock market there are no stock market crashes, no demanding stockholders, and no mountains of paperwork to keep them informed.  And, without the distraction of fluctuations in the price of their stock, management can devote their full attention to running their operations.

Needless to add, Postcapian workers highly approve of the arrangement.  Their work environment is happier and more productive, their workplaces safer and more attractive, their company’s pay scale less differentiated, their jobs more secure, and their freedoms uncompromised by unionization.  From the standpoint of management, the workforce is better motivated, more profit-oriented, and more stable.

The Postcapian business world has thus ended up populated by successful, conservative corporations that have evolved from very modest beginnings and survived multiple challenges along the way by eschewing drastic change in favor of evolutionary adjustment.

At the same time, I would not wish to portray an idealized worker paradise.  Businesses sometimes fail, workers unfairly fired, and management inept.  Nor do hard work and aptitude always assure success.  Pure chance, natural calamity, and technological change con­tribute an element of uncertainty to all careers, however cautiously pursued.  If one took the trouble to search out extreme cases, he could no doubt find a shift­less common la­borer in an exceptionally profitable company whose bonuses exceed the salary of a hard-driving executive in a particularly depressed firm.  Anomalies such as these are of no embarrassment to Postcapia, which does no more than nature her­self to guarantee its subjects unconditional fairness.

 *    *    *

Getting back to the Ellinston Corporation, as long as the company continued to be well run and the family considerate of their employees, the worker-controlled board of directors allowed the founders to remain in charge.  However, when it appears that too much of the profits are being distributed as dividends to the detriment of plant modernization, the board decides it is time for a change in management.

The board is well aware that previous attempts by other companies to promote current employees into top management seldom worked out well.  More often than not, such appointments created discord and a downturn in company fortunes.  Rather than risking Ellinston’s financial future, the board wisely goes outside the company to select a professional management team.

Once the new managers come on board, they are given free rein to execute company strategy.  However, they are provided little margin for error thanks to constant scrutiny by their best-informed and most acutely interested critics-that is to say, their worker-stockholders who are in position to observe firsthand the outcome of managerial decisions and whose living depends on the sagacity thereof.  Put another way, it is impossible to sweep company problems under the rug when both those doing the sweeping and those who are presumably the targets of deception are one and the same.

On the positive side, the man­agers are the beneficiaries of timely, well informed, and constructive advice from those most dedicated to the company’s success.  In gen­eral, then, this balance be­tween a management responsible to its labor force and a la­bor force dependent upon its manage­ment typically results in strong, competitive companies.

CASE III:

 In Postcapia, raising capital for major projects requires more than creditworthiness; it requires patience.

After years of research and exceptionally favorable test results, Xydanics Corporation gains governmental approval for the sale of its prescription cancer-fighting drug, Xylagan.  The company believes that the drug has important profit-making potential and therefore is keen to market it as soon as possible.  But doing so requires the construction of a costly new manufacturing plant, the addition of hundreds of technicians to its workforce, and an expansion of the company’s marketing team-all of which must be financed.

The company turns to a bank syndicate for a mezzanine loan to cover the design work and initial land improvements at the factory site.  As this is a prudent, normal-sized loan, the bank sector handles it comfortably.  Postcap banks, as a rule, are well financed-there being no other depositories in the system for businesses to put surplus cash.

A jumbo loan, such as that required by Xydanics to finance the remainder of the needs for its new endeavor is, however, a different matter.  (Theoretically, banks could swell their lending base by offering higher interest on deposits, but, as a practical matter, they are forced to operate conservatively lest their existing customers flee out of concern for the safety of their deposits-a concern that might well be warranted because the government provides no insurance on deposits.  Postcap businesses are prone to the many dangers inherent in a free market but moral hazard is not one of them.)  Finding the bank window closed, the company has no other option but to enter into a bond solicitation.

Unfortunately, from Xydanics standpoint, it normally takes years in Postcapia’s credit-tight market to fund a substantial bond offering.  The fact is that there are few pools of idle cash on Postcapia awaiting investment opportunities.  Relatively few individuals can afford to invest heavily in bonds even though bond interest certainly helps mitigate the drain taxes impose on their assets.  And the commercial world is so competitive that there is nearly always a large supply of bonds in the market from companies aggressively seeking capital.  Finally, a risk-adverse attitude, pervasive on both the personal and commercial sides, subjects all bonds to heavy scrutiny.

Despite the drag on its profitability caused by the financing delay, the company eventually socks away enough cash to build its new plant and bring its new drug to market.  Thanks to the intervening years, Xylagan has undergone further testing and refinement and, according to the financial press, its commercial success can be now assured.  Patience, as noted in the introduction, has its rewards.

 *    *    *

Rather than bemoaning the congenital lethargy of their credit market, the Postcapian’s celebrate it.  Indeed, if, by some odd chance, big money began to flow more easily, they would take immediate steps to retard it.  They equate easy credit to tsunami-like waves of cash crashing into a hitherto placid economy.  Existing products and services are abruptly made obsolete, facilities idled, workers displaced, and society left to clean up the debris.  In short, nobody gains from excessive cash flows except the handful of top dogs riding their crests.  Far preferable, Postcapians believe, is gradual evolutionary change that gives human and material resources the opportunity to adjust.  “Speed kills,” they say and take whatever steps are necessary to ensure everybody stays within the posted limits.

Space does not allow a detailed listing of all the other common sense Postcap choices that promote non-violence in their competitive marketplaces.  But a few points may be worth mentioning.  For one, their free market, uncontaminated by government intervention, generally discourages giantism.  No corporation is likely to expand horizon­tally or vertically beyond its optimal size-that is to say, beyond the point at which its adminis­tration, communica­tions, and transportation costs become less efficient than the competition.  Natural economic forces see to it that conglomerates are un­known, mergers rare, and divesti­tures far more common than diversification.  Which is not to say that cor­po­ra­tions never venture into new fields, but rather that they cannot do so without incurring at least some risk of losing ground in their core businesses to more single-minded competitors.

Some companies grow within their fields to the point that they become virtual monopolies.  Surprisingly, the Postcapians regard such results as propitious, thanks to the monopolies’ ability to provide useful standardization and generally superior products and services.  Moreover, they have few worries that monopolies will exact “obscene” profit margins.  The reality is that monopolies are, if anything, after obscene overall profitability, which means setting price points low enough to stimulate high volume.  And with consumers vigilant, companies, monopolies or no, are seldom in the position to engage in predatory pricing.  In any case, monopolies cannot escape competition from companies serving adjacent markets that force them to price their products and services accordingly.

Another curious Postcap attitude is that the people are more fearful of prices that are too low than of those that appear too high.  To explain this curious preference, consider the example of a shopper facing a choice between two articles of clothing.  The more expensive article manufactured by conscientious Company “A” provides good materials, proper lining, and fine workmanship.  The cheaper article manufactured by deceptive Company “B,” on the other hand, is inferior to its competition in every respect but appearance.  Understandably, the uninformed buyer would choose the cheaper article despite the fact that the more expensive one, thanks to its far longer life, is the real bargain.  In short, in an uninformed marketplace the business cycle that should reward the virtuous manufacturer rewards his unethical rival instead.  As a result, Company “A” eventually might very well be driven out of business and society pushed backward toward the lowest common denominator of acceptability.  And the purchasers of too cheap goods are left burdened by the cost of product replacement often accompanied by the cost of installation, not to mention the loss of time associated with dealing with inferior goods.

To protect themselves from exploitive underpricing, Postcapians demand that all retail outlets make available computer terminals on which shoppers can query a number of independent product testing services before making their intended purchase.  These services are so universally utilized, the Postcapian supplier has no real choice but to produce an honest, cost-effective so­lu­tion to its customers’ needs if it has any expectation of staying in busi­ness.

Another characteristic of Postcap companies bears mentioning.  Within the bounds of ethical behavior, every corporation is enti­tled-indeed is duty bound-to single-mindedly pursue its selfish interest.  It follows then that a cor­poration is not expected to engage in civic affairs, raise money for charity, promote social reforms, contribute to the arts, or be otherwise diverted by matters extraneous to its fundamental pur­pose.  Corpo­rate greed is considered a sign of health comparable to an individual’s good appetite and, by the same token, hypocritical gestures, a sign of incompetence.

By keeping charitable endeavors out of governmental and corporate hands, the opportunity for individual Postcapians to help others knows no bounds.  The wisdom of this approach is in evidence everywhere.  There is no disease without its humanitarian counterpart; no physical handicap without its benevolent society; no mental disturbance without its support group; and no aged group left unattended.  In short, individuals, left to their own philanthropic instincts, fill every niche for which there is a need.

Taken together then, the various-sized companies that make up the Postcap economy can be thought of as a fer­tile and bountiful forest from which issue endless inno­va­tive goods and services.  Established com­panies loom large over particular areas but never lack challenge from either branches extending from other mainline firms or nearby undergrowth.  Medium-sized compa­nies compete above and below for their place in the sun while on the forest floor, there seems always to be room for ambitious, well-run upstarts.