Portico Exam 1 (Study Guide) PDF

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Study guide based on reading from beginning of year...

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Portico Exam 1 (Study Guide) Ralph’s Pretty Good Grocery (Mueller) p. 21-43: Mueller’s thesis is that capitalism encourages and rewards business behavior that is honest, fair, civil, compassionate, and also behavior that should reasonably be considered heroic. (Nice guys tend to finish first mentality) He defines capitalism as “an economic arrangement in which the government substantially leaves people free to pursue their own economic interests as long as they do so without violence and theft”. He says that capitalists spend a great deal on advertising but the best advertising is wordof-mouth through already existing customers. -

Honesty: o Uses the example of Quakers, a religious group requires absolute honesty from members, people would generally prefer to buy from Quakers because they felt as if they could trust them more. Over time because of the pessimistic view of capitalism, they were often accused of being liars and sly, dishonest salesmen. o Transparency is very closely related to honesty; the more transparent car salesman will have a competitive advantage on his opposers and is more likely to make the sale even if the price is a bit higher. o In the case of chains, a customer who feels cheated in one store, is unlikely to go to any other stores within the franchise, however, if they are pleased, they will tend to venture to any store in the chain. o It is also essential in management, because a dishonest man will often destroy people, spirit, and performance. Employees are less likely to forgive a man who lacks integrity rather than one who seems incompetent, etc.

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Fairness: o A vendor/deal-maker who is perceived as unfair will often do less well than one who is seen as fair. Those attain the reputation of being unfair will be approached with wariness that will not be beneficial to them and they will find it difficult to make deals. o It is more beneficial in the long term to have the other party walk away from a deal feeling as if they were treated fairly and that the agreement was fair, even if it may not be as favorable or as profitable as it could have been for you. § John D. Rockefeller used this mentality in many of his dealings knowing that it is not worth fighting for every last dollar, if he planned on having a long term profitable relationship with these people.

o Smart businesses will avoid a phenomenon known as price gouging, drastically increasing the price during peak times of operation, in order to maintain a reputation of fairness. Ski resorts are an example of an industry who tries to avoid this. o Overall, people do not like feeling conned or it is often in your best interests to drive a soft bargain with people. -

Civility o Politeness and civility are the best capital ever invested in business, according to Barnum, customers are more likely to return if the salesperson is pleasant and polite and treats the customer well and with respect o Even in panhandling, being polite can almost instill guilt in the person passing by, a simple “Have a nice day” can go a long way and can influence others to be more generous towards you. o Studies show that 69% when asked why they stopped shopping/going to a specific business, that it was due to poor service. Customer satisfaction through service is essential. o Same goes for employers towards employees, employers who are more considerate and courteous towards their employees, will often find their employees willing to work harder for less money or more for the same money. Treating people as adults/partners and treating them with respect will encourage them and make them more willing to work for you and do what you need of them.

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Compassion o It is generally good for business to show compassion through showing community responsibility, charity and altruism. o People are more likely to buy from a company, if they like what the company stands for and what they do for their community. It will often increase consumer loyalty and profits, if it is well-known that a business is active in doing their part, through charities, community service, etc. o However, some behavior that can be considered lacking compassion is inevitable such as large lay offs and such. There are ways to counteract this, such as what’s known as the golden handshake, a departure payment that is not required of businesses to do. If employees feel as if they were fired fairly and treated with compassion in doing so, they are less likely to ‘bad-mouth’ the company following. o Generally, employers who are able to show their employees compassion and that they actually care, have a more productive workforce and increase profits.

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The Capitalist Virtues and The Monopolist o Even a monopolist will find it beneficial to adhere to these virtues, if they have

a reputation with these virtues, it may be easier to slide price boosts past a wary public, due to the fact that it is less likely to inspire angered customers to use less of the product or spark protests against government agencies o Makes it not surprising for cable companies to treat their customers compassionately and sponsor public relations projects to show their responsibility, or for taxicab companies to serve an airport because they have made their realization that using the virtues is more profitable for business -

The Essential Insincerity of Capitalist Morality o Ultimately, the use of these virtues in business is very insincere as they are not doing it because they value them in themselves but more for acquisition of profits and greed. o This can be seen in many other aspects of life as well, people behaving a certain not necessarily because of their own morality but instead for the rewards that can be reaped from it. o It’s hard to fake sincerity for a long period of time, eventually you will show your true colors and in doing so, there are very severe consequences. o The most successful capitalists will need to be naturally virtuous, or perhaps acquire them over time.

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Why Nice Guys Finish First o Deals among friends are both more secure and more likely to happen than the latter. o Nice guys are like friends and will feel bad in doing harm, and essentially punish themselves, thus it is better to make deals with nice guys because he will be affected more than a non-nice guy if he lets you down, he will be more sympathetic.4

Invisible Heart (Roberts) p. 40-50: Sam and Laura are both teachers who are having a discourse about whether or not teachers are underpaid Laura believes they are, she thinks that with a job that is so essential that they should be paid the same amount as these big athletes and big CEOs, who mostly have such ‘frivolous’ jobs. Sam argues that we have free will to choose the job we want; thus no one forces us into certain positions and we know what we sign up for essentially. He also says that athletes entertain millions while teachers educate 30-150 kids per year. He also mentions that her view point is subjective, she sees a basketball player as frivolous but to others he’s a genius and an idol.

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He also mentions how there is no alternative, because if the wages for teachers reached upwards of $100k, more people would want to teach and may not be as dedicated, etc.

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Laura mentions how she doesn’t still understand how athletes make so much, if everyone wants the fame and glory, or how CEOs make so much when all they do is “slash jobs and cut wages”.

Sam then explains how when the supply is low, wages are high. It is quite difficult to become a professional athlete, you have to be gifted or talented and even the bench warmer who is paid millions to not play is still better than you or me and that is why he’s there. And most CEOs had to work hard to get where they are and still work a lot harder than most believe. The Shareholder Value Myth (Stout) p. 1-4; 24-27; 37-38; 42-44: The Deepwater Horizon was an oil rig that exploded and combusted on April 20, 2010, due to multiple decisions by BP employees and contractors to ignore standard safety procedures in order to cut costs. o This event resulted in the largest offshore oil spill in history, with 11 deaths and the ultimate demise of the rig. The company also took a hit, with their stock plunging from $60 to less than $30 per share. The value of their bonds also dropped from prestigious AA to near-junk status BBB bonds.

o It caused enormous damage to the Gulf of Mexico’s ecosystem, the full extent of which is still unknown today According to the doctrine of shareholder value, public corporations “belong” to their shareholders, and exist only to maximize their shareholder’s wealth. o BP had thought by skimping on safety procedures it would help them erase their $1 million per day deficit for shareholders but instead cost them $100 billion. While trying to appease shareholders, companies can engage in dangerous and immoral behavior such as selling key assets or firing loyal employees, delaying replacement of essential/worn out equipment, etc. o They do all of these things even though many individual directors feel uneasy doing them, realizing that they do not effectively work toward the interest of society, the company or shareholders. It is not required by law for public companies to maximize the profits of shareholders, as long as they are not using the board to enrich themselves, there is a wide range of things that can be goals, such as growing the company, protecting employees, improving products, etc. The idea of shareholder value grew the most in 1990s, even to the point where scholars, executives and journalists would preach it to a near-religious extent o While others began preaching the idea of social corporate responsibility and the stakeholder value instead. -

It has become routine to dispute as fact that US law legally obligates businesses to

maximize shareholder wealth, and any who fail to do so, are subject to be sued. o With this widespread perception, it is hard to blame this corporations for doing things such as taking on massive debt, laying off tons of employees and more to raise shareholder wealth, under the assumption they can be liable for not doing so. o In the end, this claim is completely false, and springs from a largely outdated and misunderstood court decision in 1919 known as Dodge v. Ford Motor Company -

Dodge V. Ford Motor Company and its implications: o Henry Ford, founder and majority shareholder of Ford Motor, got into a conflict with Horace and John Dodge who also happened to be shareholders in Ford. o They started their own rival motor company and expected money from their Ford shares to help, as Ford traditionally paid large dividends, however Ford caught wind and began to withhold their dividends. o Ford claimed this was for the purpose of lowering cost and increase employee wages, and when brought to court, the judge sided with the Dodge brothers and Ford had to pay up. o A statement made by the Michigan Supreme Court was blown out of proportion and vastly misinterpreted as law, when it was what is known as “dicta”, which is not precedent and therefore can be ignored and disregarded in the future. However, this statement is the basis for the shareholder value ideology and the only ‘legal’ authority for it.

Corporate law is found in three places: 1. ‘Internal’ laws (by-laws), 2. State codes and statutes, 3. State case law A largely mistaken assumption, by a wide variety of people, is that shareholders own a corporation, this is not true, shareholders do not and cannot own corporations. Corporations are independent legal entities that own themselves, similar to human beings. o Corporations behave the same way as an adult human in most eyes of law, such as hold property in their name, bind themselves to contracts, and be liable for committing torts. Shareholders merely own a share of stock, which is a contract between shareholder and corporation that provides very limited rights under very limited circumstances, in essence they are no different from employees or suppliers in that sense. None own the company itself, o Once understanding this, it diminishes the ideal of the shareholder owning the business. -

The idea that shareholders are principals and directors are agents is wrong o The principal are supposed to be able to control the behavior of the agents, in

the case of corporations and shareholders, the corporations answer to the board of directors not to the shareholders o Shareholders have a voting right, they have the right to vote to remove or elect new directors, however they cannot choose the company’s CEO, cannot require the company to pay dividends, cannot stop the company from using revenue for health care, charitable contributions, etc. o Shareholders are allowed to sue the board, but the board is not legally obligated to behave in a manner that benefits the shareholder, they have the power to pursue any goal besides enriching themselves.

The Divine Right of Capital (Kelly) p. 1-7.5: Shareholders do not fund corporations, equity investments reach a public corporation only when new common stock is sold, which is very rare for major corporations. This has been the case in the past as well, in a study on the steel industry, only 5 percent of capital came from stocks. Stocks are similar to used cars, when a person buys a used car, the money goes to the previous owner not to Ford, Ford only gets money from new car sales. Essentially, stockholders contribute very little to the actual corporation itself. For some odd reason, we perceive the stockholders as the corporation, when the stockholders do well, the company “does well” The way corporation is designed, allows for the rich to get richer, while employees wages stagnate, and why they can demand exemption from property tax. As of right now, we have been living with an aristocratic form of capitalism, but we can change it into a democratic form by switching to a system of capital not for capital, that allows for people to accumulate capital based on their productivity and where the nature capital of environment and community can be preserved Almost all capitalistic ideals are sturdy and healthy besides the ideal of maximizing returns for shareholders. It is a form of entitlement, and there is no room for entitlement in a free market economy The stock market has its ups and downs. It serves as a currency in which companies can buy other companies, a high share price can be the basis for a good credit rating for companies to borrow money. Public markets also create liquidity, without it, investors could only cash out when a company was sold or liquidated, similar to buying a house, money could be tied up for decades. Public corporations are beginning to dominate the world, while shareholder primacy is beginning to also get a little out of control, due to some changes to public corps o They are actively increasing in size, some are now larger than many nationstates economically, yet are still “private property” of shareholders

o The shrinking of ownership functions, the shareholders are seen as the owners but essentially they don’t manage, fund or accept liability for the company. They only extract wealth. o The rise of knowledgeable economy, knowledge is the newest competitive advantage, to allow shareholders to claim the corporation increasing wealth, is a misallocation of resources o The increased damage to our ecosystem, the rules of accounting were written a long time ago when nature and its resources seemed unlimited, we know now that this is not the case. Companies have grown more than the forefathers could have ever imagined, these companies were hands of the Crown in their time, so getting rid of the Crown, they believed corporate predation would follow, so they set no guidelines regarding this scenario. -

Economic Aristocracy: o Six principles that each uphold the needs of property owners above all § 1.) Worldview: In this worldview, the aim is to pay property owners as much as possible, while paying employees as little as possible. § 2.) Privilege: Stockholders claim wealth that they did little to create § 3.) Property: A corporation is considered property, so it can be owned and sold by the propertied class § 4.) Governance: Only members of the propertied class may vote § 5.) Liberty: Restricts the liberty of employees and the community § 6.) Sovereignty: Assert that they are private and the free market will self regulate

The Second Discourse (Rousseau) p. 134-135 [paragraphs 1-5]; p. 137-138 [para. 910]; p. 149-154 [para. 33-39]; p. 157-159 [para. 46-51]; p. 164-167 [para. 13-19]; p. 169-174 [para. 23-33]; p. 183-184 [para. 52]; p. 186-188 [para. 57]: Rousseau argues that in many ways humanity was better off in the state of nature, we were independent/self-sufficient/strong/healthy (agile, fast, robust). In the state of nature, we were at peace and content. Amour de sol dominated (love of self in which you satisfy absolutes needs like health, pleasure, security). Our needs were easy to satisfy and had pertained to only what was essential. There was no appetite for vengeance. In a limited sense we were also morally good, we possessed pity and were self-sufficient. However, we did not enjoy to see other humans suffer. We were unified and authentic versions of ourselves, there was no motivation to go against your own desires.

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There was no private property and we were all essentially equal.

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Today, however: o We are very much dependent on one another, somewhat weak and unhealthy, we have creating many of the illnesses that ail nations today. o We are often never satisfied now and unhappy, Amour propre, love of self that is contingent on the opinions of others now reigns supreme over your own needs and happiness. There is not much misery for a free man, in good health, who’s heart is at peace, unlike the average man today. A desire for reputation and honors consumes us. o There is now a powerful incentive to be morally corrupt, in the age of reasoning, it is easy for a man to see another suffer and come to terms with it, if he is safe or benefits from it, we have a hidden desire to profit at another person’s expense. o We are now divided and inauthentic versions of ourselves, we try to do anything to convince others to work towards his profit, even if that means acting like someone we are not and being deceitful in order to attain their skills. o With the introduction of private property, inequality is now more prevalent as ever, which is not fair. It allows for exploitation of the poor by the rich.

The Wealth of Nations (Smith): Adam Smith wants us to know that one of the biggest achievements of many wealthy countries is something called the "division of labor." In other words, the fact that we have specialized people for specialized tasks makes us much more productive than having a bunch of people who try to do every job well. o An amateur who doesn't know anything about pin making could probably make one decent pin per day. But when you bring in someone who is specialized at stretching a wire, another one at cutting it, another one at pointing it, etc., then you can make thousands of pins a day. o It also breeds creativity for invention of new machines because people would want to do less work, (the kid who makes the machine to do his work for him). Through treaty, bargain, and trade, we are able to obtain the necessities we need, the more work we do for others, the more we benefit ourselves because we are often compensated in one way or another. Benevolence is not a good motive because love is not sustainable whereas self-interest is. -

The larger your market, the more efficient and extensive the division of labor will be.

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People working in their own self-interest will actually work toward the common good.

Second Treatise of Civil Gov't (Locke): Locke proposes the theory that at first everything in nature was common and that no man had right to anything except himself. It can also be said that he owns his labo...