The Ownership Solution
Toward a Shared Capitalism for the Twenty-First Century

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CHAPTER ONE

Disconnected Capitalism

If we do not change our direction, we are likely to end up
where we are going.

--Chinese proverb

    For the first time in human history, a single economic system encircles the globe. This global capitalism is both good news and bad. The good news is that more so than ever before, capitalism has proven its capacity to produce untold riches. The bad news is that many people are now victimized by forces seemingly beyond their control, including an ongoing globalization of finance that benefits the few while marginalizing the many. Those same forces could be harnessed to the advantage of everyone, but this will come about only if, as and when more of us become connected to capitalism--as capitalists.

    As the world's largest market economy, the United States provides a dramatic example of how modern capitalism is rapidly becoming "disconnected" from those who live in its midst. America's institutional investors--pension funds, mutual funds, insurance companies, banks, foundations and university endowments--held $11,100,000,000,000 ($11.1 trillion) in assets as of 1 July 1996. Due to the booming stock market, those holdings doubtless crossed the $12 trillion threshold by early 1998.

    Fidelity Management and Research Company oversees more than $600 billion in assets; Boston's State Street Bank manages $300 billion. The December 1997 announcement of a merger between Union Bank of Switzerland and the Swiss Bank Corporation was the first sign of what is likely to be a series of megamergers that reflect the structural changes sweeping global capital markets. It not only created the world's second largest bank with $595 billion in assets; it also created a money management behemoth with $920 billion in assets. Worldwide, the top half-dozen investment managers now direct $3.5 trillion in combined assets. These are the equivalent J. P. Morgans, Pilkingtons and Krupps of today, but with a key difference: where those legendary "silk hat" capitalists were hands-on managers both of companies and the financial capital those companies represented, today's megacapitalists manage only one thing--money. Money management focused on maximizing financial returns is not new. What is new is the vast scale and the skyrocketing growth of contemporary "disconnected" capital. Institutional assets totaled just $673 billion in 1970 and still only $1.9 trillion by 1980. For the next ten years, all American will turn age fifty every seven seconds. Aging baby boomers (born between 1946 and 1964) ensure a continued growth in retirement savings, along with a steady flow of funds into institutional hands.

    What is also new is the enormous deference granted the information reflected in financial returns, especially when one considers how dramatically people's lives are affected by the decisions based on those numbers. To an alarming extent, short-term share prices are the compass by which the course is set. The result is a sort of secular sanctification of market forces, with the result that these vast sums are invested to reflect only those values contained within a very narrow band of very specialized feedback. This preference for financial indicators, in turn, neglects the impact this capital has on many other key indicators of economic and social health.

    Those include the nation's social structure, including the steadily widening gap between rich and poor; the environment (financial data inadequately signals ecological costs that are distant in time and place); and the steadily growing number of households left out of this wealth accumulation process altogether who, in turn, become dependent on government support. This escalating dependency, in turn, imperils the nation's fiscal health as claims for support (income, services, public-sector jobs, etc.) "crowd out" budget resources essential to the general welfare, including funds needed for education, health, infrastructure and the cleanup and restoration of the environment.

    This trend toward institutionalized, disconnected capital is gaining momentum worldwide as governments privatize state-run pension plans and enhance incentives for retirement savings. One school of experts sees this trend contributing both to development and political stability as growing pools of capital support dynamic "emerging markets" worldwide. These analysts foresee a steady lessening in the vulnerability of developing countries to the whims of foreign investors and the volatility of quick-trigger capital flows. Others worry that the dictates of financial capital will diminish both the will and the means for societies to pursue fundamental notions of equity, dignity and individual self-realization. While experts disagree on the impact of this trend, there is little disagreement on one key feature of the trend itself: the ongoing concentration of wealth in the hands of either the already-rich or institutions.

The Widening Gap Between the Haves and the Have-Nots

Between 1980 and 1992, total assets in the United States increased nearly threefold while institutional assets grew 4.5 times. By mid-1997, American mutual funds held $4.0 trillion, almost six times the total of just a decade earlier. While it's true that more American adults own stocks and stock mutual funds than at any time in history (51.3 million in 1995), 71 percent of households own no shares at all or hold less than $2,000 in any form, including mutual funds, popular 401(k) plans and traditional pensions, according to a 1995 study by M.I.T. economist James M. Poterba and Dartmouth economist Andrew A. Samwick.

    Though stories of "401(k) millionaires" abound, such individuals are a rarity. For instance, a mid-1997 survey of the records at one fund group, T. Rowe Price Associates Inc. in Baltimore, found just 308 millionaires among their seven hundred thousand company-sponsored retirement accounts (i.e., four-hundredths of 1 percent). Even though the United States now has 2.7 millionaires in a 1996 population of 265 million (1 percent), it would be a mistake to conclude that wealth ownership is broadening in any appreciable way. Indeed, surveys suggest quite the opposite. For example,

* Research by Harvard University economic historians found that the share of the nation's overall net worth held by the wealthiest 1 percent of American households jumped from below 20 percent in 1979 to more than 36 percent in 1989.

* Although the national net worth expanded $5 trillion from 1983 to 1989, New York University professor Ed Wolff found that 54 percent of that was claimed by the half million families who make up the top one-half of 1 percent of the U.S. population. That works out to an average $5.4 million gain per already-wealthy household. That's three-quarters of a million dollars each year, $65,000 per month, or $90 per hour, twenty-four hours a day. And that's when the Dow-Jones industrial average was a fraction of what it is today.

* Research by scholars at the Federal Reserve and the Internal Revenue Service found that the net worth of that top 1 percent is now greater than that of the bottom 90 percent.

* Professor Wolff characterizes the current era as the most extreme level of wealth concentration since the late 1920s. Census Bureau data (1996) confirm that impression, documenting that the gap between America's haves and have-nots is the widest since the end of World War II.

    Those who own financial capital also benefited disproportionately from a record-breaking inflow of funds into the stock market, due in substantial part to more funds (dominantly baby-boomer retirement savings) chasing a relatively limited number of securities. That fueled a steady increase in share values far higher than what could be justified by underlying economic activity. For instance, following the stock market "correction" of October 1987 (when the Dow-Jones industrial average fell from 2,700 to 1,700), the Dow index climbed to 5,000 by November 1995 and soared beyond 8,000 by mid-1997. In other words, according to financial market reckoning, the value of these companies more than quadrupled in less than a decade.

    Accompanying this steady increase in wealth concentration was a steady increase in income disparities:

* According to the Congressional Budget Office, the top 1 percent of U.S. households claimed 70 percent of the total $250 billion net increase in household income during the 1977-1989 period.

* The Census Bureau reported in 1996 record levels of inequality, with the top fifth of American households now claiming 48.2 percent of the nation's income while the bottom fifth gets by on just 3.6 percent.

* Though average household income climbed 10 percent between 1979 and 1994, 97 percent of that gain was claimed by the most well-to-do 20 percent. In 1973, the income of the top 20 percent of American families was 7.5 times that of the bottom 20 percent. By 1996, it was more than 13 times.

* Between 1989 and 1993, median household income in the United States fell more than 7 percent after correcting for family size and inflation. Recent data suggest that this erosion is accelerating. After adjusting for inflation, the annual income of households in the lowest quintile rose only $87 from 1975 to 1994, while the median wage is nearly 3 percent below what it was in 1979. For those in the bottom tenth percentile--someone earning just above the minimum wage--their inflation-adjusted wages fell by an astounding 16 percent between 1979 and 1989. Three-quarters of Americans have weathered two decades of stagnant living standards.

* Meanwhile, income tax returns for 1995 show that 87,000 Americans reported adjusted gross income of $1 million or more. This upper-upper income group's income soared 25 percent from 1994 to $227.6 billion, outpacing the overall 7 percent increase in income reported for the nation's 118.2 million individual returns.

    These trends led William McDonough, chairman of the Federal Reserve Bank of New York, to issue a strongly worded caution: "Issues of equity and social cohesion [are] issues that affect the very temperament of the country. We are forced to face the question of whether we will be able to go forward together as a unified society with a confident outlook or as a society of diverse economic groups suspicious of both the future and each other." M.I.T. economist Lester Thurow shares that concern, cautioning that we have entered a realm where "[T]he system that has held democracy and capitalism together for the last century has started to unravel.

Two-Tier Markets for a Two-Tier Society

The marketplace is fundamentally indifferent to this record-breaking inequality in wealth and income. Retailers have adjusted to this social polarization by turning to a "Tiffany/Kmart" marketing strategy that tailors their products and pitches to two very different Americas. Saatchi & Saatchi Advertising Worldwide warns its clients of "a continuing erosion of our traditional mass market--the middle class," while Paine Webber Inc. cautions investors to "avoid companies that cater to the `middle' of the consumer market." In 1997, both Kmart and Tiffany reported earning surges while the midscale chains such as J. C. Penney suffered.

    This dual society means that separate and decidedly unequal markets are becoming the norm, such as private banking for the well-to-do alongside record levels of check-cashing outlets (the number of Americans without checking accounts has surged from 9 percent to 13 percent since 1977). The United States now has fifty-five hundred check-cashing outlets, versus less than half that in 1988. The Gap recently remodeled and expanded its Banana Republic clothing stores, adding sixty-eight new outlets since 1992. Meanwhile, it created a lower-end chain called Old Navy, opening two hundred outlets since 1993 (compared with just twenty-one new middle-income Gap outlets).

    This phenomenon cuts across industries. The top-earning 20 percent of Americans now account for 54 percent of new-car sales, up from 40 percent in 1980. Meanwhile, since 1994 growth in the "secondhand" industry has tripled the pace of more traditional retail sales. Used-car sales are at record levels. Pawnshop activity is booming. Prepaid phone cards have become a must for those who cannot afford their own telephone. This trend is poised to accelerate. The Atlanta-based Affluent Market Institute predicts that by 2005 America's millionaires will control 60 percent of the nation's purchasing dollars. Sales of high-end luxury yachts are already at record levels.

    The Index of Social Well-Being is at a twenty-five-year low. Working with research dating back to 1970, Fordham University's Institute for Social Policy annually compares government statistics on sixteen troublesome topics such as teen suicide, children in poverty and the gap between rich and poor. The nation's best year was 1973 when (on a scale of 100) the index stood at 77.5. In the Nixon-Ford era, the index averaged 73. Under President Carter, it fell to 60. Under President Reagan it plummeted to 43, and to 40 under George Bush, where it has since stabilized. Noting that the index has dropped steadily since its inception, Institute Director Marc L. Miringoff concludes: "Despite a range of stated differences in philosophy and policy, neither political party has been able to achieve significant progress in social health over 25 years."

UN Assessment: "World Heads for Grotesque Inequalities"

A worldwide widening of disparities in wealth and income led the United Nations Development Program to conclude in 1996 that the world is heading for "grotesque inequalities," noting that "100 countries are worse off today than 15 years ago." According to UN figures, the poorest 20 percent of the world's people saw their share of global income decline from 2.3 percent to 1.4 percent over the past thirty years. Meanwhile, among the world's 5.7 billion people, the top 20 percent hold 83 percent of worldwide wealth. While global GNP grew 40 percent between 1970 and 1985 (suggesting widening prosperity), the number of poor grew by 17 percent. Although 200 million people saw their incomes fall between 1965 and 1980, more than 1 billion people experienced a drop from 1980 to 1993. In sub-Saharan Africa, twenty countries remain below their per capita incomes of two decades ago. Among Latin American and Caribbean countries, eighteen are below their per capita incomes of ten years ago. Even within the developed countries, more than 100 million people live below national poverty standards and more than 5 million are homeless.

    Meanwhile, the UN reported in 1996 that the assets held by the world's 358 billionaires now exceed the combined incomes of countries with 45 percent of the world's people. These findings led UN development experts to conclude "Development that perpetuates today's inequalities is neither sustainable nor worth sustaining" (emphasis added). This pattern--pockets of prosperity alongside widespread deprivation--has become the worldwide trend both within and among nations. Over the past thirty years, those countries that are home to the richest 20 percent of the world's people increased their share of gross world product from 70 percent to 85 percent. Three decades ago, the people in these well-to-do countries were thirty times better off than those in countries where the poorest 20 percent of the world's people live. This gap has since more than doubled (to sixty-one times) and is certain to widen further. The UN offers the most dramatic assessment, concluding that, if this rich-poor divide continues, it will produce a world "gargantuan in its excesses and grotesque in its human and economic inequalities."

Chronicling the Cost of Economic Disparity

This global growth in economic disparity and "disconnectedness" creates an array of challenges to the health of entire nations and, indeed, to global capitalism. Mexico evidenced an early symptom in the armed uprising of the "Zapatistas" on New Year's Day 1994 in impoverished Chiapas state, home to one-third of Mexico's population though host to 70 percent of its extreme poor, its highest illiteracy rate (60 percent) and childhood mortality rate (46 percent) and its lowest life expectancy (35 years for women, 45 for men). Similarly, in the Islamic world, the shift to fundamentalism and occasional extremism is fueled, in part, by those concerned about steadily worsening poverty and fast-accelerating economic disparities. Yet the Islam-phobic West points to fundamentalist fervor as the cause rather than a symptom of discontent.

    Frances Moore Lappe, author of Diet for a Small Planet, documents the correlation between concentrated ownership in agrarian economies and the high incidence of hunger, malnutrition and infant mortality. In Latin America, for instance, large landowners are notorious for allowing vast stretches of arable acreage to lie fallow while landless peasants eke out a hardscrabble existence. She cites a Central American study where only 14 percent of the land held by the largest landowners was under cultivation. A UN study of eighty-three nations found that 5 percent of rural landholders controlled three-quarters of the land. Reflecting a common pattern, a mid-1980s study disclosed that six families in El Salvador controlled as much land as three hundred thousand peasants.

    In the United States, the most obvious challenge is the ongoing deterioration in social cohesiveness and the erosion in civil society, made worse by the fast-growing economic separation between the haves and have-nots. Fully one-third of American men between the ages of twenty-five and thirty-four do not earn enough to keep a family of four out of poverty, with all that implies for the strains on marriage and the prospects for young families. This growing rift is also racial. The Census Bureau found in 1991 that the meager median wealth of white households is eight times that of Hispanic households and ten times that of African-American households.

    Based on a 1995 survey, the Federal Reserve found that the typical American family had a net worth of $56,400, including home equity, down from $56,500 six years earlier. This ever widening gap has well-known social and political implications. Two-tier societies and two-tier marketplaces are not the fertile ground in which robust democracies take root. Historians have long documented the threat posed to open political systems by extreme disparities in wealth, as the possession of great wealth by a few confers on their holders inordinate power, which they may be tempted to use in ways that run counter to the general welfare.

The Trend Accelerates

There remains yet much fuel for a continued widening of this two-class system. For instance, in order to boost short-term earnings, corporations can unleash what the Wall Street Journal characterizes as the "four horsemen of the workplace": (1) downsizing, (2) moving operations to low-wage countries, (3) increased automation and (4) the use of temporary workers. Other factors are also at work, including the growth in demand for high-skilled labor, the spread of networked computers, immigration, the shift from a manufacturing to a service economy, flatter tax rates, cutbacks in assistance to the poor, an increase in single-parent families, a decline in unionization, an erosion in the value of the minimum wage and the steady rise in the stock and bond markets (and speculation) in which the wealthy are disproportionately represented.

    Widespread assetlessness and eroding incomes also imply large and growing fiscal strains. That's because, absent broad-based economic self-reliance, a nation's citizens tend to look to their government not only for services they cannot afford but also for income they cannot generate. For example, absent a major shift in policy, a 1994 Bipartisan Commission on Entitlements and Tax Reform concluded that outlays for entitlements (Social Security, Medicare and Medicaid) plus interest on the national debt will by the year 2012 consume 100 percent of federal tax receipts. Social Security and Medicare alone cost Americans $591.4 billion in 1996 while other outlays to boost household incomes (such as military and federal employee pensions) cost an additional $247.5 billion.

    That's a single year total of $838.9 billion in income redistribution. And that's before the retirement needs of the baby boomers begin to kick in. Also, in January 1998, President Clinton proposed an expansion of Medicare to those aged 55 to 65. This trend is not limited to the United States. As wealth disparities have widened within developed economies, the ratio of public to private spending has grown, on average, from 30 percent of gross domestic product in 1960 to 46 percent in 1997, belying the notion that the worldwide expansion of free enterprise will necessarily reduce the size of government. Other countries are also struggling under the fiscal strains associated with this widespread assetlessness.

    America's hugely regressive Social Security tax (levied on a flat percentage of payroll) is now the largest single tax paid by most U.S. taxpayers. For a majority of American workers in private industry, Social Security entitlements are their only old-age pension. Most revealing of all, those anticipated payments now represent the most significant "wealth" for a majority of U.S. households. Thus, in the world's avowedly most "capitalist" economy, the most important asset for a majority of its citizens is an assurance that someone else will be taxed on their behalf. Adding insult to injury, that tax is levied on jobs, the sole link that most Americans have to their economy. Perhaps most ominous of all: U.S.-trained economists now advise in-transition socialist countries worldwide, spreading this suspect ownership formula abroad.

Cracks in the Facade

As I suggest in the introduction, the main "systemic" deficiency in today's capitalism lies in its faulty "feedback" system. The system is not engineered--wired, if you will--to anticipate and respond to the needs of those who populate it. Rather (as we shall see), it is steadily being rewired to reflect the peculiar dictates of financial capital. It is useful to recall that the very concept of free enterprise is itself a feedback notion, a term unknown two centuries ago when Adam Smith opened The Wealth of Nations with his parable of how the market's "invisible hand" of voluntary exchange and freely determined prices would assure the optimum results for its participants.

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, We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.

    History has proven Smith largely correct. The dismal results achieved in "command economics" (such as the Soviet Union) offer eloquent testimony to the need for markets. However, two major cracks are beginning to show in the free-enterprise facade. They share a common trait: faulty feedback. The first: the bulk of people participating in free enterprise today are not connected to the system in a fully appropriate manner. Jobs alone are proving inadequate. For instance, Jacques Delors, president of the European Commission, advised that Europe's disadvantaged would have to learn to cope with "a whole new relationship with leisure time" (i.e., unemployment). In the United States, more flexible wages assure more jobs, but at the cost of soaring inequality and growing poverty. Both Americans and Europeans suffer from a Faustian bargain: Americans with their high rate of job creation alongside their "working poor"; Europeans with their government-protected jobs alongside a growing "leisure class." Despite capitalism's roots in private property, little thought has yet been given to reengineering free enterprise to make it possible for more people to participate as capitalists.

    The second crack: environmental hazards continue to mount. For example, the market-driven search for "cheap" energy has left radioactive waste worldwide, creating health and genetic dangers that will last for millennia. The cost of hydrocarbon-fueled development has resulted in 1.3 billion people breathing air below the minimum standard considered acceptable by the World Health Organization. None of the largest twenty cities in the world meet international clean-air standards. The environment will come under even greater assault as industrialization continues in the Asian Tigers and as China's development hastens resource consumption among its 1.2 billion people. Similar costs accompany the spread of industrial-scale farming and modern production techniques that contaminate aquifers, degrade watersheds, waste precious topsoil and imperil rivers and oceans with the runoff of agricultural chemicals.

    These two cracks are destined to widen if ownership continues to become ever more institutionalized, concentrated and disconnected--and if financial capital continues to become ever more directed solely "by the numbers" (i.e., to the lowest-cost, highest-return production). Because the broader impact of investment decisions typically lie in a faraway part of some larger system, today's finance-dominated capitalism is limited in its ability to learn from those consequences. The impact often is too distant in both place and time. Precisely because the economy lacks a way to incorporate more personalized, localized, genuinely humanized feedback, Adam Smith's vision of a seamless, self-designed system has begun to fray. As yet, there is no countervailing signaling system capable of ensuring that capitalism is sufficiently well informed except in a limited, financially myopic manner.

    Policymakers are searching for a comprehensive "design science" capable of organizing economic activity in a way that both promotes human well-being and reflects sound ecological, ethical and fiscal principles. Today's finance-dominated free enterprise is simply incapable of detecting, much less responding to, those self-correcting signals for which Adam Smith envisioned the market so well suited. Smith could not have foreseen how financial capital, the lifeblood of capitalism, would become both (a) concentrated in so few hands and (b) disconnected from the concerns of those whose lives it affects.

    Happily, private ownership is uniquely well suited to provide today's missing "connectivity." Why? Because at their core, property rights operate as a signaling system, connecting people to their economy in a way that enables them to register their personal concerns so that free enterprise performs in a genuinely people-responsive fashion. That, in a nutshell, is the premise behind The Ownership Solution.

A Sustainable Capitalism Requires a People-ized Signaling System

At present, free enterprise responds to three types of feedback:

   * Product pricing. Consumers "vote" for the best quality at the best price.

   * Share pricing. Capital markets "vote" by directing investment capital to those firms with the best financial returns.

   * Corporate governance. This feedback is provided both by hands-on managers and by the monitoring of those managers by boards of directors who, in turn, are voted in or out of office by shareholders.

    As we shall see, each of these signals has significant limitations. Yet each could be improved if the underlying ownership pattern were more participatory. As Smith envisioned, pricing serves as free enterprise's dominant "feedback loop"--both product pricing and the prices at which a company's shares trade hands in the marketplace. Consumers have long assumed that the price of a product includes the full cost of its production plus a profit. Similarly, shareholders assume that share prices reflect the company's success in selling products on a profitable basis. Yet neither assumption may be true where, for example, a company treats the environment as a cost-free subsidy.

    Environmental costs are often imposed neither on the customer (through higher product prices) nor on shareholders (through lower share values) but on the public in the form of reduced air quality, increased needs for health care, depleted stocks of natural resources (clean water, fishes, forests, etc.) and a poisonous and depleted legacy for future generations. Even the notion of "profit" may be illusory where private gain is generated by shifting such costs to the public. When free enterprise signals us that the invaluable (breathable air, drinkable water) lacks value, then our feedback system is flawed. Further, when product costs show up not as a business expense but as a social cost (pollution, illness and such), this flaw undermines free enterprise by ensuring higher taxes (for environmental cleanup, health care, etc.), more intrusive government regulation and, eventually, less consumer purchasing power.

    Further, it is impossible to "cost" certain types of environmental damage, How does one set a price on lumber when its harvesting destroys a centuries-old stand of virgin forest? Or cost the use if industrial chemicals when their disposal damages an aquifer? Or do a cost-benefit analysis on the use of chemicals that disrupt the endocrine system? Or put a price tag on the enhanced likelihood of childhood cancer? Such questions raise both commercial and ethical concerns.

    Microbiologist Theo Colborn documents five hundred measurable chemicals in our bodies that were never in anyone's body before the 1920s, including a range of endocrine-disrupting chemicals (EDCs) associated with a litany of adverse health effects, including weakened immune systems, reproductive problems, metabolic maladies and functional deficits in intelligence, sexual function and behavior. As explained by Michael Lerner, president of Commonweal, a health and environmental research institute: "Before EDCs, we used to worry most about toxic chemicals' increased cancer risk. The higher the dosage/exposure, the greater the cancer risk. The new research shows that EDCs have a wide range of serious effects beyond cancer; that they cause these effects at infinitely lower levels than are necessary to cause cancer; that these effects are fundamentally intergenerational (the health effects are in our children and grandchildren)."

    Lastly, experience suggests that the current feedback between directors and managers often fails to provide the oversight needed to protect either the financial interests of shareholders or the personal interests of "stakeholders"--those who are put at risk by the company's activities but have no voice. Although stockholders, at least, have ownership rights (ineffective though they may be), stakeholders typically lack any property right through which they can either communicate their concerns or pursue corrective action.

    What free enterprise requires is another signaling mechanism. The feedback conveyed by prices is essential, but it's insufficient to meet even the most rudimentary standards of sustainability. Further, as it creature of law, the corporate entity's "license to operate" is put at risk when decisions affecting a broad base of stakeholders are reserved solely for shareholders--who may not even reside in the community where the effects are felt. In the constant balancing of the interests of stockholders and stakeholders, the solution is often regulation or litigation. I suggest that the solution may lie in a more inclusive style of feedback-intensive decision-making, one that takes into account the concerns of both shareholders and stakeholders.

Capitalism Needs More "Up-Close" Capitalists

While that may sound reasonable in the abstract, what does it mean in operation? Consider, for instance, the case of a power-generating facility organized as an investor-owned utility with rates set by a public utility commission. Because investors are assured a minimum return, these companies are seen as prudent blue-chip investments favored by institutional investors. Consequently, a power utility's shareholders commonly reside far from the community where the physical impact of its operations are felt. Thus, if the company becomes an environmental scoundrel, the most a local consumer can do is complain--to the company, to the public utility commission, to a local politician--an indirect, after-the-fact and, at best, tenuous form of feedback.

    However, that company could be financially reengineered so that a portion of its shares are owned by its consumers and its employees. Converting those stakeholders into shareholders could change things. For instance, where dissatisfied local residents now depend on a circuitous feedback system to register their concerns, an ownership stake would transform them from concerned (but disconnected) stakeholders into property-empowered owners. Even if local consumers and employees owned only a small quantity of the utility's total shares, this qualitative change in the composition of that ownership could transform the company's capacity to anticipate and respond to legitimate local concerns.

    As an example of the benefits of such "up-close capitalism," Nobel laureate economist Myron Scholes touts the positive effect that employee stock ownership can have on corporate decision-making. In his view, such "inside" ownership improves performance both directly (by encouraging insider challenges to poorly conceived management decisions) and indirectly--by influencing managers who know that the firm's owners are now working among them. Similarly, by including a component of consumer ownership, the utility's managers (and their families) would live among shareholders who are also neighbors, schoolmates and teammates. Such a community-focused ownership stake could change the quality of business relationships across a broad spectrum because local, up-close capitalists have more at stake than do remote investors, They are also more likely to raise a hue and cry when the company makes an environmental misstep (or is about to make nor). Dumping solvents into the local watershed, for instance, looks very different from up close--when it's your family, not just your financial return, that's at risk.

If a Little Capitalism Is So Good, Why Not a Lot?

What contemporary capitalism needs most is to be consistent with itself. If the private ownership of capital is a "public good" worthy of promotion and protection, then surely the nation will be much improved as more people gain an opportunity to directly experience just how good ownership can be. That will happen only when the culture underlying capitalism includes as a goal the creation of a free enterprise broadly populated with capitalists.

    The intentional engineering of up-close ownership patterns is something new for modern-day capitalism. However, the deliberate creation of feedback systems is nothing new. Democracies enjoy popular support for the very reason that they are engineered feedback systems. Voting provides a way for the populace to "talk back" to the system, though opinions vary regarding how well the system listens. Both pricing and voting reflect a preference for "self-designed" systems based on personal preference. "The true case for the market mechanism," Financial Times columnist Sam Brittan argues, "is that it is a decentralized and non-dictatorial method of conveying information, reacting to change and fostering innovation."

    Both Adam Smith and Thomas Jefferson proposed radically decentralized systems, along with a centralized government strong enough to ensure that decentralization. That paradox continues to this day. Winston Churchill aptly cautioned that democracy is "the worst form of government, except for all those other forms that have been tried from time to time." The same could be said of free enterprise. For relieving poverty and protecting personal freedoms, market-based democracies are a major improvement on state-controlled systems. In large part, that's because command economies fail to tap that very personal feedback that fuels the dynamism, responsiveness, robustness and, yes, the messiness of markets.

    In the United States, the political foundation of free enterprise is based on what Alexander Hamilton described in The Federalist Papers as a "commercial republic." The goal was to encourage an environment of free economic activity as a way to counteract the erosive influences of envy, class division and the tyranny of the majority. In a similar vein, Adam Smith saw commercial activity as the engine fueling the ever-widening prosperity that democracies require for their popular support. Worldwide, the resulting "capitalism" now takes many different forms, reflecting the many cultures in which it arose." Individualistic, American-style capitalism is very different from that of communitarian Japan, which differs from that of corporatized Germany, egalitarian Sweden or doctrinaire Singapore. Yet each, to varying degrees, creates wealth--capitalism's primary practical goal. Each of these capitalisms also shares a common challenge: how to institutionalize a system that generates reliable, people-responsive feedback on a sustained day-to-day basis.

    That, in turn, requires some attention to social engineering. I propose that societal feedback grounded in broad-based, up-close ownership is not only desirable but also feasible, affordable and perhaps even essential. However, without a sustained initiative by leaders in both the private and the public sector, the bulk of capitalism's financing will continue to flow through a highly exclusionary, ownership-concentrating "closed system of finance," which I will describe in Chapter 3.

    Modern-day free enterprise has about it an internally corrosive element because it lacks a sufficiently engaged constituency with a personal ownership stake. Again, the capital is there and so is the capitalism; what is clearly missing are the capitalists. The reason for this low level of ownership participation is, I submit, a design flaw because it fails to tap the wisdom of the community. That flaw is traceable to the fact that capitalism is not yet designed to create capitalists. Instead it remains frozen in time, reliant on antique financing techniques that retain their very limited turn-of-the-century purpose: to finance capital. Those dramatically different goals (i.e., creating capitalists versus simply financing capital) require a conscious choice if they are to be combined. And combined they must be. A genuinely sustainable capitalism must be engineered so that, by its very operations, it steadily expands the ranks of those who can rightly be called capitalists.