Twenty-first century capitalism; to humanize, ownerize.

We live in the midst of the most dramatic shift in ownership in history. In 1995, the World Bank identified ninety-five nations in the throes of making the transition from state to private ownership. Today, five billion people live in market economies--up from one billion just a decade ago. For the first time in human history, a single economic system encircles the globe. Yet, as World Bank President Jim Wolfensohn pointed out in November 1997, more than three billion people live on less than two dollars a day. With population growing at 80 million a year, he warns that, unless we devise a more inclusive system, in thirty years we could see five billion people living on two dollars a day.

The trends are ominous. The United Nations reported that, in 1996, the assets held by the world's 358 billionaires exceeded the combined incomes of countries with 45 percent of the world's people, leading U.N. development experts to draw a sobering conclusion: "Development that perpetuates today's inequalities is neither sustainable nor worth sustaining." If this rich-poor divide is allowed to continue, they report, it will produce a world "gargantuan in its excesses and grotesque in its human and economic inequalities."

The multidimensional impact of ownership patterning has only recently become a subject of serious inquiry. For instance, population specialists have documented that people in developing countries accumulate children in lieu of any opportunity to accumulate assets--as their version of economic security and social status. This finding suggests the need for an ownership-inclusive development policy. Yet the development community stood blithely by as Indonesia's Suharto clan accumulated $35 billion (1997 CIA estimate) while Indonesia became the world's fourth most populous nation.

We are only just beginning to comprehend the downside of the indifference shown ownership patterning in the policy community. For example, the United States currently has more than $12 trillion in the hands of money managers. As a result, American-style capitalism has become largely detached from the personal concerns of individuals and their communities. Rather than capitalism taking shape according to the "self-design" originally envisioned by Adam Smith, the father of free enterprise, this huge pool of financial capital is virtually "on automatic" in a global pursuit of goals reflected in a very narrow band of criteria used by financial analysts.

As a result, today's capitalism often forfeits the feedback, foresight, concern, and common sense that reside uniquely within individuals and their communities. Instead, money has become the measure of the public good through the capital market-maximizing of financial returns. That, in turn, is accompanied by a systemic rich-get-richer propensity that both disconnects people and divides them. Let me explain.

Detached and Divided

As the world "mentor" capitalist nation, the United States is now home to the developed world's most economically stratified society, host to the highest concentration of both wealth and income in the industrial world. However, unlike traditional class-conscious societies--such as Britain, which inherited its disparities from a feudal past--Americans lack that handy excuse; we didn't inherit it, we chose it. For example, in the course of expanding the national net worth $5 trillion from 1983 to 1989 during the heyday of the laissez-faire Reagan era, New York University professor Ed Wolff documents that we also chose to allow 54 percent of that amount to be claimed by the half million families who make up the top 0.5 percent of the population. Wolff's conclusion: the current era is witness to the most extreme level of wealth concentration since the robber baron era.

According to the Congressional Budget Office, the top 1 percent of U.S. households claimed 70 percent of the total $250 billion increase in household income during the 1977 to 1989 period. Meanwhile, after adjusting for inflation, the annual income of households in the lowest quintile rose a mere $87 from 1975 to 1994, while the median wage was 3 percent less than what it was in 1979. The average inflation-adjusted earnings for nonsupervisory American workers was the same in 1993 as in 1959, when Eisenhower was president. Despite the long-heralded promise of labor-saving advances, the average American's paid work year increased by 163 hours between 1970 and 1990, equivalent to adding an extra month of toil for no additional income. In short, three-quarters of American households have weathered two full decades of stagnant living standards.

What about all that oft-heralded wealth accumulated through the meteoric growth in pension plans, 401(k) plans, and mutual funds? According to 1995 research by Massachusetts Institute of Technology professor James Poterba and Dartmouth economist Andrew A. Samwick, 71 percent of U.S. households own no stock at all, or less than $2,000 in any form, including pensions. Federal Reserve and IRS data confirm that the net worth of the top 1 percent of Americans is now greater than that of the bottom 90 percent. Based on a 1995 survey, the Federal Reserve found that the typical American family has a net worth of $56,400, including home equity, down from $56,500 six years earlier.

These trends led New York Federal Reserve President William McDonough to caution, "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." MIT professor Lester Thurow echoes that concern: "The system that has held democracy and capitalism together for the last century has started to unravel.

Capitalism Needs a Capital Solution

The United States was founded by property owners who denied the vote to nonproperty owners. Yet, despite the crucial role that ownership has always played in the nation's development, the United States still lacks a national ownership policy. Our guiding economic policy is the half-century-old Employment Act of 1946, obliging policymakers to promote not ownership but jobs. For a capitalist country, the irony runs deeper even than that. Consider: at present, America's hugely regressive Social Security tax (levied on a flat percentage of payroll) is now the largest single tax paid by most taxpayers. For a majority of American workers in private industry, Social Security entitlements are their only old-age pension. Most revealing of all, the present value of those anticipated payments now represents 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 linkage that most Americans have to their capitalist economy. Perhaps most ominous of all, U.S.-trained economists are now busily advising almost 100 countries in the throes of making the transition from state ownership, spreading this suspect formula abroad.

The costs of this ownership-pattern indifference are steadily mounting. In 1996, the U.S. government paid out $839 billion in various income support programs, including Social Security, Medicare, and federal pensions (civil service, military, and the like). The bulk of these funds were paid to people who had accumulated insufficient assets to sustain themselves. These income redistribution programs are now the "third rail" of American politics: touch them only at the risk of your political life. Yet, with a more broadly self-reliant populace, much of that money could instead be invested in infrastructure, education, research, environmental restoration--or simply left in people's pockets.

That is not to be, however, at least not until American-style capitalism acknowledges the need not only for full employment of the nation's human resources but also widespread ownership of its capital resources. Without a more participatory, property-empowering policy environment, we are certain to see a steadily growing portion of the population who are left ever more dependent on income transfer techniques, the bane of any private property system.

Laissez-faire and libertarian advocates may find it preposterous that anyone would propose changes to an economic system in need of less rather than more intervention. Yet the right sort of intervention is required if we ever hope to reduce the size and intrusiveness of government. Libertarian philosopher Henry Simons got it right when he wrote in 1948: "The libertarian good society lies... in the maximum dispersion of property compatible with effective production."

At the other end of the political spectrum, the naivete of the left has long been reflected in its attempts to construct a system to change human nature to achieve social justice, instead of nurturing an economic environment that evokes social justice while accommodating human nature. The everyday reality of human interaction suggests that any prescription acknowledge that market exchange will continue to be made on the basis of self-interest. That fundamental mechanism is a key ingredient by which economic progress is advanced worldwide. The issue is how to reconcile the realities of the marketplace with the need for social justice.

Needed: A Capitalism That Creates More Capitalists

The seldom-acknowledged truth is that capitalism does a terrific job of financing capital but a lousy job of creating capitalists. In 1997, the U.S. economy financed $845 billion in nonresidential structures and equipment--buildings, bulldozers, computers, and such--plus more than $1 trillion in mergers and acquisitions. At the same time, the division between the haves and have-nots continued to widen. Free enterprise--flexible, resilient, and virtually valuesless--is busily adjusting to this new reality, indifferent to the fact that the American middle class has become an endangered species. For example, Saatchi and Saatchi advertising worldwide warned its clients of "a continuing erosion of our traditional mass market--the middle class," while PaineWebber now cautions investors to "avoid companies that cater to the `middle class' of the consumer market."

Shifting to an income-pattern-realistic "Tiffany/Kmart" marketing strategy, retailers now tailor their products and pitches to two very different Americas. That shift is poised to continue: the 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. Proving the capitalist wisdom of PaineWebber's sound investment advice (that is, to dump the shares of retailers catering to the disappearing middle class), the stock of Tiffany and Kmart prospered in 1997 while that of middle-class retailer JCPenney plummeted.

Meanwhile, public- and private-sector leaders continue to focus not on how to make Americans into owners but how to make them into workers, oblivious to the fact that there's never yet been a capitalist manager who intentionally devised a way to turn out a product or service that required more hours of work. We now confront both the promise and the peril attending the success of two centuries of labor-saving innovation. Either the nation's progress can be converted into security and leisure for the many (through broad-based ownership) or it can continue to become lavish capital accumulation for the few.

The only way out, I submit, is a sensible capital ownership policy. That requires confronting the technical reality that capitalism finances itself within a "closed system of finance" that's wired not for inclusion but for exclusion. What's needed is a system ensuring that capitalism ad,dances broad-based economic self-sufficiency. That's the only possible course if ever we hope to escape today's fiscal trap of steadily increasing entitlements alongside the ever-widening indignities of dependency.

Capitalism's Closed System of Finance

For a reality check, it's essential first to realize just how it is that "the rich get richer." Everyone knows it happens; few people understand how. As a quick glance at this chart indicates, companies fund themselves in a way that is designed not to create more owners but to finance more capital for existing owners.

SOURCES OF FUNDS IN A CLOSED SYSTEM OF FINANCE
(Source. U.S. General Accounting Office)

Internal {Undistributed Profits-reinvested for current owners
         {Depreciation reserves-reinvested for current owners

         {Debt-repaid on behalf of current owners
External {Equity-most affordable by current owners

If we hope to ever escape (or at least contain) today's expensive yet politically untouchable income redistribution policies, we need to demonstrate more collective foresight by "rewiring" capitalism for inclusion. That requires policy and private-sector initiatives focused on a steady broadening of ownership because only this will, in time, change the current concentration. While full employment can remain a centerpiece of economic policy, it must be complemented by an ownership strategy. This could fill the current policy void in either the Republican or Democratic Party, because an ownership solution offers a unique political platform--lending itself to populist rhetoric while the prescriptions are typically rock-ribbed conservative.

One thing that's abundantly clear: stock purchases alone are inadequate. Expecting wage earners to buy their way into significant ownership (from already stretched paychecks) is what I call "Marie Antoinette Capitalism," only instead of urging "Let them eat cake," the modern refrain is "Let them buy shares." After all, it's a free market.

To experience the benefits of a property system that favors more than a privileged few, we need not a "level playing field" but, rather, a field designed to ensure that more players have a chance to make it onto the field. In its current form, capitalism is not designed for participation. Yet the intelligent reengineering of financing techniques can broaden ownership based on the very same financial principles that have proven so successful in concentrating ownership.

Opening today's closed system of finance is not only feasible but desirable and, I submit, essential. One symptom: as wealth disparities have steadily widened in developed countries, the ratio of public to private spending has grown, according to the Economist, on average from 30 percent of the gross domestic product in 1960 to 46 percent in 1997, belying the notion that the worldwide expansion of laissez-faire will necessarily reduce the size of government.

New Property Paradigms

As history has proven time and again, unless an inclusionary system of finance is incentivized, the closed-system dynamics of traditional finance (as illustrated) will continue. Luckily, the United States has amassed some modest experience in advancing ownership-broadening techniques of finance and offers, as well, some other ideas with great promise.

In the first employee stock ownership plan (ESOP), in 1956, San Francisco attorney Louis Kelso persuaded the three principal owners of Peninsula Newspapers in Palo Alto, California, to transform their employee profit-sharing into a financing vehicle to purchase 72 percent of the company's stock for their employees--paid for with the company's future profits (in other words, "self-financing"). That transaction set the pattern: through an ESOP, founders now have a way to sell their shares (without paying capital gains tax), companies get a tax deduction for funding an employee benefit plan (that purchases the shares), and employees get a chance to acquire a significant stake on the only financially feasible basis--paid for from the earnings of the capital itself.

By 1997, more than 10,000 American corporations had ESOPs covering some 10 million employees. Ninety percent are in unlisted companies. Overall, 9 percent of employer equity is now in employee hands, with a market value exceeding $750 billion, including popular 401(k) plans and broad-based stock options. But ownership-broadening schemes (except for options) are growing quite slowly, with 1996 ESOP transactions totaling less than $1 billion. To make these popular requires additional encouragement--such as a preferred corporate income tax rate for maintaining a prescribed level of broad-based ownership. Or more favorable depreciation could be allowed ownership-broadening firms.

As an ownership-engineering rule of thumb, it's helpful to remember: where the cash flows, ownership grows--or could. That handy guide can be used to make owners not only of direct employees but also of those employed by, say, suppliers or distributors of related enterprises (through a related enterprise stock ownership plan, or RESOP). Similar financial logic could be adapted to "ownerize" certain long-term customers or even the general public.

Consider, for example, the case of an investor-owned power company. That company could be financially reengineered so that a portion of its shares becomes owned by its customers through a customer stock ownership plan (CSOP). As any investment banker knows, practically any revenue stream can be used to ownerize income-producing assets--over time. In the case of a power company, its present financial value is a function of the future revenues that will flow through it. That revenue, in turn, is based on its customers paying their bills.

You probably pay at least two utility bills each month: power and water. Unless you're a rare exception, you own shares in neither company. Yet each bill has built into it a financial return for someone who does. You can live in that utility district for 100 years and still pay a monthly return to people who live thousands of miles away. Why not, over time, alter the ownership pattern so that you pay some portion of that return to yourself? That's a CSOP. Environmentally, that would also create a constituency of up-close, property-empowered stakeholders who have something more complex at stake than just their financial return.

Similar techniques can be used to create individual ownership for those who are clearly stakeholders but not yet stockholders. For instance, a general stock ownership corporation (GSOC) can proprietorize natural resources such as mineral deposits, timber stands, or oil pockets found on public lands. A GSOC could, for instance, retain a royalty interest in an oil field, while a more traditional company is awarded extraction rights conditioned on its sponsoring a combination ESOP/RESOP. Stock warrants could be dedicated to fund local education or infrastructure.

In the only version of the GSOC thus far enacted into federal law (in 1978), a for-profit GSOC was designed to enable Alaskan citizens to acquire British Petroleum's stake in the trans-Alaska pipeline system. Its self-financing component was calculated to pay the acquisition costs from future dividends. Though never implemented due to local political reasons, the Alaskan legislature instead established the Alaska Permanent Fund, directing to it lease payments and royalty income from North Shore and Prudhoe Bay oil fields. Since 1977, it has paid out over $5.8 billion to 500,000 Alaskan residents from a principal now exceeding $20 billion. Though this state-owned fund is very different from a GSOC with its personal, transferable ownership, the fund suggests the potential of what can be done with new models of property participation. With reinvested dividends, fund officials indicate that an Alaskan family of five would have 1997 savings of $94,066.71.

Mechanisms for an inclusive brand of capitalism are easily crafted. The fact that legislators fail to embrace them may speak volumes for what lies behind their intentions. History is replete with stories of nations that experience a bust following on the heels of a natural resource-fed boom, such as the discovery of oil in Venezuela and Nigeria. Time and again, the boom fuels an unsustainable spurt in public-sector growth, much of which is drained off by corrupt officials through contract fraud and outright theft. By one estimate, 75 percent of the oil-derived funds invested in Nigerian public-sector projects between 1970 and 1985 were diverted. What Alaska discovered is that any political attempt to divert its fund's dividend stream encounters staunch opposition. New Mexico has a similar fund, through which the bulk of the state's mining royalties are invested in education, a popular use from which public officials likewise have difficulty diverting funds to pet projects.

This ownerization process might begin with a simple opinion poll, inquiring if people are happy participating in capitalism as workers only or whether they would like to be capitalists too. To date, the question has yet to be asked--not in the United States or in any country. Yet it was just such a poll--asking whether Congress should enact policies fostering full employment--that brought the political credibility required to enact the Employment Act of 1946, the core of U.S. economic policy. Similar use might be made of "ownership impact reports," analogous to environmental-impact assessments required by government agencies. Government contractors could be required to identify both the short- and long-term effects of contract awards on ownership patterns (for instance, Ross Perot founded his $3.3 billion fortune providing information-processing for Social Security). Similar reporting could accompany the granting of broadcast licenses, the opening to extraction of timber or oil resources, the granting of government loan guarantees, or the provision of export/import assistance.

Similarly, the government's purchasing power, for items ranging from paper clips and air travel to smart bombs and aircraft carriers, could be directed to corporations with certifiably broad-based ownership. The value of these government contractors is often primarily dependent on taxpayer-funded purchases. Taxpayers would realize far more impact for their tax dollars if contract awards enhanced the economic self-sufficiency of a broad, rather than narrow, base of their fellow taxpayers. That we fail to do so amounts to fiscal folly, because we forego an opportunity to promote economic self-reliance.

Toward a Humanized and Localized Capitalism

To end where we began, it's worth noting that today's combination of highly concentrated personal ownership and highly detached institutional ownership is creating a system at odds with the very premise underlying free enterprise. Adam Smith was first and foremost a moral philosopher. He knew that markets make helpful servants but lousy masters. Both markets and democracies trace their appeal to the openness that accompanies personal choice. That's why both are obliged to respond to the preferences of the consumers and the constituents who participate in them.

Smith envisioned that the self-design of free enterprise would be wrought by a being (a self) embodying the complexity of purpose that makes humans so uniquely human. Financial calculation is part of who we are--but only a part. It was humankind, not Dow Jones or Moody's, that he envisioned as the animating force in what he called his "system of natural liberty." At their core, the complex motivations that accompany broad-based capitalism provide a means for reconnecting personal preference to market capitalism.

There was a time when economic decisions were shaped by sensitivity to the human community. That was most obviously the case when village elders held sway, or more recently when close-knit communities were the rule rather than the rarity. That multilayered, multiple-agenda decision-making process has gradually been replaced by a cool financial efficiency engineered with but one goal in mind: the generation of money-denominated returns. On that score, global capitalism displays an undeniable genius for detached reckoning in its capacity to ferret out financial returns worldwide--regardless of the collateral impact, be it social, political, fiscal, cultural, or environmental.

The human element that Smith saw at the heart of selfdesign has been allowed to atrophy as return-seeking capital has been granted deference, even dominance. We are now buffeted by a global economy in which key actors are encouraged, even mandated, to maximize financial returns. At any given hour of the day, somewhere a capital market is operating. The securities traded often belong to huge, virtually stateless multinational corporations which, in turn, take their cues from the peculiar concerns of investment managers directed to pursue short-term financial returns. Money--not humankind or the environment--is fast becoming the measure of the public good.

Stewardship Requires Ownership

My ownership-pattern hypothesis is simply this: people are likely to become better stewards of all those systems of which they are a part--social, political, fiscal, cultural, and natural--as they gain a personal stake in the economic system, with the rights and the responsibilities that linkage implies. It is unproductive to complain about overly large or remote economic forces--multinational corporations, global trade, cross-border capital flows, and such--absent efforts to implement ownership patterns that support strong local communities.

Serendipitously, this ownership engineering resonates particularly well with Americans because decentralized systems play directly to our historic strengths. Democracies and markets are both intended to be broadly distributed, self-organizing systems; the challenge lies in how to engage more "selves" in the system's self-design. Because so many of our citizens' concerns are either ignored by our dynamic financial environment or not addressed by our dynamic social fabric, people feel increasingly alienated, left out, and cut off--and with good reason. This increasingly detached, disconnected, divisive, feedback-deprived, "dumbed down" system is now spreading worldwide, led by the rapid growth of concentrated and institutionalized capital operating through global capital markets.

The transition to a genuinely humanized capitalism requires leadership in both the private and the public sector to create a component of "up-close capitalists" as a means for advancing both conservation (of what works) and creative change (of what could be improved). The goal should be to foster a context for balancing competing interests through a feature embedded in the system itself. We know that private property is an essential "property" of private enterprise (much like wet is a property of water). The question is how to ensure that twenty-first-century capitalism plays to its core strength. That suggests three interrelated challenges:

* how to make capitalists of those with little capital to invest

* how to foster a broader distribution of wealth without undermining the security of already-owned wealth

* how to evoke an ownership pattern that includes a palpable stake both by those most affected by commercial activity and by those in the best position to affect it.

While today's capitalism is remarkably adept at maximizing financial returns worldwide, Adam Smith's goal for free enterprise was not to maximize money-denominated returns but to enhance societal well-being. As with democracies, that requires a means for linking people to the system so that each person can participate as a co-creator of the commercial component of human association that Smith rightly saw as an essential force for shaping a better society. Absent a means for incorporating community-sensitive, personal input, global capital markets are destined to evoke a pageant of unsustainable practices through a decision-making process based on financial criteria that often fail to take into account legitimate human, societal, and environmental concerns.

Through noninvasive ownership engineering, a more participatory human-sized capitalism can gradually replace today's exclusive, disengaged, and socially corrosive ownership patterns. The time to act is now. History suggests that even the fate of our free enterprise civilization may depend upon it. In a search for the common factors that led to the demise of twenty-one past civilizations, historian Arnold Toynbee identified two: concentrated ownership and inflexibility in light of changing conditions. Those may well be two sides of the same coin. Indeed, the response to Toynbee's concern lies latent in his findings: the route to the flexibility now required of those inhabiting global capitalism will be found in addressing history's most enduring danger--concentrated ownership

Jeff Gates is author of The Ownership Solution--Toward a Shared Capitalism for the Twenty-first Century (Addison Wesley Longman, May 1998). As counsel to the U.S. Senate Committee on Finance (1980-1987), he crafted much of the federal legislation on ESOPs. Over the past decade, he has advised more than twenty-five foreign governments on ownership engineering. The Ownership Solution can be ordered directly from the publisher ($27.50 cloth); call [phone].