Capitalism

Panama Papers in Perspective

May 3, 2016 By Stephen DeKuyper Leave a Comment

stetson-jenkins-montecristi-panama-hat-22-p It has been about a month now since the infamous Panama papers were leaked. A devastating revelation of international corporate intrigue, corruption, and tax evasion. But yet one month later, we hardly hear anything about the opaque world of offshore entities.

Offshore entities and special purpose vehicles are relatively uncommon in the North American context, but they are prevalent throughout the international corporate world. Having spent time in Hong Kong, I became aware of these incorporation options and their pros and cons.

There can be legitimate reasons for setting up an offshore entity. With efficient systems in place, many of the offshore domiciles make incorporation and ownership transfer quick, easy and relatively cheap. It is possible to set up or transfer a company in Hong Kong within a week for under $2,000. Something that would be difficult to do in a place like Canada.

When they are used to facilitate an efficient business environment, they have a legitimate purpose. There are however, two important aspects of using offshore entities that can make them suspect: taxes and transparency.

Taxes

In most cases, these offshore domiciles offer low or even no corporate income tax rates. (The domicile makes money from incorporation fees and administration costs as well as having their citizens employed.) There has been a lot of buzz lately around the idea of inversions and transfer pricing, through which companies seek to minimize their profits in countries with higher tax rates in favour of those with lower rates. While this may be legal, is it moral? Is it moral for a company to benefit from the social and transportation infrastructure of the market, but yet not contribute anything towards paying for that infrastructure? There is a legitimate question of how much tax is “fair” for them to pay, but it that amount is probably not none.

Transparency

The more contentious of these two aspects however, is transparency. While registering an offshore domicile to lower or minimize taxes may be legal or even moral, in many cases this is not the primary purpose. The main purpose of these domiciles is often to hide the ownership of wealth. It has been interesting to see the names of have been revealed and the papers have gone a long way to raising the profile of international corruption. There is no question that legitimacy of registering an offshore domicile for the purposes of hiding corruption and proceeds from other criminal activity is not one up for debate.

Legitimate Purposes

There is a legitimate place for offshore domiciles in the international corporate arena. Not only can they make doing business easier, the competition they provide can push other domiciles to make their own incorporation and tax environments more efficient. Using them however, to evade taxes and hide wealth are both morally unacceptable purposes and there should be a push to increase transparency.

Is Profit Maximization A Stated Purpose of Most Companies

February 12, 2015 By Stephen DeKuyper Leave a Comment

I am curious to understand whether the stated purpose of most companies includes ‘maximizing shareholder profit’ or whether this has become a purpose imposed by the market. I understand that the market can impose that purpose if they wish. No one is forcing them to invest the money nor for the company to take the money. But I am not so much curious because I think it is not valid, as I am interested to understand whether this implicit purpose ends up supplanting the purposes explicitly stipulated in the company’s articles of incorporation.

This raises a question about whether a manager has a fiduciary responsibility to manage a company according to the company’s stated purposes. If they have a responsibility to manage according to stated purposes, none of which include maximizing shareholder value, are they being irresponsible if they focus on their stock price instead of the long-term health of the company? A company’s purpose, mission, vision, and values are often disregarded in the pursuit of financial gain and this helps strip a company of their true identity.

Is Maximizing Shareholder Value Like Standardized Testing?

February 9, 2015 By Stephen DeKuyper Leave a Comment

In some ways, managing a company in order to (solely) maximize shareholder value is similar to educating students for standardized tests. The emphasis is on the results of the process and the means to the ends are not properly considered, anything that does not directly affect the results is ignored, and content that is necessary or useful beyond the results is often dismissed. The short-term mindset that focuses on the immediate results does not properly prepare the company or the student for anything other than that particular goal and this can be harmful, particularly in the long-run.

There is also an emphasis on the quantity of the results over the quality of the content. Western, ‘enlightened’ society tends to focus on what is quantifiable over what is more difficult or subjective to measure. Although a child may be growing into a fine adult, we often ask how they are doing in school and expect an answer that includes grades or how they scored in their school tests. It is easier to compare scores than character. This is similar to public companies, in that many investors are more concerned with how they company will do in their next quarterly results than they are in the company itself (other than how that will directly affect the results). ‘Responsible’ and ‘well-run’ are not easily quantifiable and therefore not very helpful as inputs on a spreadsheet.

In both cases, those who write the tests determine the direction the company or student takes, sometimes without even having a stake in either. This forces both the company and the students to pursue goals set by someone else, often at the cost of sacrificing their own purposes in order to meet them.

The Basis of Capitalism

April 16, 2013 By Stephen DeKuyper Leave a Comment

Originally feudalistic, the economies in Europe shifted to a more capitalistic system from the Middle Ages onward. Feudalism flourished during the 9th to 15th centuries and the structure of relationships in society were primarily economic. Land holders were empowered with a ruling authority arising from their land holdings and the relationship of the different classes were based on their relationship to the land holding. Rodney Stark argues that capitalism started to take form as early as the 12th century and that by the end of the 13th century “the leading Christian theologians had fully debated the primary aspects of emerging capitalism-profits, property rights, credit, lending, and the like.” [zotpressInText item=”{FBSTGVC8, 66}”]

Capitalism contrasts with the earlier economic system in that it is characterized by the purchase of labor for money wages as opposed to the direct labor obtained through custom, duty or command in feudalism.

Rather than trying to define ‘capitalism’ as a system, it may be better to understand what are the necessary conditions to make a successful economic model work.

Freedom

Freedom is the foundational component for any successful economy. Agents must have the freedom to make the best and most productive economic and business decisions if the system is to work properly. Without freedom, the economy will necessarily be centrally planned and dictatorial. We can see from history that such an economy rarely if ever works. It is not feasible in the long-term because it is built upon and subject to the whims of a small group of ‘elite’ leaders who normally have vested interests in directing the economy. The collective wisdom of the market will often trump the presumed wisdom of a small group of leaders.

Rule of Law

The Rule of Law is essential to the efficient and effectual functioning of an economy for two main reasons: first, it establishes the parameters in which the market operates, and second, it gives the players the confidence necessary to partake in the system. Trying to participate in the economy without the Rule of Law is like playing sports with rules or a referee. It becomes chaos and bows to the whims of the strongest players. Capitalism is not a free for all, but a system in which the players makes decisions with certain expectations and the Rule of Law helps establish and enforce those expectations.

Private Property

Private property is what puts the ‘capital’ into capitalism. Many have tried to argue for a communal or communist attitude toward property from the Bible, often citing Acts 2:44-45 and Acts 4:32. These passages however, are descriptive and not prescriptive. Two of the ‘Ten Commandments’ are a) do not steal (Exod 20:15), and b) do not covet (Exod 20:17). Both of these assume some form of private ownership of property. We also know from experience and human nature, that people tend to respect and value private property more highly than public property and thus they tend to be better stewards of these resources.

But there is another important aspect of private property. Hernando de Soto argues that when the ownership of property is not fully and legally recognised, it is effectively ‘dead’. Without the proper infrastructure and systems to recognise and reinforce ownership, private property cannot be put to its best and more effective use. It is unusable as collateral for credit, which is essential for small businesses. Also, because ownership is questionable, the property itself is frequently kept out of the system. In order for an economy to best utilise its resources and capital, it needs both to recognise and reinforce private property.

Medium of Exchange

In order to have efficient economy, there needs to be some sort of easy and efficient medium of exchange. Money has been that medium for some time now and more recently, the US dollar in particular. Previously people traded goods under the barter system, but exchanging goods of unequal value can be cumbersome. The shift to a monetary system removed the barriers and allows people to trade more freely by creating an easy marker of value.

Free Markets

The free exchange of commodities, products, and services is near the heart of the capitalist system. The freedom to exchange is an essential aspect of an efficient market because without it capital is illiquid. Investors are deterred from injecting capital into the system for fear of not being able to get it out at a later date. Illiquidity must also be considered an opportunity cost of capital, if it could be used more efficiently elsewhere, but cannot be moved.

The main advantage of a free market is that it is a pricing mechanism, representing the amalgamation of all of the buying and selling choices of all of the participants in the market. Buyers and sellers make their choices based on the information available and pertinent to them. The market communicates the real-time accumulation of this information through price fluctuates, reflecting the collective valuation of a particular commodity, product, or service. It is impossible for a central planner to have and understand this depth of information.

Discovery, Creation, and Innovation

At the true heart of a prosperous economic system however, is creation, discovery, and innovation. That is, putting resources to their best and most productive use through human intelligence and ingenuity. God reveals himself and our world to us through the Bible. God is the ultimate creator (Gen 1:1) and man is made in the image of God (Gen 1:27) and in the Garden of Eden, he called Adam to work and steward creation (Gen 2:15). A productive economic system will therefore reflect man’s desire, ability, and calling to understand, produce, and steward the resources that God has put under his control.

Milton Friedman and Greed

October 11, 2012 By Stephen DeKuyper Leave a Comment

I really like this video of Milton Friedman on the Phil Donahue show. He takes his host to task on the question of greed.

I have struggled in the past trying to reconcile capitalism and greed. The corporate greed and crony capitalism that has become increasingly prevalent in the market over the past 10-20 years or so is very concerning. Capitalism, as a system, is being denigrated by the examples of corrupt players in the game. I grant that one of the strengths of capitalism is the liberty one has to operate within the system and that with liberty comes the risk of abuse. The increasingly unchecked personal ambitions, with disregard to the corporation or those working in it, reflect an increasingly depraved morality not just in the business world, but the western world in general.

Having said that and having lived in a communist country, I can attest that greed is not unique to our economy and culture. Its manifestation may be subdued by authoritarian rule in communist regimes and exaggerated in liberal democracies, but the underlying lusts of the heart which drive us to greed in the first place are the same no matter where we go.

There is something deeper at the heart of the problem and that is our own sinful nature. The Bible tells us that the disobedience by the first couple turned us away from God and as the descendants of the first sinners, we have inherited this propensity to want to be our own gods and the rulers of our own destinies. In the post-modern world, we try to ignore the “rules” of the game, by setting out our own, false parameters. Regrettably, this has only exacerbated the problem. Whether you believe in God or nature as the ultimate creator and ruler, we live by a set of rules and when we break those rules, we should expect consequences.

Capitalism and Christianity – The Fallen World

August 23, 2012 By Stephen DeKuyper Leave a Comment

It is easy to blame the ills of the world on the capitalist system. As Christians, we often see it being in opposition to the teachings of the Bible. Jesus pointed to the poor and downtrodden as the right objects of our love and attention. The Bible contains a mandate to serve the poor and protect them from the abuses of the rich. As God has bestowed his grace and mercy upon us, so should we do to the poor. But is capitalism, as a system, to blame for the poverty, or for the abuse, or for the greed that we see in the world?

One quick way to see if these negative aspects are based on the system itself, is to look at other systems to understand if the issues capitalism face are unique to it. This post isn’t long enough to get into a detailed analysis of other economic systems. From a personal perspective however, having lived in the most laissez faire economy in the world (Hong Kong), a free market, capitalist economy (United States), a socialist market economy (Canada), and a central command economy (Mainland China), I can attest that inequity of wealth and power, greed, consumerism, and depletion of natural resources are by no means the exclusive domain of capitalist economies. While there may be aspects of the capitalist system that help facilitate these things to happen, the issue is really our hearts.

Capitalism can allow us to reflect God’s character, but it can only be fully realized when it is undertaken by God’s people properly reflecting his image in all of their relationships and actions. There is an underlying morality necessary for the system to function properly. We have seen in earlier posts that God created us to be producers, managers, and workers. Entrepreneurship, business, capitalism, investment and employment are all productive manifestations of these. Because of the freedom inherent in the system, capitalism, contrary to popular belief, actually allows us the opportunity to show our love and build our relationships with one another. It provides an opportunity for us to treat one another with respect and dignity. I am not saying this happens all the time, or even enough, but the system makes it possible.

The system seems flawed to many however because there is still poverty and inequality and we see rampant greed and consumerism. But when we work through the arguments, we come to realize that the root problem is not a flaw in the system, but because of the brokenness of our hearts. The Bible tells us that God made us to be in relationship with him. Adam and Eve walked with God in the Garden of Eden and had a direct relationship with him, but when they disobeyed God by eating the fruit on the tree, they rejected his authority. They were tempted by the prospect of having their eyes open and being like God, knowing good and evil. (Genesis 3:5) This is what is known as the Fall. They became eternally separated from God and we, as their descendants, continue in our sin and in that separation. And it is this condition which leads us to see the evils we see in the world.

One oft misquoted line from the Bible is 1 Timothy 6:10. It is often quoted as “money is the root of all evil,” but what the Bible really says is “For the love of money is a root of all kinds of evils. It is through this craving that some have wandered away from the faith and pierced themselves with many pangs.” It is the love of material things, and power, and prestige that drive us to act in a way that is hurtful to our fellow man and not necessarily those things in and of themselves.

Do you think the love of something and the object itself can be separated?

Capitalism and Christianity – Work

August 16, 2012 By Stephen DeKuyper Leave a Comment

work team The third leg of the Capitalism and Christianity stool comes from our call to work. While God created us to be producers and managers, he also created us to be workers. Even before the Fall, man was called to work;

The Lord God took the man and put him in the Garden of Eden to work it and keep it. (Genesis 2:15 ESV)

People often see work as a burden, as something bad, but work was meant as a good thing for man to do. It was man’s disobedience that led to the Fall and that in turn fundamentally changed the way in which we work.

And to Adam God said Because you have listened to the voice of your wife and have eaten of the tree of which I commanded you, ‘You shall not eat of it,’ cursed is the ground because of you; in pain you shall eat of it all the days of your life; thorns and thistles it shall bring forth for you; and you shall eat the plants of the field. By the sweat of your face you shall eat bread, till you return to the ground, for out of it you were taken; for you are dust, and to dust you shall return. (Genesis 3:17-19 ESV)

As a result of the Fall, work became difficult, but that does not fundamentally change its original purpose. God did not put Adam to work as punishment. Employment is an opportunity for us to glorify God. We can glorify God in our relationships with superiors and subordinates. When the relationship between employer and employee is working properly, both parties can benefit. Most simply, work enables us to be obedient and productive and relational.

Striving to improve our work is another way to glorify God. Competition helps us to grow the gifts that God has given us. We are pushed to higher expectations, to get better at creating things, reflecting God’s desire to have us to do well and improve what we are able to do. The competitive system tests our abilities and if we are able to do them well, we will be paid for it. The Olympics have just finished and while the athletes are not getting paid for their participation, the games are one of the best examples of the glory God can get from those who work hard and push themselves and develop the talents God has given them.

This is not to argue that work doesn’t play a part in any other other economic system nor any other religion. What is does say however, is that as Christians, we should believe that work is good, and that it has been negatively affected by the Fall, but that one day in the New Heavens and New Earth, it will again be as it was first meant to be.

They shall build houses and inhabit them; they shall plant vineyards and eat their fruit. They shall not build and another inhabit; they shall not plant and another eat; for like the days of a tree shall the days of my people be, and my chosen shall long enjoy the work of their hands. They shall not labor in vain . . . (Is 65:21–23 ESV)

Do you see your work as a curse or as a way to be blessed and glorify God?

Capitalism and Christianity – Stewardship

August 13, 2012 By Stephen DeKuyper Leave a Comment

In my last post, I wrote about the first of the three foundational truths which lead us to understand the morality of capitalism, and that was creation. The second truth is stewardship. Men and women are not just called to create, we are called to manage, in a godly way, what has already been created. God appointed us as his vice-regents or as his representatives on earth. While he has allowed us to utilise the resources he has given us, he has also called us to steward all of creation in a way that glorifies him.

“Be fruitful and multiply and fill the earth and subdue it, and have dominion over the fish of the sea and over the birds of the heavens and over every living thing that moves on the earth.” And God said, “Behold, I have given you every plant yielding seed that is on the face of all the earth, and every tree with seed in its fruit. You shall have them for food. And to every beast of the earth and to every bird of the heavens and to everything that creeps on the earth, everything that has the breath of life, I have given every green plant for food.” And it was so. (Genesis 1:27-28a)

God owns all of creation, but men and women are entrusted with the management of these resources through control or implied “ownership” of them. Capitalists and investors are called to manage the resources put under their control with a view of maximising their value.

In the parable of the Ten Minas (Luke 19:12-26), the nobleman gave each of his servants ten minas, which they were to increase by doing business. When he returned, the nobleman rewarded the servants according to how much they were able to grow the initial capital. Although this may speak primarily to spiritual matters, the fact that Jesus used an economic example like this is significant. Profits can be an indication that we have been faithful to steward God’s resources more efficiently than others.

We may have a long-term claim on the earth and all that is in it, but it is necessary to recognise that true ownership still lies with God. We do not have a right to abuse our “ownership” by recklessly exploiting the natural resources with which God has endowed the planet. Conflict comes when entrepreneurs, capitalists, investors, and other business people see a responsibility to steward the resources under their care without regard to other resources. God is owner of all things and as his representatives, we have the responsibility to ensure that our stewardship does not impinge on those resources under the stewardship of others.

The role of stewards gives us an opportunity to imitate God. Once again referring to Business for the Glory of God by Wayne Grudem, he posits:

. . . ownership of possessions is a fundamental way that we imitate God’s sovereignty over the universe by our exercising “sovereignty” over a tiny portion of the universe, the things we own. When we take care of our possessions, we imitate God in his taking care of the whole universe, and he delights to see us imitate him in this way. In addition, when we care for our possessions, it gives us opportunity to imitate many other attributes of God, such as wisdom, knowledge, beauty, creativity, love for others, kindness, fairness, independence, freedom, exercise of will, blessedness (or joy), and so forth.

These represent God-given desires to exercise dominion over the earth and exercise faithful stewardship so that we and others may enjoy the resources of the earth that God made for our use and for our enjoyment. We glorify God by doing this in a responsible manner, which takes into consideration the effects our actions have on all of creation.

How can we effectively manage the resources under our control without negatively impacting other resources? Does the financial system discourage this attitude?

Capitalism and Christianity – Creation

August 9, 2012 By Stephen DeKuyper Leave a Comment

A great idea Today I want to talk about the first of what I believe are the three core, biblical truths that lead us to see capitalism as a moral, economic system. Creation is foundational to capitalism because capitalism is fundamentally a creative endeavour. I can feel the pushback or even confusion already. Are you trying to tell me that business is creative? The answer is a resounding yes!

But first about our calling as creators. The very first words of the very first verse of the very first chapter of the Bible are;

‘“In the beginning, God created …” (Genesis 1:1)

Throughout the first chapter of Genesis we see that God created the heavens and the earth, the land and the sea, the night and the day, the plants and the animals, and he created man and woman. In essence, God is a creator and he has made something out of nothing.

So God created man in his own image, in the image of God he created him; male and female he created them. And God blessed them. And God said to them, “Be fruitful and multiply and fill the earth . . . (Genesis 1:27-28a)

He created man and woman in his own image and as such, we too are purposed to be creators. Whereas God made something out of nothing however, men and women are created to make something out of the raw materials he has already been made. We are called to be pro-creators and re-producers and throughout history, men and women have been applauded for their ability to create, whether as traditional artists (painting, sculpture, music, and film) or as artisans (carpenters, seamstresses, or silversmiths). But what does creativity in capitalism look like?

In its most raw form, creativity in capitalism looks like entrepreneurialism. On one level, it is the intentional act of creating a product or service. It is the entrepreneur seeing a need in the market and striving to fill that space; It is the industrial designer designing the most useful widget she can; It is the production engineer figuring out the most efficient process to manufacture them; and it is the employees who makes and sells them.

On another level, we have all those companies and people who help facilitate the process. They can include lawyers and accounts, or investment bankers and stock brokers. Although these people are generally not consider “producers” in the traditional sense, not only do they help create companies which create and sell products and services, but through the process of providing their own services, they too build up their own companies, they provide services, and they employ people.

I realise that most people are never going to see an entrepreneur in the same creative light as a sculptor. Even though their end product is not necessarily as aesthetic (although we can think of Steve Jobs and Apple), entrepreneurs are creators in the most fundamental sense of the meaning. Capitalism is the system that facilitates these people to be producers, by providing them with the infrastructure that allows them the freedom to pursue their dreams.

In his book Business for the Business for the Glory of God, Wayne Grudem argues:

That is why God made us with a desire to be productive, to make or do something useful for other people. . . such desires to be more productive represent God-given desires to accomplish and achieve and solve problems. (28)

Capitalism and Christianity – Definition

August 2, 2012 By Stephen DeKuyper Leave a Comment

Before going any further in this series, I thought it would be a good idea to set out a general definition of capitalism to make sure we are talking in the same terms.

Dictionary.com defines capitalism this way:

An economic system in which investment in and ownership of the means of production, distribution, and exchange of wealth is made and maintained chiefly by private individuals or corporations, especially as contrasted to cooperatively or state-owned means of wealth.

Merriam-Webster defines it as follows:

An economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decision, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market.

I don’t normally reference Wikipedia as a source, but I thought the entry for capitalism does a great job of outlining it:

Capitalism is an economic system that is based on private ownership of the means of production and the creation of goods or services for profit. Competitive markets, wage labor, capital accumulation, voluntary exchange, and personal finance are also considered capitalistic. Competitive markets, capital accumulation, voluntary exchange, and personal finance are, however, not capitalism, and often a part in non-capitalist systems such as market socialism and worker cooperatives. There are multiple variants of capitalism, including laissez-faire and state capitalism.

I am not going to try to produce a comprehensive definition myself. I agree with the main gist of these definitions and I see no reason to reinvent the wheel. The main point I would highlight is that at its base, ‘capitalism’ is a system that facilitates capital and resources to be owned, transferred and employed.

What I will not entertain in defining capitalism, is what its opponents often attempt; that is to sneak in moral judgements and attribute them as essential aspects of the system. The above definitions isolate characteristics that are unique to capitalism. As I will argue in the later posts, morals and ethics are integrally intertwined with the system, but they cannot be attributed to it. They are readily found in most other economic models as well. For example: greed is not a moral behaviour unique to capitalism. The system may in some way more readily tempt its participants to greed with the hopes of great profits and wealth, but greed comes from the participant and not the system. It is no way conditioned as part of its definition.

In the next three posts, I am going to address the issues of creation, stewardship, and work, primarily from a biblical perspective, with the hope of showing how they are fundamental to the capitalist endeavour. I will follow those up with responses to some accusations against capitalism often levelled by its opponents. I then hope to bring these together by looking at some of Jesus’ parables and other examples in the Bible to try to understand God’s view of this economic system.